International Economics

Pataasin ang iyong marka sa homework at exams ngayon gamit ang Quizwiz!

A managed floating exchange rate refers to?

an exchange rate that is not​ pegged, but does not float freely.

An increase in the real exchange rate ​(real depreciation of domestic currency​) will result in?

an increase in net exports.

If the central bank purchases​ assets, it will result in?

an increase in the money supply.

The GATT was?

an international treaty governing trade.

The Ricardian model attributes the gains from trade associated with the principle of comparative advantage result to?

differences in labor productivity.

The potential for gains from the rearrangement of production among countries is due to?

differing opportunity costs.

A​ self-fulfilling currency crisis implies that?

outflows caused by an expectations shift resulted in a possibly unnecessary crisis.

If there is a decline in​ output, to keep the exchange rate​ fixed, the central bank has to?

sell foreign assets.

In the figure to the​ right, the importing country imposes a tariff that raises the domestic price from PW to PT but lowers the foreign export price from PW to P*T. The net welfare COST of this tariff on the importing country is given by?

​(b + d − e).

The degree of specialization predicted by the basic Ricardian model?

is much more extreme than is observed in the real world.

A country has a comparative advantage in producing a good if?

its opportunity cost of producing that good is lower than elsewhere.

What is the main problem with imposing labor standards to prevent child labor and poor working conditions in the exporting sector of a​ less-developed country?

​Less-developed countries are opposed to them.

A pollution haven is said to exist when?

an economic activity becomes concentrated in countries or regions having less strict environmental controls than elsewhere.

We have the following data for a hypothetical open​ economy: GNP​ = ​$9,000 Consumption​ (C) = ​$7,200 Investment​ (I) = ​$1,400 Government Purchases​ (G) = ​$1,600 What is the value of the current account​ balance? ​

$-1200 Y​ = C​ + I​ + G​ + EX−​IM CA​ = EX−​IM $12,000=$8,000+$800+$1,600+ CA

Given the following Balance of Payment data for a given​ country: Current Account​ Balance: ​$1,400 Capital Account​ Balance: ​$80 What must be the Financial Account​ Balance?

$-1480

We have the following data for a hypothetical open​ economy: GNP​ = ​$10,000 Consumption​ (C) = ​$8,200 Investment​ (I) = ​$1,400 Government Purchases​ (G) = ​$1,600 Tax Collections​ (T) = ​$1,200 What is the value of total savings​ S? What is the value of the current account balance​ CA?

$200 (​$12,000−​$1,400−​$8,000+$1,400−​$1,200) ​ $-1200 ($12,000−​$8,000−​$1,400−​$1,200)

Unit Labor Requirements Home: 10 (cloth), 20 (widgets) Foreign: 60 (cloth), 30 (widgets) Given the information in the table​ above, Foreign's opportunity cost of cloth​ is?

2.0

In the figure to the​ right, the importing country imposes a tariff that raises the domestic price from ​$8 to ​$12 but lowers the foreign export price from ​$8 to ​$4. The net welfare gain from this tariff for the importing country is?

$4

This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Home for each of two goods. Home: aLS=1 hour per pound (shrimp), aLG=3 hours per gallon (glue) ​where: aLS=number of labor hours needed to produce a unit of shrimp in​ Home aLG=number of labor hours needed to produce a unit of glue in​ Home PS=the price per pound of shrimp​ PG=the price per gallon of glue If the price per gallon of glue ​(PG​) is ​$12​, the hourly wage rate in the glue sector of​ Home's economy will be?

$4

Which of the following functions corresponds to a liquidity preference function and correctly identifies the relationship between the​ left-hand side variables and the​ right-hand side​ variables? ​(Note that Md is the quantity of money​ demanded, P the price​ level, i interest​ rates, Y real ​income, and f is the function operator that relates inputs to an​ output.)

(M^d)/P = f (i-, Y+)

Assume that the Uncovered Interest Parity​ (UIP) holds. If the rate of return on a euro asset is 6 percent and the rate of return on a comparable dollar asset is 3 percent, the expected rate of dollar depreciation must be?

