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Mexico and the United Kingdom (UK) are trading partners. Each year Mexico exports 1500 ponchos and 6000 kilograms of limes to the UK and the
Mexico and the United Kingdom (UK) are trading partners. Each year Mexico exports 1500 ponchos and 6000 kilograms of limes to the UK and the UK exports 3000 dress shirts and 5000 kilograms of wool to Mexico. The ponchos Mexico makes are made primarily from the wool it imports. The exchange rate is 1 Great British Pound (GBP) to 25 Mexican Pesos (MXN). Ponchos are MXN 3000 and limes, MXN 50/kg. Shirts are GBP 65 and wool, GBP 1.50/kg. a. What are the prices of ponchos and limes in terms of GBP? b. What are the prices of shirts and wool in terms of MXN? c. What is Mexico's current account and capital account? d. What is the UK's current account and capital account? Now suppose that the Mexican Peso declines against the Pound, so that now 1 GBP = 30 MXN. Further suppose that the price of wool rises to GBP 2.50/kg, which causes the price of ponchos to rise to MXN 3300. The prices of shirts and limes are unchanged. The UK reduces imports of ponchos to 1300. Exports of limes and wool are unchanged. e. What are the adjusted prices of ponchos and limes in GBP? f. What are the adjusted prices of shirts and wool in MXN? g. How many shirts can Mexico import from the UK before it runs a trade deficit
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