2013-12 QUIZ 20 April 1999
1. John can wash and wax the exteriors of two cars an hour, or do a detail clean on the interior of one car an hour. Sue can wash and wax the exteriors of three cars an hour, or do detail cleans of the interiors of four cars an hour.
Who has comparative advantage in interior detailing? John or [Sue] --Sue is the answer
You have comparative advantage if you are the low opportunity cost producer. John's alternatives in an hour are w&w 2 cars or detail 1; so his opportunity cost of detailing is two wash and waxes. Sue's alternatives in an hour are w&w 3 or detail 4; so her opportunity cost of detailing is 3/4 of a wash and wax. She has the lower opportunity cost, so she has comparative advantage.
2. If last Friday, one English pound could be bought for $1.48, but today it costs $1.50, from Friday to today, relative to the pound the $ has
appreciated or [depreciated]*
and relative to the $ the pound has
[appreciated]* or depreciated
* right answer
Appreciated means "become more valuable," i.e. more expensive in foreign currency; depreciated means "become less valuable," i.e. cheaper in foreign currency. One pound was $1.48, now is $1.50; so the pound has become more expensive, it has appreciated relative to the dollar; so the $ (which now buys fewer pounds) has become cheaper, it has depreciated.
3. If, in the US compared to its major trading partners,
GNP grows faster (so imports tend to grow faster than exports),
Inflation is more rapid, and
Real interest rates are lower,
the tendency will be for US demand for foreign currency, compared to the supply of foreign currency to the US, to grow
[faster]* or slower
and therefore the value of the US $ to
appreciate or [depreciate]*
To buy imports means to pay foreigners, to pay foreigners you need foreign currency, so the demand for foreign currency increases;
If inflation is more rapid in the US, US prices rise faster than foreign prices, so foreign goods are relatively cheaper, so imports tend to rise, US demand for foreign currency tends to rise;
If US real interest rates are lower, you get a higher real interest rate in a foreign currency in a foreign country, so that will tend to raise the US demand for foreign currency.
Supply of foreign currency to the US is the same as demand for US $ from foreigners, which will be growing slower for those same three reasons. So US demand for foreign currency grows faster, meaning the price of foreign currency in dollars will tend to rise. That means the value of the dollar in foreign currency will fall (the one is the reciprocal of the other), so the value of the US $ depreciates.