Chapter 15 International Trade and Finance

What could motivate government to pursue these stricter entry barriers on Japanese cars?

Politicians often come under political pressure to accommodate the domestic industry.

Without trade, the consumption possibilities for two nations are:

along their production possibilities curve.

Suppose the price level in South Korea rises by 7%, while the price level in the euro zone remains the same. That is, the inflation rate in South Korea is higher than in the euro zone. Drag the appropriate curve or curves on the following graph to illustrate how this affects the market for South Korean won.

- Demand curve shifts left - Supply curve shifts right - Suppose the real interest rates in the euro zone and South Korea are initially the same. Then the real interest rate in South Korea falls, while the real interest rate in the euro zone remains the same. This will cause the supply of won to [increase] and the demand for won to [decrease], which causes the euro to [appreciate] relative to the South Korean won.

Suppose the price level in Malaysia rises by 10%, while the price level in Mexico remains the same. That is, the inflation rate in Malaysia is higher than in Mexico. Drag the appropriate curve or curves on the following graph to illustrate how this affects the market for Mexican pesos.

- Demand curve shifts right - Supply curve shifts left - Suppose the real interest rates in Malaysia and Mexico are initially the same. Then the real interest rate in Malaysia falls, while the real interest rate in Mexico remains the same. This will cause the supply of pesos to [decrease] and the demand for pesos to [increase], which causes the Malaysian ringgit to [depreciate] relative to the Mexican peso.

Suppose an economic downturn in South Korea causes South Korean incomes to decrease, while European incomes remain unchanged. Shift the appropriate curve or curves on the following graph to illustrate how this affects the market for South Korean won if all other things remain equal.

- Supply curve shifts left - The decrease in South Korean incomes causes the South Korean won to [appreciate] relative to the euro and causes the euro to [depreciate] relative to the South Korean won.

Suppose an economic expansion in Mexico causes Mexican incomes to rise, while Malaysian incomes remain unchanged. Shift the appropriate curve or curves on the following graph to illustrate how this affects the market for Mexican pesos if all other things remain equal.

- Supply curve shifts rightward - The increase in Mexican incomes causes the Mexican peso to [depreciate] relative to the Malaysian ringgit and causes the Malaysian ringgit to [appreciate] relative to the Mexican peso.

In Exhibit 15-1, the production possibilities curves of wheat and corn for Nabia and Pada are presented. Suppose Nabia produces at point A on its PPC. How many units of wheat is the country able to produce?

20

balance of payments

A bookkeeping record of all the international transactions between a country and other countries during a given period of time

depreciation of currency

A fall in the price of one currency relative to another

How could an increase in a nation's fiscal deficit increase its trade deficit?

A greater fiscal deficit increases interest rates. This attracts foreign funds increasing the value of the dollar and therefore the trade deficit.

embargo

A law that bars trade with another country

quota

A limit on the quantity of a good that may be imported in a given time period

appreciation of currency

A rise in the price of one currency relative to another

tariff

A tax on an import

What impact will an appreciation of the dollar have on the relative price of foreign goods to Americans, and the relative price of American-made products to foreigners? What will likely happen to America's trade deficit?

An appreciation of the dollar will cause the relative price of foreign-made products to be cheaper to Americans. America will import more. The relative price of American-made goods will be more expensive to foreigners and America will export less. These combined effects create a larger trade deficit.

World Trade Organization (WTO)

An international organization of member countries that oversees international trade agreements and rules on trade disputes

In Exhibit 15-1, the production possibilities curves of wheat and corn for Nabia and Pada are presented. If both countries specialize in one good and trade for the other, :

Nabia and Pada will be able to consume at a point to the right of their respective production possibilities curves.

Which type of trade barrier is most advantageous from the government's perspective?

Tariffs because they raise tax revenues.

comparative advantage

The ability of a country to produce a good at a lower opportunity cost than another country

absolute advantage

The ability of a country to produce a good using the same or fewer resources than another country

What are the benefits and the costs to a nation of higher trade barriers? Which are greater: the benefits or the costs?

The benefits accrue to the protected industries and their workers in the form of higher profits and greater job security. The costs to a nation are borne by the general consuming public who must pay higher prices for not only imported products but domestic products as well.

free trade

The flow of goods between countries without restrictions or special taxes

protectionism

The government's use of embargoes, tariffs, quotas, and other restrictions to protect domestic producers from foreign competition

exchange rate

The number of units of one nation's currency that equals one unit of another nation's currency

What will likely happen to a nation's balance of payments if its GDP and income levels increase?

The trade deficit will likely increase because higher relative incomes will increase imports.

balance of trade

The value of a nation's imports subtracted from its exports; balance of trade can be expressed in terms of goods, services, or goods and services

Suppose the U.S. government increases trade barriers on Japanese cars coming into the United States. a. What impact would this have on the American car market? What about the impact on American automotive workers? (Hint: think in terms of demand and supply analysis). b. What impact would this have on the Japanese car market in the United States? c. Who benefits and who loses from the higher trade barriers imposed on Japanese cars coming into the United States?

a) This would increase the demand for American cars, increasing prices and the amount bought and sold. Profits would rise. This would also increase the demand for American automotive workers increasing wages and employment opportunities. b) This would reduce the supply of Japanese cars in the United States thereby pushing up their prices and decreasing the amount bought and sold. c) The beneficiaries include the American car manufacturers and their stockholders because of the increased profits earned. American automotive workers also benefit. The American consumer, on the other hand, loses because of the higher prices which must be paid for both American-made and Japanese-made cars sold in the United States.

