Suppose that the United States and Spain both produce cognac and handbags. In the United States, cognac sells for $20 a bottle and handbags sell for $80. In Spain, cognac sells for 30 euros a bottle and handbags sell for 40 euros. If the current exchange rate is 0.8 euro to the dollar, then

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Quizplus · Accepted Answer

When converted to a common currency, cognac is cheaper in the US ($20 = 16 euros) than in Spain (30 euros), and handbags are cheaper in Spain (40 euros = $50) than in the US ($80). Thus, the US will import handbags from Spain, and Spain will import cognac from the US.

Suppose That the United States and Spain Both Produce Cognac