1. Why did the Mercantilists consider holdings of precious metals so important to nationstate building? (6 points)
Mercantilists consider that a country’s wealth is measured by its holding of precious
metals (specie). Nation-states wished to become wealthy and this meant obtaining large
holdings of precious metals. It is also argued by some that the shortage of money
constrained the growth of these nation-sates and that precious metals were required to
increase the supply of money in order for the countries to grow. Also, a country should
maintain a positive trade balance.
2. Assume that both the United States and Germany produce beef and computer chips with the
following costs: (12 points)
Unit cost of beef (B)
Unit cost of computer chips (C)
United States Germany
(dollars)
(marks)
2
8
1
2
a. What is the opportunity cost of beef (B) and computer chips (C) in each country?
United States: the opportunity cost of one unit of beef is 2 chips; the opportunity
cost of one chip is 1/2 unit of beef.
Germany: the opportunity cost of one unit of beef is 4 chips; the opportunity cost
of one chip is 1/4 unit of beef.
b. In which commodity does the United States have a comparative cost advantage?
What about Germany?
The United States has a comparative cost advantage in beef, while Germany has a
comparative cost advantage in chips.
c. What is the range for mutually beneficial trade between the United States and
Germany for each computer chip traded?
The range for mutually beneficial trade between the United States and Germany for
each unit of beef that the U.S. exports: 2 chips to 4 chips.
d. How much would the United States and Germany gain if 1 unit of beef is exchanged
for 3 chips?
Both the U.S. and Germany would gain 1 chip for each unit of beef traded.
3. “If U.S. productivity growth does not keep up with that of its trading partners, the United
States will quickly lose its international competitiveness and not be able to export...