-3%

Which of the following is not part of the definition for Gross National​ Product?

...produced within a​ country's borders...

Suppose the Central Bank is trying to keep the exchange rate​ fixed; however, investors expect the exchange rate to depreciate. The graph on the right depicts an initial equilibrium in the economy with the fixed exchange rate.​ Note: 'E'​ = E$/€. ​1.) Using the line drawing tool​, add a new AA curve corresponding to increased​ expectations, before the Central Bank​ reacts, and label it ​"AA2​." ​2.) To reflect how the Central Bank reacts to keep the exchange rate​ fixed, using the line drawing tool​, add a third AA schedule corresponding to the equilibrium with new expectations and the old exchange rate. Label it ​"AA3​."

1. AA2 is above AA3. 2. AA3 is first. We can see that as a result of expected​ depreciation, output will stay the same. As the Central Bank is adjusting to keep exchange rate​ fixed, the money supply will fall and the interest rate will rise.

Refer to the diagram to the right. ​1) Using the triangle drawing tool​, shade in the area that represents the production distortion due to the imposition of a tariff​ 't'. Label this area​ 'PD. ​2) Using the triangle drawing tool​, shade in the area that represents the consumption distortion due to the imposition of a tariff​ 't'. Label this area​ 'CD. What is the numeric value of the distortion caused by the​ tariff?

1. Mini triangle to the left touching red line 2. Mini triangle to the right touching blue line $48.75 (add the areas of triangles PD + CD together) 10.2 reference graph

Consider the simultaneous equilibrium in the US money market and the foreign exchange market. In this problem we will analyze the effect of a decline in real GNP in the US. In the US money​ market, a decline in the US real GNP will cause the interest rate to fall. The figure on the right shows expected return on euro deposits as a function of the​ dollar/euro exchange rate E$/€. ​1) Using the line drawing tool​, draw a line representing the return on dollar deposits. Label this line ​'RET-$1​'. ​2) Using the line drawing tool​, draw a new line on the same graph representing the return on dollar deposits as the US real GNP falls. Label this line ​'RET-$2​'. As the result of this​ shock, the dollar will depreciate.

1. RET-$1 is the vertical line after RET-$2​. 2. RET-$2​ is the first vertical line.

Consider the simultaneous equilibrium in the US money market and the foreign exchange market. In this problem we will analyze the effect of a decline in the euro interest rate. Start with the money market equilibrium. As a result of a decline in the euro interest​ rate, while all other exogenous variables remain​ unchanged, the interest rate in the US will remain unchanged. The figure on the right shows the return on dollar deposits as a function of the​ dollar/euro exchange rate E$/€. ​1) Using the​ 3-point curve tool​, draw a curve representing the dollar return on euro deposits. Label this line ​'RET-€1​'. ​2) Using a​ 3-point curve tool​, draw a new line on the same graph representing the dollar return on euro deposits as the euro interest rate falls​, and label it ​'RET-€2​'. As the result of a decline in the euro interest​ rate, the dollar will depreciate.

1. RET-€1​ downward curve on top. 2. RET-€2​ downward curve below it.

Refer to the diagram to the right. The​ closed-economy equilibrium price is​ $14. The world price is ​$10. By how much will domestic​ (Home) supply be reduced by allowing international​ trade? What is the quantity of imports at the world price of $10​?

10 units (compare the quantity supplied at the domestic equilibrium price and at the world price); Imports= 20 units (subtract the two quantities on x-axis)

Suppose a bond issued by the European Central Bank and denominated in euros pays 4​% per year. Today the exchange rate is 1.49 dollars per euro. It is expected that the exchange rate in one year will be 1.64 dollars per euro. What is the annual dollar return on this​ bond?

14% ...R€+Ee$/€/E$/€ − 1 = 0.04 +1.64​/1.49−1 ​= 0.14 or 14%

Suppose the return on a European bond is 8 percent per year. If we expect the US dollar to depreciate with respect to the euro by 10 percent in the next​ year, what is the expected dollar return on this European​ bond?

