econ 452 test 3
We solved a trade model for an optimal tariff, but we saw that there is a limit to how high we can set the tariff. Why must the optimal tariff be small in order to increase national welfare?
If it is too high then it makes products way too expensive, when low it still hurts but way more reasonable
Discuss the state of credit/debt to GDP in China and explain what this may indicate
Possibility of market crash. China debts and credits have been continually increasing and hasn't hit a peak yet so could indicate a bubble in the market, surpassed us level, could indicate a market crash in the future
(extra prob) In 1984 and 1985, the small Latin American country of Bolivia experienced hyperinflation. Consider key macroeconomic data from those years like the Money Supply, Price Level, and Exchange Rate. Do the money supply, price level, and exchange rate against the U.S. dollar move broadly as you would expect? Explain. The Bolivian government introduced a dramatic stabilization plan near the end of August 1985. Looking at the price levels and exchange rates for the following two months, do you think it was successful? In light of your answer, explain why the money supply increased by a large amount between September and October 1985.
price level rises consistently with the increase in the bolivian money supply. increase in money supply should cause prices to rise. an increase in money supply and the price level should in turn cause bolivian peso to depreciate against the dollar the stabilization plan was effective at reducing the increase in the price level and arresting the depreciation of the bolivian peso. money supply continued to grow during these two months. can partially attribute differential growth rates to expectations.
(extra prob) In Munich, a bratwurst costs 5 euros; a hot dog costs $4 at Boston's Fenway ark. At an exchange rate of $1.05/per euro, what is the price of a bratwurst in terms of a hot dog? All else equal, how does this relative price change if the dollar depreciates to $1.25 per euro? Compared with the initial situation, has a hot dog become more or less expensive relative to a bratwurst?
price of one bratwast= 5 euros x $1.05 = $5.25 price of bratwurst in terms of hot dog = 5.25/4 = 1.3125 so one bratwurst is equal to 1.3 hotdogs. so relative price of bratwurst to hotdog=1.3 5 euros x $1.25 = 6.25 6.25/4=1.5625 relative price of bratwurst to hotdog=1.6 hotdogs become less expensive
Consider the hyperinflation in Zimbabwe described on page 400 (and hyperinflations in general). A. What was the cause of hyperinflation? i.e. do hyperinflations occur "naturally"? B. What happened to the Zimbabwean dollar to U.S. dollar exchange rate?
Cause- change in the money supply (controlled by government/central bank) correlated to changes in price, do not occur naturally, exchange rate- price of zim dollar over u.s. Dollar, zim dollar value goes down, depreciation
If there are internal economies of scale, why would it ever make sense for a firm to produce the same good in more than one production facility? (on review)
Even with internal economies of scale, there may still be an advantage to producing the same good in multiple production facilities. This is an example of the proximity-concentration trade-off. The advantage of producing in only one location is that economies of scale are maximized. However, producing in only one location exposes this firm to trade costs when it exports from that location. If these trade costs are high enough, it may be more efficient to locate production in multiple locations. The number of locations is limited by the losses from splitting production and losing out on economies of scale
Which of the following goods or services would most likely be subject to external economies of scale and dynamic increasing returns? Explain your answers. c. motion pictures (on review)
External economies are highly likely because having a great number of support firms and an available pool of skilled labor in filmmaking are critical to film production. Dynamic returns are also likely because filmmaking is an industry in which learning is important.
Which of the following goods or services would most likely be subject to external economies of scale and dynamic increasing returns? Explain your answers. e. timber harvesting (on review)
External economies are somewhat likely if there are a set of skills unique to the timber industry that would lead to a clustering of timber firms and timber workers. Dynamic returns are unlikely as the technology used in timber harvesting is relatively stable (i.e., a low learning curve).
Which of the following goods or services would most likely be subject to external economies of scale and dynamic increasing returns? Explain your answers. d. cancer research (on review)
External economies are somewhat likely in that it may be advantageous to have other researchers nearby. Dynamic returns are highly likely because such research builds on itself through a learning by-doing process.
