1. International Trade, Exchange Rate, and Balance of Payment

Two countries, US and CH, produce two goods, apples and bananas. In one hour, US can produce either 2 apples or 10 bananas; CH can produce either 5 apples and 2 bananas. After opening up to trade, US and CH specialize in producing the good in which they can follow their own comparative advantage (lower opportunity cost). In tradeequilibrium, US and CH agree to trade 1 apple for 2 bananas and both countries' international trade is balanced.There is no factor and asset trade.

US CH Productivity Apple 2 5 Banana 10 2 Specialization Apple 0 5 Banana 10 0 Trade Equilibrium Apple 2.5 2.5 Banana 5 5 Local Prices Apple $ 5 Y 2 Banana Y 5