Which of the following statements is true? a. Specialization and trade along the lines of comparative advantage allows nations to consume more than if they were to produce just for themselves. b. Free trade theory suggests that when trade takes place any gains made by one nation comes at the expense of another. c. According to the theory of comparative advantage a nation should specialize in the production of those goods for which it has an absolute advantage. d. All of the above.

a. Specialization and trade along the lines of comparative advantage allows nations to consume more than if they were to produce just for themselves.

Trade between nations A and B: a. leaves the consumption possibilities of nation A unchanged. b. increases the consumption possibilities of both nations. c. increases the production possibilities of both nations. d. leaves the consumption possibilities of nation B unchanged.

b. Increases the consumption possibilities of both nations.

Specialization and trade allow an economy to expand its: a. technological advantage. b. consumption possibilities. c. production possibilities. d. absolute advantage.

b. consumption possibilities.

International trade has the potential to ____ the availability of goods and services to ____. a. increase; those nations who export more than they import b. increase; all nations c. decrease; all nations d. increase; nations that have an absolute advantage in the production of a good or service

b. increase; all nations

Opening trade between two nations would: a. leave the production possibilities unchanged and decreased their consumption possibilities. b. leave the production possibilities unchanged and increase their consumption possibilities. c. shift their production possibilities curves inward. d. shift their production possibilities curves outward

b. leave the production possibilities unchanged and increase their consumption possibilities

In Exhibit 15-1, the production possibilities curves of wheat and corn for Nabia and Pada are presented. If both countries specialize in one good and trade for the other, : a. Nabia will be able to consume, at the most, the combination represented by point A. b. The citizens of Nabia will consume only corn and the citizens of Pada will consume only wheat. c. Nabia and Pada will be able to consume at a point to the right of their respective production possibilities curves. d. Pada will be able to consume, at the most, the combination represented by point B.

c. Nabia and Pada will be able to consume at a point to the right of their respective production possibilities curves.

In Exhibit 15-1, the production possibilities curves of wheat and corn for Nabia and Pada are presented. If these two nations trade, Nabia should specialize in the production of: a. corn. b. neither product since Pada has the absolute advantage in the production of both. c. wheat. d. corn and wheat.

c. Wheat.

Comparative advantage explains why a nation will benefit from trade when: a. it exports more than it imports. b. it exports goods for which it is a high-opportunity cost producer, while importing those for which it is a low-opportunity cost producer. c. it exports goods for which it is a low-opportunity cost producer, while importing those for which it is a high-opportunity cost producer. d. its trading partners are experiencing offsetting losses.

c. it exports goods for which it is a low-opportunity cost producer, while importing those for which it is a high-opportunity cost producer.

As shown in Exhibit 15-2, the United States has a comparative advantage over Mexico in: a. cloth, but not in wheat. b. neither wheat nor cloth c. wheat, but not in cloth. d. both wheat and cloth.

c. wheat, but not in cloth.

Specialization and trade allow an economy to expand its:

consumption possibilities.

In Exhibit 15-1, the production possibilities curves of wheat and corn for Nabia and Pada are presented. Suppose Nabia produces at point A on its PPC. How many units of wheat is the country able to produce? a. 60. b. 15. c. 40. d. 20.

d. 20.

Which of the following statements is true? a. A tariff is a physical limit on the quantity of a good allowed to enter a country. b. An embargo is a tax on an imported good. c. A quota is a law that bars trade with another country. d. When a nation exports more than it imports it is running a balance of trade surplus.

d. When a nation exports more than it imports it is running a balance of trade surplus.

Without trade, the consumption possibilities for two nations are: a. at a point equal to the world production possibilities curve. b. outside their production possibilities curve. c. inside their production possibilities curve. d. along their production possibilities curve

d. along their production possibilities curve.

If the dollar appreciates (becomes stronger) this causes: a. the relative price of U.S. goods to increase for foreigners. b. the relative price of foreign goods to decrease for Americans. c. U.S. exports to fall and U.S. imports to rise. d. a balance of trade deficit for the U.S. e. All of the above.

e. All of the above.

Which of the following is not an argument used in favor of protectionism? a. To protect an "infant" industry. b. To protect domestic jobs. c. To preserve national security. d. To protect against "unfair" competition because of cheap foreign labor. e. To reduce prices paid by domestic consumers.

e. To reduce prices paid by domestic consumers.

International trade has the potential to ____ the availability of goods and services to ____.

increase; all nations

Trade between nations A and B:

increases the consumption possibilities of both nations.

Comparative advantage explains why a nation will benefit from trade when:

it exports goods for which it is a low-opportunity cost producer, while importing those for which it is a high-opportunity cost producer.

Opening trade between two nations would:

leave the production possibilities unchanged and increase their consumption possibilities.

In Exhibit 15-1, the production possibilities curves of wheat and corn for Nabia and Pada are presented. If these two nations trade, Nabia should specialize in the production of:

wheat.