18%

This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign and Home for each of two goods. Home: aLC=6 hours per pound (cheese), aLW​=5 hours per gallon (whiskey) Foreign: a*LC​=2 hours per pound (cheese), a*LW=6 hours per gallon (whiskey) where: aLC=number of labor hours needed to produce a unit of cheese in​ Home aLW​=number of labor hours needed to produce a unit of whiskey in​ Home; a*LC=number of labor hours needed to produce a unit of cheese in​ Foreign a*LW=number of labor hours needed to produce a unit of whiskey in​ Foreign PC=the absolute or money price of cheese on world​ markets PW​=the absolute or money price of whiskey on world markets. In​ post-trade equilibrium with PC=PW=$20, the wage of workers in Foreign relative to the wage of workers in Home will be equal​ to?

2.5

In​ 2013, what percent of all world consumption​ (private and​ public, including real​ investment) was​ imported?

30%

Assume the U.S. currently grows 2.3 million tons of fresh winter fruit and that the resources absorbed in the production of this fruit could have produced 300,000 laptop computers.​ Therefore, the opportunity cost of those 2.3 million tons of fruit is ??? computers. Suppose that South America could have instead produced those 2.3 million tons of fruit at an opportunity cost of​ 150,000 laptops. Because of the difference in opportunity costs between the two​ regions, it can be shown that trade gives the possibility of?

300,000; a mutually beneficial rearrangement of world production.

Refer to the diagram to the right. The​ closed-economy equilibrium price is​ $14. The world price is ​$4. What is the quantity of imports at the world price of ​$4​? Imports=? By how much will imports be reduced with the introduction of the​ $2 tariff? Imports decrease by? How much tariff revenue is generated by the​ $2 addition? Tariff revenue​=?

50 units; 10 units; $80

The nation of Acirema is​ "small," unable to affect world prices. It imports peanuts at the price of​ $10 per bag. The demand curve​ is: D=400−10P​, and the supply curve​ is: S=50+5P. Calculate and graph the following effects of an import quota that limits imports to 50 bags. ​1) Using the line drawing tool​, draw the​ nation's supply and demand curves on the graph to the right. Properly label these curves. ​2) Indicate the world price without the quota. Using the line drawing​ tool, draw a horizontal line at the correct price. Label the line Pw. ​3) Indicate the domestic price with a quota that limits imports to 50 bags. Using the line drawing​ tool, draw a horizontal line at the correct price. Label the line Pq. The quota rents are $? The consumption distortion loss is $? The production distortion loss is $?

9.9 reference graph $500; $500; $250

What is the definition of a​ "small" country?

A country that cannot affect its​ terms-of-trade.

What is the​ "arbitrage" opportunity in the foreign exchange​ market?

A difference between the exchange rates in different trading centers.

Which of the following is not a key assumption that allows strategic trade policy to work effectively in the​ Brander-Spencer example of Airbus and​ Boeing?

A subsidy enables both firms to operate profitably.

On the Environmental Kuznets Curve shown in the figure to the​ right, China's transformation since 1980 can be displayed as the movement from?

A to B. (first two upwards points)

In the​ Output-Exchange rate​ space, draw the AA schedule using the line or curve drawing tool. Label this schedule​ 'AA'. Note:​ 'E' = E$/€. As you move down the AA​ curve, the interest rate?

AA curve is upwards sloping! Rises.

Suppose the economy is initially in equilibrium as depicted on the graph to the right.​ Note: 'E'​ = E$/€. The government implements a permanent expansionary monetary​ policy, which corresponds to an increase in the US​ (domestic) money supply. Using the line drawing tool​, draw on the same graph a new AA line or new DD line. Properly label your line.

AA2 is above the AA1 line. As a result of permanent expansionary monetary policy in the short​ run, output will rise and the exchange rate will rise. In the long​ run, the economy will slowly adjust to a new equilibrium since the change was permanent. In this new​ equilibrium, compared to the initial​ equilibrium, output will be the same as before​, and the exchange rate will be higher.

