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US = $6 / Hour $1 = £ 2
UK = £1 / Hour
Product US UK
Wheat $6 £1
𝑋 $1 = $1 𝑋 $2 = $2
6 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 1 𝑃𝑟𝑜𝑑𝑢𝑐𝑡
Clothes $6 £1
𝑋 $1 = $1.5 𝑋 $2 = $1
4 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 2 𝑃𝑟𝑜𝑑𝑢𝑐𝑡
Question:
1. How If the exchange rate between the dollar and the pound were instead £1 = $1?
2. How if the exchange rate were £1 = $3?
Answer:
1. If exchange rate were $1 = £1
Product US UK
Wheat $6 £1
𝑋 $1 = $1 𝑋 $1 = $1
6 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 1 𝑃𝑟𝑜𝑑𝑢𝑐𝑡
Clothes $6 £1
𝑋 $1 = $1.5 𝑋 $1 = $0.5
4 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 2 𝑃𝑟𝑜𝑑𝑢𝑐𝑡
Analysis:
A. Wheat production in the USA surpasses the UK in efficiency where they only
needed $1 to produce 6 wheat while the UK needed the same amount only to
produce 1 wheat. In contrast, the production of clothing, the cost required by the
UK to produce 2 clothing is $0.5 whereas the US requires $1.5 to produce 4
clothing.
B. By paying fees of at least $1 and 2 hours of work time, the US can satisfy the needs
of clothing domestically. in contrast to that, the UK only needs $1 and 20 minutes
of work time to meet domestic needs for wheat.
Conclusion: US and UK may experience the benefit of working time if they
allocate their resources to their comparative advantage, the US will get 1 additional
hour of clothing production to produce wheat and the UK will get 1 hour of wheat
production to be allocated to clothing production.
 2. If exchange rate were £1 = $3
Product US UK
Wheat $6 £1
𝑋 $1 = $1 𝑋 $3 = $3
6 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 1 𝑃𝑟𝑜𝑑𝑢𝑐𝑡
Clothes $6 £1
𝑋 $1 = $1.5 𝑋 $3 = £1.5
4 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 2 𝑃𝑟𝑜𝑑𝑢𝑐𝑡
Analysis:
In these circumstances, there will be no profitable trade for the US because
the price of goods in the UK is too high. The UK will benefit from this trade while
the US will suffer losses in all fields that will be traded. Trade will not occur, and
the US will produce both goods domestically.

Conclusion: No trade will occur because of the discrepancy between two countries.
It would only benefit one side.

Source:
Salvatore, Dominick. 2013. International Economics 11th Edition. New Jersey: John
Wiley & Sons, Inc.