Which of the following goods or services would most likely be subject to external economies of scale and dynamic increasing returns? Explain your answers. b. production of asphalt/concrete (on review)
External economies are unlikely because it is difficult to see how the costs of a single firm would fall if other firms are present in the asphalt industry. Dynamic increasing returns are also unlikely as the asphalt industry is pretty well established and learning curves are likely to be low.
Which of the following goods or services would most likely be subject to external economies of scale and dynamic increasing returns? Explain your answers. a. Software tech-support services (on review)
External economies of scale are likely due to the need to have a common pool of labor with technical skills. Dynamic increasing returns may be likely due to the need for continual innovation and learning.
Use your knowledge about trade policy to evaluate each of the following statements: b. "Tariffs have a more negative effect on welfare in large countries than in small countries." (on review)
False, the opposite is true because tariffs by large countries can actually reduce world prices, which helps offset their effects on consumers.
Use your knowledge about trade policy to evaluate each of the following statements: a. "An excellent way to reduce unemployment is to enact tariffs on imported goods." (on review)
False, unemployment has more to do with labor market issues and the business cycle than with tariff policy. Empirical estimates suggest that the cost to society of jobs saved through tariffs is exorbitantly high, and tariffs may actually increase unemployment in nonprotected industries.
For each of the following examples, explain whether it is a case of external or internal economies of scale: a. A number of firms doing contract research for the drug industry are concentrated in southeastern South Carolina.
This case represents external economies of scale as industry production is concentrated in a just a few locations. The benefits of geographical clustering include a greater variety of specialized services to support industry operations, access to a larger pool of specialized labor, and thicker input markets.
For each of the following examples, explain whether it is a case of external or internal economies of scale: d. Cranbury, New Jersey, is the artificial flavor capital of the United States.
This case represents external economies of scale as industry production is concentrated in a just a few locations. The benefits of geographical clustering include a greater variety of specialized services to support industry operations, access to a larger pool of specialized labor, and thicker input markets.
For each of the following examples, explain whether it is a case of external or internal economies of scale: b. All Hondas produced in the United States come from plants in Ohio, Indiana, or Alabama.
This case represents internal economies of scale because a single firm/plant is producing the output for the whole industry. As the output of a single firm increases, average costs will fall. This can lead to imperfect competition as it supports a limited number of firms in an industry.
For each of the following examples, explain whether it is a case of external or internal economies of scale: c. All airframes for Airbus, Europe's only producer of large aircraft, are assembled in Toulouse, France.
This case represents internal economies of scale because a single firm/plant is producing the output for the whole industry. As the output of a single firm increases, average costs will fall. This can lead to imperfect competition as it supports a limited number of firms in an industry.
Use your knowledge about trade policy to evaluate each of the following statements: c. "Automobile manufacturing jobs are heading to Mexico because wages are so much lower there than they are in the United States. As a result, we should implement tariffs on automobiles equal to the difference between U.S. and Mexican wage rates." (on review)
This kind of policy might reduce automobile production and Mexico but also would increase the price of automobiles in the United States and would result in the same welfare loss associated with any quota.
In perfect competition, firms set price equal to marginal cost. Why can't firms do this when there are internal economies of scale?
With internal economies of scale, there is imperfect competition, and firms set marginal revenue equal to marginal cost. Unlike the case of perfectly competitive markets, under monopoly, marginal revenue is not equal to price. Marginal revenue is always less than price under imperfectly competitive markets because to sell an extra unit of output, the firm must lower the price of all units, not just the marginal one. Furthermore, if internal economies of scale are driven by large fixed costs, then setting price equal to marginal cost would actually lead to negative profit for a firm that needs to set price above marginal cost to cover its fixed costs
An open economy A. can save either by building up its capital stock or by acquiring foreign wealth. B. cannot save either by building up its capital stock or by acquiring foreign wealth. C. can save only by building up its capital stock. D. can save by avoiding excessive imports. E. can save only by acquiring foreign wealth.