Refer to the diagram to the right. Complete the following table. Without Trade: Consumer Surplus x Producer Surplus With Trade: Consumer Surplus x Producer Surplus What area represents the gains from​ trade?

ACH; BCH AEG; BFG CEF

Refer to the balance sheet below for the Bank of Pecunia. Suppose the Bank of Pecunia goes to the foreign exchange market and purchases ​$220 worth of foreign assets. If the Bank of Pecunia paid for its purchase with domestic currency​, fill in the new balance sheet for the Bank of Pecunia below.

Add the $220 to each section except to "Domestic Assets" & "Deposits held by private banks". When the Bank of Pecunia purchases $220 worth of foreign assets​, there is an increase in the domestic money supply.

The multi−good (2−​country) model differs from the two​ country, two product​ model, in that in the​ former?

All of the above. -one cannot determine which country will export which product given only labor productivity data. -the relative wage ratio will determine the pattern of trade​ ( which good is exported by which country. -full specialization is less likely to hold in equilibrium.

When the dollar is worth less in relation to currencies of other countries (for example relative to the Japanese Yen in the diagram to the right​), are you more likely to buy​ American-made or​ foreign-made electronics? Are U.S. companies that manufacture​ semi-conductors happier when the dollar is strong or when it is​ weak? What about an American company that is in the business of importing electronic consumer goods into the United​ States?

American (domestic) products. When the dollar is weaker. When the dollar is stronger.

How is an export subsidy by a large country different from an import quota by a large​ country?

An export subsidy worsens terms of trade while an import quota improves them.

The figure to the right shows the domestic tobacco market for a small country which initially faces a world price of ​$24 per unit. Use the line drawing tool​, to show the effect of this​ country's imposition of a ​$4 tariff on foreign tobacco. Properly label this line. According to your​ graph, the small country tariff?

At $28 draw a straight horizontal line across (Pw+t); is passed on in its entirety to the domestic market and also cuts imports.

Devaluation is often used by countries to improve their current accounts. The current​ account, however, equals national saving less domestic investment. Given the assumptions we made about saving and​ investment, how will devaluation affect national saving and​ investment? What is the effect on​ saving? What is the effect on​ investment?

Both public saving and private saving will rise; Investment will remain the same.

An import tariff imposed by a large country affects income distribution in the following​ way?

Consumers lose in the importing country and gain in the exporting​ country, while producers gain in the importing country and lose in the exporting country.

Using the line drawing tool​, show the effect of a decline in the dollar interest rate. Properly label this line. This shock will lead to a dollar?

R2 (vertical blue line) behind RS (vertical red line) w E euro return curve crossing both like upside-down rainbow (green line); depreciation.

The graph on the right represents initial output in the short run. Suppose tax rates increase. Using the line drawing tool​, draw a new line depicting the new aggregate demand. Label this line ​'D2​'.

D2 goes below D1! If tax rates increase​, output in the short run will fall.

In the​ Output-Exchange rate​ space, draw a DD schedule using a line or curve drawing tool. Label this relationship​ 'DD'. Note:​ 'E' = E$/€. The DD curve describes the link between the exchange rate and the output in the short run. Through which variable does this link​ operate?

DD curve is upwards sloping! Current account.

Suppose a temporary rise occurs in world demand for domestic products. Using the line drawing tool​, illustrate the impact of this event. Properly label your line. Now let the government use temporary monetary contraction to restore full employment. In this case the policy​ re-establishes full employment?

DD2 is below the DD1 line & AA1 intersects DD1 right in the middle! ;the currency to further appreciate.

Suppose the economy is initially in the​ long-run equilibrium as depicted on the graph to the right.​ Note: 'E'​ = E$/€. The government implements a temporary expansionary fiscal​ policy, which corresponds to an increase in US government spending or a fall in the US tax rates. Using the line drawing tool​, draw a new AA line or DD line. Properly label this line.

