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Unit IV Assignment
Part One
Your company is deciding to expand to the following countries, and you and two other
managers will have to visit these countries to set up operations. You have $1,500.00 to convert in
each currency.
of another currency
(as of 2/17/16)
Utilizing the same exchange rate, while you are visiting each of these countries, you have
to buy supplies/equipment for your operations; you want to determine what it is costing you in
Ұ167,000.00
€1,125.00
Pedro in Costa Rica wants to purchase some wild Atlantic salmon from Hans in Iceland.
The fish are purchased in Iceland’s currency, the krona. Pedro’s brother works in a bank and will
take care of the transactions free of charge. Pedro has 1,000,000.00 colones to start with. How
much krona does he have to work with? (There is no transaction fee, and shipping is not
2/17/16)
Pedro uses CRC 1,000,000 to buy USD: 1,000,000: 0.001909= USD 1,909
The next day, Hans decides to purchase some bananas from his new trading partner in
Costa Rica. Han’s sister works for an import/export agency and can arrange the transaction in
euros with no fee. Hans takes all of the krona he received from Pedro and proceeds to convert his
currency to colones. How much colon does he have to work with? (Note: One country’s currency
experienced some weakness overnight.) List your steps and the results you achieved with each
step. Also, explain some factors that could cause the country’s currency to weaken.
Trade deficit: When the cost of a country's imports exceeds the value of its exports, the
demand for USD increases resulting in the increase of USD price and devalue of local currency.
with the rest of the world for a specified time period. When inflow of USD is less than the
outflow of USD, it leads to a shortage of USD and the price of USD increases.
Inflation: Inflation is defined as a sustained increase in the general level of prices for
goods and services. It is measured as an annual percentage increase. As inflation rises, every
Tariff: A tax imposed on imported goods and services. Tariffs are used to restrict trade,
as they increase the price of imported goods and services, making them more expensive to
consumers. Tariffs provide additional revenue for governments and domestic producers at the
expense of consumers and foreign producers. They are one of the several tools available to shape
trade policy.
goods from one country must compete with those from other countries. For example, if the value
of the euro decreases against the dollar, the price of the cars sold by European automakers in the
The economic situation in the country: Economic conditions refer to the state of the
economy in a country. They change over time in line with the economic and business cycles, as
an economy goes through expansion and contraction. Economic conditions are considered to be
positive when an economy is expanding and are considered to be negative when an economy is
in USD leading to a high demand of USD and increased price of USD, which devalues the
country’s currency. More money is printed also leads to high inflation and the value of country’s
currency is decreased.
Part Three
Absolute advantage theory and competitive advantage theory: Both theories state that
labor productivity affects the trade pattern of a country and assume that labor is the only factor of
production.
Absolute advantage theory was first mentioned by Adam Smith in 1776 relating to
international trade. It stated that different countries produce a greater quantity of a good, product,
or service than others with cheaper price, using the same amount of resources. (Daniel, et al.
2015. p.236). A country’s advantage can be a natural advantage such as climate, soil, gold
mines… or acquired advantage such as product technology or process technology that enables a
country to produce a unique product which is easily distinguished from those of competitors
(Daniel, et al. 2015 p. 237). Japan has an absolute advantage in automobile technology.
For example:
4. Uses half of total resources per 4. Uses half of total resources per
product when there is no trade with product when there is no trade with
Italia France
France has the absolute advantage in producing cheese as it needs only 5 units of
Italia has the absolute advantage in producing Ham as it needs only 8 units of resources to
Without trade:
France 10 5
Italia 5 6.25
Total 15 11.25
Without trade, each country spends half of its resources to produce cheese and ham.
France produces 10 tons of cheese (50 units of resources/5 units of resources per ton of cheese)
and 5 tons of ham (50 units of resources/10 units of resources per ton of ham). Italia produces 5
tons of cheese (50 units of resources/10 units of resources per ton of cheese) and 6.25 tons of
ham (50 units of resources/8 units of resources per ton of ham). The total outputs of 2 countries
With trade
France 20 0
Italia 0 12.5
Total 20 12.5
With trade, each country will focus on producing the product which is its absolute
advantage. France has the absolute advantage in cheese, so it focuses on producing cheese with
maximum output is 20 tons (100 units of resources/ 5 units of resources per ton of cheese). Italia
has the absolute advantage in ham, so it focuses on producing ham with maximum output is 12.5
With trade, both countries have benefited by increased product, for cheese, they have extra 5 tons
efficiency gains may still result from trade if a country specializes in what it can produce most
efficiently, regardless of other countries’ absolute advantage” ( Daniels, et al. 2015. p.239).
4. Uses half of total resources per 4. Uses half of total resources per
product when there is no trade with product when there is no trade with
Italia France
Without trade:
France 5 6.25
Italia 12.5 10
France produces 5 tons of cheese (50 units of resources/10 units of resources per ton of cheese)
and 6.25 tons of ham (50 units of resources/8 units of resources per ton of ham). Italia produces
12.5 tons of cheese (50 units of resources/ 4 units of resources per ton of cheese) and 10 tons of
ham (50 units of resources/5 units of resources per ton of ham). The total outputs of 2 countries
for cheese are 17.5 tons and ham are 16.25 tons.
With trade:
France 0 12.5
Italia 17.5 6
With trade, Italia has absolute advantages in both cheese and ham. Both countries keep
the total output of cheese as 17.5 tons, which is the same as before trade. Italia uses only 70 units
of resources (17.5 tons* 4 units of resources= 70 units of resources) to produce 17.5 tons cheese,
the remained 30 units of resources are used to produce ham which gives out 6 tons of ham
(30/5=6). France doesn’t have the absolute advantage in both products, however, it can produce
ham more efficiently than cheese. France uses all of its resources to produce 12.5 tons of ham
(100/8=12.5). The total output of ham increases to 18.5 tons (12.5+ 6), which is 2.25 tons more