a
The highest component of GNP is A. consumption. B. government purchases. C. the current account. D. investment. E. trade.
a
The infant industry argument was an important theoretical basis for A. import-substituting industrialization. B. historiography of the industrial revolution in Western Europe. C. neo-colonialist theory of international exploitation. D. the East-Asian miracle. E. the reduction of tariffs on Western Europe.
a
The optimum tariff is most likely to apply to A. a small tariff imposed by a large country. B. a large tariff imposed by a large country. C. an ad valorem tariff on a small country. D. a large tariff imposed by a small country. E. a small tariff imposed by a small country.
a
The prohibitive tariff is a tariff that A. is so high that it eliminates imports. B. is so low that the government prohibits its use since it would lose an important revenue source. C. is so high that it causes undue harm to trade-partner economies. D. is so low that it causes domestic producers to leave the industry. E. is so high that it causes undue harm to import competing sectors.
a
The reason Airbus succeeded in the Brander Spencer example is that A) the European government made an explicit subsidy offer, but the U.S. government did not. B) Airbus' prices were better when adjusted for quality and warranty services. C) Boeing traditionally refused to undertake any exchange rate risk in its transactions. D) the U.S. acted in accordance with its ideological reliance on market solutions, whereas the Europeans ignored market and technological factors. E) the Airbus plane benefited from more advanced technology.
a
The strongest political pressure for a trade policy that results in higher protectionism comes from A. domestic workers lobbying for import restrictions. B. domestic workers lobbying for export restrictions. C. domestic consumers lobbying for import restrictions. D. domestic workers lobbying for free trade. E. domestic consumers lobbying for export restrictions.
a
When the U.S. placed tariffs on French wine, France placed high tariffs on U.S. chickens. This is an example of A. a trade war. B. multilateral negotiations. C. international market failures. D. deadweight losses. E. bilateral trade negotiations.
a
How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.50 dollars per British pound? A. 10 British pounds B. 30 British pounds C. 25 British pounds D. 20 British pounds E. 35 British pounds
b
If a firm's output doubles when all inputs are doubled, production is said to occur under conditions of A. intra-industry equilibrium. B. constant returns to scale. C. increasing returns to scale. D. imperfect competition. E. decreasing returns to scale.
b
If a firm's output more than doubles when all inputs are doubled, production is said to occur under conditions of A. intra-industry equilibrium. B. increasing returns to scale. C. imperfect competition. D. constant returns to scale E. decreasing returns to scale.
b
In external economies of scale, cost per unit depends on the size of the __________ but not necessarily on the size of the __________, A. rental rate, wage B. industry, firm C. firm, industry D. labor, capital
b
In previous chapters, trade among nations was motivated by their differences in factor productivity or relative factor endowments. The type of trade that occurred, for example of food for manufactures, is based on comparative advantage and is called interindustry trade. This chapter introduces trade based on internal economies of scale in production. Such trade in similar productions is called ___________. A. quadrafractional trade. B. intraindustry trade. C. interindustry trade. D. multinational trade.
b
In the Brander-Spencer model the subsidy raises profits by more than the subsidy because of A. the military-industrial complex. B. the deterrent effect of the subsidy on foreign competition. C. the economies of scale once the company enters the market. D. the forward and backward linkage effects of certain industries. E. the "multiplier" effect of government expenditures.
b
Internal economies of scale arise when the cost per unit A. remains constant over a broad range of output. B. falls as the average firm grows larger. C. rises as the industry grows larger. D. falls as the industry grows larger. E. rises as the average firm grows larger.
b
Internal economies of scale explain how the production cost per unit of output depends on the size of the __________ but not necessarily on the size of the __________. A. capital, labor B. individual firm, industry C. industry, individual firm D. wage, rental rate
b
The Internet has made transactions between businesses (B2B trading) fast and easy. Any business in any location can access specialized knowledge, labor, and materials. It is likely that these virtual economic communities will result in A. consolidation of industries into a small number of powerful firms. B. external economies of scale. C. government intervention and regulation. D. internal economies of scale. E. suppression of innovations and collusive behavior, driving up prices.