DD2 is below the DD1 line. As a result of temporary expansionary fiscal​ policy, output will rise and the exchange rate will fall in the short run.

The earliest statement of the principle of comparative advantage is associated with?

David Ricardo.

Correctly sign the relationship between the following components and aggregate demand​ ('+' a positive​ relationship, '−​'a negative​ relationship).

Disposable income + Taxes - Investment Spending + Government Spending + Real Exchange Rate +

Does any of the discussion in this chapter lead you to believe that dollar deposits may have liquidity characteristics different from those of other currency​ deposits? How would the differences affect the interest differential​ between, say, dollar and Mexican peso​ deposits? How may the liquidity of euro and yen deposits be changing over time as capital markets become increasingly​ integrated?

Dollar deposits are more liquid than deposits in most other currencies. Dollar deposits will tend to offer lower interest rate than peso deposits. Both yen and euro deposits are likely to become more liquid.

This exercise employs aspects of the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Home for each of the two goods. Chocolate: aLC= 1 hour per pound Whiskey: aLW= 3 hours per gallon where... aLC​=number of labor hours needed to produce a unit of chocolate in​ Home aLW=number of labor hours needed to produce a unit of whiskey in Home. Using the line drawing​ tool, draw the production possibilities frontier for chocolate and whiskey in​ Home, given that there are 120 total labor hours​ (L) available. Label this curve PPF.

Draw a line from 40(y) to 120(x).

In the accompanying diagram the curves labeled SB and CC​ show, for soybeans and cigars​ respectively, how the​ land-labor ratio chosen for each​ good's production varies with the​ wage-rental (w/r) ratio. Using the line drawing​ tool, show​, for an arbitrary​ wage-rental (w/r)​ ratio, how the​ land-labor ratio varies across the two industries. Label this line​ 'w/r'. From the intersection points of the CC and SB curves with the​ (w/r) line it can be deduced that cigars are the ??? good.

Draw line straight horizontally across; labor−intensive

The table below contains the unit labor requirements in Home and Foreign for each of five goods as well as the relative productivity advantage of Home. Assume there are no transportation costs. Fill in the five blanks in the table below. ​(Enter your responses rounded to one decimal place where​ necessary.)? Given the data in the preceding​ table, we know that if the relative Home wage​ (w/w*) = 1​?

EX.) 4, 20, 5; Home produces cell phones, jackets, laptops, and MP3 players and Foreign produces MP3 players and sneakers.

We have focused on the case of trade involving only two countries. Suppose that there are many countries capable of producing two goods​ (apples and​ bananas), and that each country has only one factor of​ production, labor. The graph to the right shows the world relative supply and relative demand curves. As in the two country​ case, the flat sections of the RS curve are countries with different unit labor requirement ratios aLA/aLB. Referring to the​ graph, countries to the left of the equilibrium relative price would ??? apples to the countries to the right of the intersection.

EXPORT

Suppose the dollar interest rate and the pound sterling interest rate are the​ same, 6 percent per year. What is the relation between the current equilibrium​ dollar/pound exchange rate and its expected future​ level? Suppose the expected future exchange​ rate, ​$1.88 per​ pound, and the US interest rate remain​ constant, while​ Britain's interest rate rises to 11 percent per year. What is the new equilibrium​ dollar/pound exchange​ rate?

Expected​ dollar/pound exchange rate is equal to the current one. New equilibrium exchange rate is ​$1.97 per pound.

Classify each of the following transactions as belonging primarily to the sphere of international trade analysis​ (T) or international monetary analysis​ (M). ​(Enter T for Trade or M for​ Monetary.)

Foreigners purchase U.S. dollars. (M) The U.S. imports crude oil from the Middle East. (T) The U.S. imposes tariffs on foreign steel. (T) The Chinese government purchases U.S. treasury bonds. (M) The Chinese currency is seen as being undervalued. (M0

The coordination of international macroeconomic policies among sovereign nations?

Has only recently been advocated by economists.

International capital markets?

