1. What is the difference between absolute and comparative advantage?
2. Create an example of a comparative advantage model by choosing two countries and two products.
a. Draw a diagram describing autarky and a pattern of comparative advantage for your example.
b. Show the transition from autarky to trade in your diagram, label the trade flows, and demonstrate the gains from trade.
2. On April 2, 2015 the exchange rate between the Canadian dollar (CAD) and the Swiss franc (CHF) was CHF 0.76564/CAD 1. On that same day the exchange rate between the Euro (EUR) and the Swiss franc (CHF) was CHF 1.04283/EUR 1.
a. What were the CAD/CHF and EUR/CHF exchange rates?
b. What were the EUR/CAD and CAD/EUR exchange rates?
3. On April 3, 2015 the exchange rate between the Canadian dollar (CAD) and the Swiss franc (CHF) was CHF 0.76351/CAD 1. On that same day the exchange rate between the Euro (EUR) and the Swiss franc (CHF) was CHF 1.40215/EUR 1.
a. What were the CAD/CHF and EUR/CHF exchange rates?
b. What were the EUR/CAD and CAD/EUR exchange rates?
4. Between April 2 and April 3 did the Euro appreciate or depreciate vis-à-vis the Swiss Franc? Did the Canadian dollar appreciate or depreciate vis-à-vis the Swiss Franc? Did the Canadian dollar appreciate or depreciate vis-à-vis the Euro?
5. Alice and Bob are trapped on an otherwise uninhabited tropical island. They survive by picking coconuts and catching fish. Each works 10 hours per day. If each devotes 5 hours per day to each activity, this table describes how much of each good each can produce:
a. At which activity does Alice have an absolute advantage? At which activity does Bob have an absolute advantage?
b. At which activity does Alice have a comparative advantage? At which activity does Bob have a comparative advantage?
c. Assume that each spends all 10 hours per day producing the good at which they have a comparative advantage. How much of each good will each person produce? What will total output be? Has specialization increased total output?