b
Under the model of monopolistic competition, a(an) ________ in the number of firms in the industry will cause ________ to ________. A. decrease; markup; decrease B. increase; average price; decrease C. increase; average price; increase D. increase; marginal cost; decrease E. increase; average cost; decrease
b
An industry is characterized by scale economies, and exists in two countries. Should these two countries engage in trade such that the combined market is supplied by one country's industry, then A. consumers in both countries would have fewer varieties at lower prices. B. consumers in both countries would have higher prices and fewer varieties. C. consumers in both countries would have more varieties and lower prices. D. consumers in the importing country only would have higher prices and fewer varieties. E. consumers in the exporting country only would have higher prices and fewer varieties.
c
If the market for products produced by firms in a monopolistically competitive industry becomes larger, then there will be ________ firms and each firm will produce ________ output and charge a ________ price. A. fewer; more; higher B. more; less; higher C. more; more; lower D. more; more; higher E. fewer; more; lower
c
Import substitution policies make use of A. production facilities provided by industrialized countries. B. quotas applied to goods that are shipped abroad. C. tariffs that discourage goods from entering a country. D. tax breaks granted to industries with comparative advantage. E. production subsidies granted to industries with comparative advantage.
c
It is argued that high-tech industries typically generate new technologies but cannot fully appropriate the commercial benefits associated with their inventions or discoveries. If this is true then in order to maximize a country's real income, the government should A. discourage high-tech investments. B. tax the high-tech firms. C. subsidize the high-tech firms. D. protect the high-tech firms. E. outsource high-tech production.
c
Statistical evidence suggests that A. import substitution proved to be the most effective aid for developing countries before 1970. B. import substituting policies tend to promote effective exploitation of scale economies. C. free trade policies promote economic growth more effectively than do import substitution policies. D. import substitution is to this day the preferred growth strategy promoted by the World Bank. E. import substitution tends to lead to relatively low effective rates of protection.
c
The disappointment with import-substitution policies is in part because A. of the financial investment lost by the U.S. B. this policy tended to create world-class industrial competitors. C. many countries pursuing this strategy experienced stagnation in their growth. D. of the rapid and continuous growth record of South American countries. E. this policy is inconsistent with sophisticated economic growth models.
c
The infant industry argument calls for active government involvement A. only if the industry has a high value added. B. only if the industry is independently able to earn high returns. C. only if some market failure can be identified. D. only if the government forecasts are accurate. E. only if the industry is not one already dominated by industrial countries.
c
A country's gross national product (GNP) is A. the value of all intermediate goods and services produced by its factors of production and sold on the market in a given time period. B. the value of all final goods and services produced by its factors of production and sold on the market. C. the value of all final goods produced by its factors of production and sold on the market in a given time period. D. the value of all final goods and services produced by its factors of production and sold on the market in a given time period. E. the value of all final goods and services produced by its factors of production, excluding land, and sold on the market in a given time period.
d
External economies of scale arise when the cost per unit A. falls as the industry and the average firm grows larger. B. rises as the industry and the average firm grows larger. C. rises as the industry grows larger and falls as the average firm grows larger. D. falls as the industry grows larger and rises as the average firm grows larger. E. remains constant over a broad range of output.
d
External economies of scale often arise because similar firms A. agree to cooperate to expand global trade. B. have economies of scale in production. C. have excellent internal logistics. D. locate in the same geographic region. E. collude to fix prices and increase profits.
d
In an open economy, private saving,S^P, is equal to A. I - CA - (G - T). B. I + CA - (G - T). C. I - CA + (G - T). D. I + CA + (G - T). E. I + CA + (G + T).