Have grown significantly since the 1960s & link the capital markets of individual markets.

Unit Labor Requirements Home: 10 (cloth), 20 (widgets) Foreign: 60 (cloth), 30 (widgets) Given the information in the table above?

Home has a comparative advantage in cloth.

This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign and Home for each of two goods. Use this information to answer the question that follows. Home: aLC=1 hour per pound (candy), aLW=3 hours per gallon (whiskey) Foreign: a*LC=5 hours per pound (candy), a*LW​=4 hours per gallon (whiskey) where: aLC=number of labor hours needed to produce a unit of candy in​ Home aLW=number of labor hours needed to produce a unit of whiskey in​ Home a*LC=number of labor hours needed to produce a unit of candy in​ Foreign a*LW=number of labor hours needed to produce a unit of whiskey in Foreign. Which of the following statements is true​?

Home has the absolute advantage in both candy and whiskey production and the comparative advantage in candy production.

This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign and Home for each of two goods. Use this information to answer the question that follows. Home: aLC=1 hour per pound (cheese), aLW​=3 hours per gallon (whiskey) Foreign: a*LC=5 hours per pound (cheese), a*LW=4 hours per gallon (whiskey) ​where: aLC=number of labor hours needed to produce a unit of cheese in​ Home aLW=number of labor hours needed to produce a unit of whiskey in​ Home a*LC​=number of labor hours needed to produce a unit of cheese in​ Foreign a*LW=number of labor hours needed to produce a unit of whiskey in Foreign Which of the following statements is true​?

Home has the absolute advantage in both cheese and whiskey production and the comparative advantage in cheese production.

This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign and Home for each of two goods. Home: aLC=1 hour per pound (chocolate), aLW=3 hours per gallon (whiskey) Foreign: a*LC=5 hours per pound (chocolate), a*LW=4 hours per gallon (whiskey) ​where: aLC=number of labor hours needed to produce a unit of chocolate in​ Home aLW=number of labor hours needed to produce a unit of whiskey in​ Home a*LC=number of labor hours needed to produce a unit of chocolate in​ Foreign a*LW=number of labor hours needed to produce a unit of whiskey in​ Foreign PC=the money price per pound of chocolate​ PW ​= the money price per pound of whiskey

Home; relative supply and demand of chocolate; a step function

Give an intuitive explanation for the optimal tariff argument.

In a large​ country, a tariff can favorably shift the terms of trade such that the tariff revenue exceeds the welfare loss.

International economics can be divided into two broad​ subfields?

International trade & international money.

Transactions that involve the physical movement of goods or a tangible commitment of resources are the domain of?

International trade analysis.

​"It has been all downhill for the West since China entered the world​ market; we just​ can't compete with hundreds of millions of people willing to work for almost​ nothing." Assuming that the statement above fails to connect wages and​ productivity, which of the following statements is​ true?

It is cheaper to produce some goods in the U.S. because productivity is higher here.

Private saving can be given by the following​ equation: Sp=I+CA+(G−T). This equation can be rewritten​ as: CA = Sp−I+(T−G). ​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 private​ saving, domestic​ investment, and government​ deficit? Do you agree that import restrictions would necessarily reduce a U.S. current account​ deficit?

It is impossible to tell without a general equilibrium model; ​No, because we cannot tell what general equilibrium effects will be.

What is the main critique against the WTO with respect to environmental​ protection? How does the WTO justify its position on trade disputes that involve environmental​ issues?

It​ doesn't do enough to impose tougher environmental standards on developing countries; It forces member countries to apply the same standards to imported goods that it applies to domestically produced goods.

The graph on the right depicts real money supply. Using the​ three-point drawing tool​, draw the aggregate money demand curve in the diagram to the right. Label this line ​'L(R,Y)1​'. ​Now, suppose that real GNP rises. On the same​ graph, using another​ 3-point curve tool​, draw the new aggregate real money demand. Label this line ​'L(R,Y)2​'.

