COMM 220 Lecture Notes - Lecture 8: Opportunity Cost, International Trade, Interest Rate Parity
2 Dec 2018
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Document Summary
International trade can make people better off when their country manufactures goods whose costs are low compared to that of other countries. As for currencies, translating one to another isn"t rocket science, but the difference in interest rates between two countries sends a message about how the market expects an exchange rate to change. Wine and wool sweaters are made in both england and italy. Suppose that england can produce as much as 30,000 litres of wine or as many as 2,000 sweaters in a year. Both countries, of course, produce some mix of the two goods. Suppose also that the number of litres of wine that each country must give up to produce an extra sweater does not depend on the mix of sweaters and wine it is producing. That means that one more sweater always costs 15 litres of wine in england and 20 in italy.
