Unit 3 Short-Answer Assignment Name: 1. Using the data in the accompanying

Unit 3 Short-Answer Assignment

Name:

1. Using the data in the accompanying table, answer the following questions:

For which good does Canada have a comparative advantage?

For which good does Italy have a comparative advantage?

What might be a set of favorable terms of trade for the two countries?

Prove that both countries would be better off in the specialization-trade case than in the no-specialization–no-trade case.

Points on

Production CANADA ITALY

Possibilities Frontier Good X Good Y Good X Good Y

A 150 0 90 0

B 100 25 60 60

C 50 50 30 120

D 0 75 0 180

2. Suppose the U.S. government wants to curtail imports due to a very large trade deficit. Would it be likely to favor a tariff or a quota to accomplish its objective? Why?

3. You have decided to go on vacation to Italy. They use the euro as their country currency.
Assume the U.S. dollar exchange rate with the euro was $1.05 to purchase 1 euro when you planned your trip. The exchange rate goes to $1.30 to purchase 1 euro when you are ready to begin your trip. What has happened to the purchasing power of the U.S. dollar? What will happen to the price of the goods and services you purchase during your trip? Why?