Question: The United States and Russia each produce only bearskin caps and wheat. Domestic prices are given in the following table:

Russia United States

Bearskin caps 10 Ru $7 per hat

Wheat 15 Ru $10 Per Bushel

On April 1, the Zurich exchange listed an exchange rate of $1 = 1 Ru

a. Which country has an absolute advantage in production of bearskin caps? Wheat?

b. Which country has a comparative advantage in the production of bear skin caps? Wheat?

c. If the United States and Russia were the only two countries engaging in trade, what adjustments would you predict, assuming exchange rates are freely determined by the laws of supply and demand?