Multinational Financial Management 11th Edition by Alan C. Shapiro Solution manual

 
3.    Given the resources available to them, countries A and B can produce the following combinations of steel and corn.
 
 
               Country A 
               Country B
 
Steel (tons) 
Corn (bushels) 
Steel (tons) 
Corn (bushels)
 
36 
0 
54 
0
 
30 
3 
45 
9
 
24 
6 
36 
18
 
18 
9 
27 
27
 
15 
12 
18 
36
 
6 
15 
9 
45
 
0 
18 
0 
54
 
a.    Do you expect trade to take place between countries A and B? Why?
 
Answer. Yes. Given the data presented, we can see that if country A has 6 units of resources and it devotes X of these units to steel production, where X is an integer, it can produce a total of 6X tons of steel and 3(6 - X) bushels of corn Similarly, with 54 units of resources, country B of which it devotes Y units to steel production, it can produce Y tons of steel plus (54 - Y) bushels of corn. The net effect of these production functions is that one bushel of corn is worth 2 tons of steel in country A. In contrast, one bushel of corn is worth only one ton of steel in country B. These relative prices indicate that country A has a comparative advantage in the production of steel, whereas B has a comparative advantage in the production of corn.
 
b.    Which country will export steel? Which will export corn? Explain.
 
Answer. Given these comparative advantages, A will export steel and B will export corn. The price of corn will settle somewhere between one and two tons of steel. Suppose it settles at 1.5 tons of steel. Then, instead of producing, say, 30 tons of steel and 3 bushels of corn, it can devote an additional resource unit to the production of an additional 6 tons of steel. It can trade these 6 tons of steel with B for 6/1.5 = 4 bushels of corn, leaving it one bushel of corn better off. Similarly, B can now get 6 tons of steel for the 4 bushels of corn it trades to A instead of the 4 tons of steel it could produce on its own with the resources it took to produce the 4 bushels of corn.