For full credit, you must provide an explanation for your answers and show how you arrive at them.

Man Hour Required to Produce Unit of Output

Country A Country B

Good X 3 12

Good Y 2 14

1. Which country would prefer an international term of trade of 9? 6? Why?

2.. Let WA = wage rate in A in terms of A's currency WB = wage rate in B in terms of B's currency R = exchange rate defined as number of units of B's currency per unit of A's currency. Then, in order to have balance of payments equilibrium, (WA.R)/WB must lie in some range, i.e., m < (WA.R)/WB < n. Determine the value of m and n.

3. If WA = 5, WB = 2 and R = 3, which country will export which good?

4. Given that wages are fixed in each country at WA = 5 and WB = 2, what is the limit within which exchange rate can fluctuate in order for comparative advantage to assert itself.