Question : Assume that two countries (Pomerania and Ruthenia) produce and sell the same two commodities (steel and coal) at the following prices in their respective home markets before trade: Pomerania Ruthenia (dinars) (marks) Unit price of steel 4

Sociology Nov 09, 2020

Question : Assume that two countries (Pomerania and Ruthenia) produce and sell the same two commodities (steel and coal) at the following prices in their respective home markets before trade:

________________________________________________________________

Pomerania Ruthenia

(dinars) (marks)

________________________________________________________________

Unit price of steel 4.00 3.00

Unit price of coal 2.00 12.00

________________________________________________________________

Assume that reciprocal demand is 2.0 million units of steel and 1.0 million units of coal and assume that both countries have neither a trade deficit nor a trade surplus. Also assume that the market exchange rate is 1 dinar = 3 marks.

Calculate the per unit gains from trade and the total gains from trade for both countries.

Question 2 : Assume that two countries (Pomerania and Ruthenia) produce and sell the same two commodities (steel and coal) at the following prices in their respective home markets before trade:

________________________________________________________________

Pomerania Ruthenia

(dinars) (marks)

________________________________________________________________

Unit price of steel 2.00 1.00

Unit price of coal 1.00 4.00

________________________________________________________________

Assume that reciprocal demand is 1.5 million units of steel and 0.8 million units of coal.

Is 1 dinar = 1.88 marks the correct market exchange rate ? (20 points)