The Following Simple Two-Country Question Illustrates How Countries Are Made

question 15

Essay

The following simple two-country question illustrates how countries are made better off by trade in assets. Imagine that there are two countries, Home and Foreign, and that residents of each own only one asset, domestic land yielding an annual harvest of kiwi fruit. Assume that the yield on the land is uncertain. Half the time, Home's land yields a harvest of 100 tons of kiwi fruit at the same time as Foreign's land yields a harvest of 50 tons. The other half of the time the outcomes are reversed. The Foreign's harvest is 100 tons, but the Home harvest is only 50.
-Suppose the two countries can trade shares in the ownership of their perspective assets. Further, assume that a Home owner owns a 10 percent share in Foreign land. He will receive 10 percent share in Foreign land, and thus receives 10 percent of the annual Foreign kiwi fruit harvest. Further assume that a Foreign owner of a 10 percent share in Home land is permitted. In this case, a Foreigner is entitled to 10 percent of the Home harvest. Calculate the expected value of kiwi fruit for each investor. Is the investor better off?

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Definitions:

Contractual Liability

Refers to the legal obligation a party assumes when entering into a contract, requiring them to fulfill the terms of the agreement.

Indorser

A person who signs a document, typically a negotiable instrument, indicating their intention to transfer the document to someone else.

Transferor

The party who transfers rights or property to another party, the transferee.

Unauthorized Signature

The signing of a document by a person who does not have the legal authority or permission to do so.