Wednesday December 2

1. Which of the following increases demand for dollars in the foreign exchange market?

  1. You spend the summer in Europe
  2. **A Japanese student pays his own way to come to FSU**
  3. You buy a new Korean-made VCR
  4. **The Korean manufacturer buys US-made machine tools. **

An action increases demand for dollars in the foreign exchange market if someone who normally transacts in another currency needs dollars for the action they are going to take; the Japanese student needs dollars to pay to go to FSU, and buys them with Yen; the Korean manufacturer needs dollars to buy the US machine tools, and buys the dollars with Won. Those two actions increase demand for dollars in the foreign exchange market. The other two actions increase the supply -- people with dollars are needing to make payments in foreign currencies.

  1. An Illinois farmer can grow 40 bushels an acre of corn, or 30 bushels an acre of soybeans; a Brazilian farmer can grow 150 kg of corn a hectare, or 75 kg of soybeans a hectare. Which has comparative advantage in soybeans? For the Brazilian, what is the opportunity cost of a Kg of soybeans?

You don't need to know how many kg in a bushel, or how many acres in a hectare. For the Illinois farmer, on an acre he can grow either

40 bushels of corn OR 30 bushels of soybeans; so to get an extra bushel of corn he has to give up 30/40 = 3/4 bushels of soybean; opportunity cost of a unit of corn is 3/4 of the unit of soybeans;

or to get an extra bushel of soybeans, he has to give up 40/30 = 1 1/3 bushels of corn, opportunity cost of a bushel of soybeans is 1 1/3 of corn.

For the Brazilian, the hectare grows either 150 kg of corn OR 75 kg of soybeans; so by the same process, opportunity cost of 1 kg corn is 1/2 kg of soybeans, of 1 kg soybeans is 2 kg corn.

You have comparative advantage if you are the low opportunity cost producer; that is the Illinois farmer, whose opportunity cost is 1 1/3 corn, as opposed to 2 corn for the Brazilian.