International Finance Homework 1 1) Latvia and Estonia are two countries. Assume that currently there is no trade between them. Each country has 100 units of labor. Latvia produces fish, at a cost of 1 unit of labor per fish, and grain, at a cost of 2 units of labor per bushel. Estonia produces fish at a cost of 2 units of labor per fish, and grain at a cost of 3 units of labor per bushel. Both countries consume both fish and grain. a. True or False, the countries can both benefit if they can trade with each other? b. Circle any and all of the following which hold: i. Latvia will export fish if there is trade ii. Latvia will export grain if there is trade iii. Estonia will export fish if there is trade iv. Estonia will export grain if there is trade v. We do not have sufficient information to say what will be exported 2) Circle if any of the following hold true with respect to the MacDougall model a. Investors invest more to countries with higher rates of return b. Investors invest more in countries which have less home capital C. Capital flows are unidirectional d. Rates of return equalize if capital flows are permitted 3) Comment on which of the points in (2) hold true in reality? 4) Write one paragraph summarizing some of the advantages and disadvantages of the Euro, as seen by Mundell (in Shapiro) and Krugman ("Can Europe Be Saved") 5) Some review questions: a) What is the PV of receiving 2,000/year starting in 3 years going for 16 years if the discount rate is 12%? b) What is the NPV of a project that costs $1,500,000 and generates 120,000/year forever if the discount rate is 9%? c) A project will provide in 3 years either $8,000 with 20% probability, $13,000 with a 30% probability, $18,000 with a 40% probability, and $45,000 with a 10% probability. Given a 6% discount rate, what is its expected PV