Prof. Bryan Caplan

bcaplan@gmu.edu

http://www3.gmu.edu/departments/economics/bcaplan

Econ 311

Spring, 2001

I.                     Crusoe and Friday can both work 10 hours per day producing fish, huts, or both.  The table below describes what an hour of their time can produce:

 Fish Huts Crusoe 100 .25 Friday 30 .2

A. Who has an absolute advantage in fish?  In huts?

B.  Who has a comparative advantage in fish?  In huts?

C.  Suppose Crusoe and Friday initially refuse to trade.  Each spends half of his time producing fish, and the other half producing huts.  How much does Crusoe produce in a day?  Friday?  What is the total quantity of fish and huts produced?

D.  Now suppose Crusoe and Friday trade: Friday produces huts all day long, while Crusoe spends 7 hours/day fishing and the rest building huts.  What is their total production now?  How is that possible?

II.                   Britain and France both have 5 million full-time workers, who produce either cotton or wheat.  A full-time worker can produce the following in a year:

 Cotton Wheat Britain 2 1 France 1 2

A. Who has an absolute advantage in cotton?  In wheat?

B.  Who has a comparative advantage in cotton?  In wheat?

C.  Suppose Britain and France initially refuse to trade.  Half of each countries workers produce each good.  How much does Britain produce in a year?  France?  What is the total quantity of cotton and wheat produced?

D.  Now suppose Britain and France trade.  Use one example to show how total production can increase.

III.                  Suppose people are exchanging American dollars for Italian lira.  Draw a S&D diagram showing the effect of each of the following from BOTH the U.S. and Italian viewpoints.  Then state which currency appreciates, and which depreciates.

A.                An increase in the U.S. money supply.

B.                A decrease in the Italian money supply.

C.                An increase in the popularity in the U.S. of vacations in Sicily.

D.                Rumors that the Italian central bank will adopt more expansionary policies.

IV.               Suppose the U.S. price of 1 MB of RAM is \$1, the French price is 3 francs, and the price of 1 franc is .\$60.  Carefully describe how you could profit from this situation if there were no transportation costs and no taxes.

V.                 Using the terminology of "Current Accounts" and "Capital Accounts," explain why:

A.                Japan's high savings rates lead to U.S. trade deficits with Japan.

B.                France had a trade deficit with the U.S. after World War II.

C.                Russian had a trade deficit with the U.S. as confidence in the ruble deteriorated.

VI.               Apply one of the fallacies about international trade that Bastiat discusses to one contemporary issue.  Be careful to state the specific fallacy Bastiat critiques.

VII.              Read the attached speech by Franklin Roosevelt, "Government and Modern Capitalism."  Pick ONE economic confusion from the text to critique.  Then, in less than 1 page, double-spaced:

A.                Quote the exact passage you want to critique.

B.                Explain the economic fallacy or confusion implied or stated in the text.

C.                Describe the probable consequences of using this fallacy to formulate economic policy.