d
In the model of monopolistic competition, if firms have ________ average cost curves, then opening trade will cause ________ firms to ________ the industry. A. symmetric; less efficient; enter B. symmetric; less efficient; exit C. different; more efficient; enter D. different; less efficient; exit E. symmetric; more efficient; enter
d
When a country's currency depreciates A. foreigners find that its exports are cheaper; however, domestic residents are not affected. B. foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are cheaper. C. foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are more expensive. D. foreigners find that its exports are cheaper and domestic residents find that imports from abroad are more expensive. E. foreigners are not affected, but domestic residents find that imports from abroad are more expensive.
d
When there are external economies of scale, an increase in the size of the market will A. not affect the number of firms, but will lower the price per unit. B. decrease the number of firms and raise the price per unit. C. increase the number of firms and raise the price per unit. D. increase the number of firms and lower the price per unit. E. decrease the number of firms and lower the price per unit.
d
(extra prob) Which countries appear to have benefited the most from international trade during the last few decades? What policies do these countries seem to have in common? Does their experience lend support for the infant industry argument or help to argue against it?
developing countries policies in common- development of domestic manufacturing industries, desire to foster economic growth, improve living standards help argue against it because the argument didn't hold good all the time, could not make young industries efficient
The fact that trade policy often imposes harm on large numbers of people, and benefits only a few may be explained by A. a cycle of political corruption. B. the lack of political involvement of the public. C. the basic impossibility of the democratic system to reach a fair solution. D. the power of advertisement. E. the problem of collective action.
e
The infant industry argument is that A. comparative advantage is irrelevant to economic growth. B. developing countries have no chance to compete with industrialized countries. C. developing countries have a comparative advantage in manufacturing. D. developing countries have a comparative advantage in agricultural goods. E. developing countries have a potential comparative advantage in manufacturing.
e
(extra prob) The equation relating private savings, the current account, and the government budget deficit shows that to reduce a current account deficit, a country must increase its private saving, reduce domestic investment, or cut its government budget deficit. Nowadays, some people recommend restrictions on imports from China (and other countries) to reduce the American current account deficit. How would higher U.S. barriers to imports affect its private saving, domestic investment, and government deficit? Do you agree that import restrictions would necessarily reduce a U.S. current account deficit?
equation rewritten implies that deficit in current account is balanced by an increase in private savings, decrease in domestic investment, and a cut in government budget deficit
(extra prob) What are the disadvantages of engaging in strategic trade policy even in cases in which it can be shown to yield an increase in a country's welfare? Suppose the U.S. government were able to determine which industries will grow most rapidly over the next 20 years. Why wouldn't this automatically mean that the nation should have a policy of supporting the growth of these industries?
main disadvantage is that it can lead of both rent-seeking and beggar-thy-neighbor policies which can increase one country's welfare at the other country's expense. can lead to trade war where everyone is worse off. difficult to identify which industries to subsidize and how much to subsidize them while can lead to a net loss from a subsidy. if everyone knows that an industry will grow rapidly, private markets will funnel resources into the industry even without government support. there is need for special government only if there is some market failure, the prospect of growth by itself is not enough
"For a small country like the Philippines, a move to free trade would have huge advantages. It would let consumers and producers make their choices based on the real costs of goods, not artificial prices determined by government policy; it would allow escape from the confines of a narrow domestic market; it would open new horizons for entrepreneurship; and, most important, it would help to clean up domestic politics." Separate and identify the arguments for free trade in this statement. (on review)
• Free trade allows consumers and producers to make decisions based upon the marginal cost and benefits associated with a good when costs and prices are undistorted by government policy. • The Philippines is "small," so it will have little scope for influencing world prices and capturing welfare gains through an improvement of its terms of trade. • "Escaping the confines of a narrow domestic market" allows possible gains through economies of scale in production. • Free trade "opens new horizons for entrepreneurship," creating opportunities for Filipino exporters to reach markets unaccessible without trade. • Special interests may dictate trade policy for their own ends rather than for the general welfare. Free trade policies may aid in halting corruption where these special interests exert undue or disproportionate influence on public policy.
