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

question 75

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 25 percent share in Foreign land. He will receive 25 percent share in Foreign land and thus receives 25 percent of the annual Foreign kiwi fruit harvest. Further assume also that a Foreign owner of a 25 percent share in Home land is permitted. In this case, a Foreigner is entitled to 25 percent of the Home harvest. Calculate the expected value of kiwi fruit for each investor.

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Definitions:

Personal Benefit

An advantage or gain received by an individual, often as a result of employment, investment, or personal connections.

Contributions

Gifts or payments made to support an organization, cause, or initiative, typically in the form of money, services, or goods.

Theory X

Theory X is a management concept that assumes employees are inherently lazy and will avoid work if they can, suggesting the need for strict supervision and control.

Workers

Individuals engaged in an occupation, profession, or are employed by an organization.