L(R,Y)2​ is above L(R,Y)1​. As the result of a rise in real​ GNP, equilibrium in the money market will be at a higher interest rate. Real money holdings will remain unchanged.

The United​ States' imports from 1945 through 1970 were more​ capital-intensive than its exports. One would have expected that the United States would have imported more​ labor-intensive goods and exported​ capital-intensive goods during this period. This phenomenon that occurred in the United States is known as the? During the time period​ 1945-1970 the U.S. exported more?

Leontief paradox; ​technologically-intensive goods.

The figure on the right shows aggregate real money demand​ L(R,Y) and the initial money supply. ​Now, suppose the price level rises ​(this is a​ one-time change). Using the line drawing tool​, draw the new real money supply on the same graph and label it ​'MS2 ​'.

MS2 is directly vertical behind MS1. As the result of this change in the price​ level, equilibrium interest rate will rise.

The international debt crisis of early 1982 was precipitated when​ _____ could not pay its international debts.

Mexico.

What is the​ short-run effect on the exchange rate of an increase in domestic real​ GNP, given expectations about future exchange​ rates?

Money demand​ increases, the domestic interest rate​ increases, and the domestic currency appreciates.

In the real​ world, the dividing line between trade and monetary issues is?

Neither simple nor clear-cut.

The figure on the right shows the United​ States' end-of-year international investment position​ (IIP) as a percent of its nominal GDP for the period​ 1976-2012. The United States has run current account deficits in almost every year since the​ mid-1980s. Do the data in the graph therefore surprise​ you?

No, increasingly large current account deficits coupled with slowing growth in nominal GDP imply the trend shown for​ (IIP/NGDP) at right. Reference 13.9 graph

This exercise applies the basic Ricardian model of one factor​ (labor) and two goods to the national economy of Home. Assume the​ following: aLS​=number of labor hours needed to produce a unit of steel in​ Home aLC​=number of labor hours needed to produce a unit of canvas in​ Home PS​=the price per ton of steel​ PC=the price per bolt of canvas Which of the following conditions signifies that workers in Home will all want to work in the steel sector?

PS​/PC>aLS​/aLC

What is the main reason explaining why agriculture enjoys protective tariffs in the​ U.S.?

Producers​ (who gain) are well​ organized, while consumers​ (who lose) are not.

​France, in addition to its occasional stabs at strategic trade​ policy, pursues an active nationalist cultural ​policy, promoting French​ art, music,​ fashion, cuisine, and so on. This may be primarily a matter of attempting to preserve a national identity in an increasingly homogeneous​ world, but some French officials also defend this policy on economic grounds. In what sense could some features of such a policy be defended as a kind of strategic trade​ policy?

Promoting French culture is a strategic trade policy in that it promotes tourism and industries related to French culture such as the textile and wine industries.

Using the diagram on the​ right, show what effect a devaluation will have on the current account.​ Note: 'E'​ = E$/€. ​1) Using the line drawing tool​, shift any​ lines, making sure to label them appropriately. ​2) Using the point drawing​ tool, label new equilibrium​ "B". The sample correct answer is drawn for the case of devaluation. What is the intuition for this effect of devaluation on the current​ account?

Reference 18.5 graph. As a result of a devaluation​, the current account will rise. Imports fall and exports rise as domestically-produced goods become less expensive.

Over the last few​ decades, East Asian economies have increased their share of world GDP.​ Similarly, intra-East Asian trade—that ​is, trade among East Asian nations—has grown as a share of world trade. More than​ that, East Asian countries do an increasing share of their trade with each other. Using the gravity​ model, explain why East Asian countries do an increasing share of their trade with each other.

Since the GDP of East Asian countries has​ grown, the product of any two East Asian​ countries' GDP is now larger. And as the gravity model​ predicts, the trade volume between them has grown.

If the United States had its​ way, it would demand that Japan spend more money on basic research in science and less on applied research into industrial applications. Explain why in terms of the analysis of appropriability.

The benefits to the United States of Japanese basic research would exceed the benefits from Japanese research targeted to specific problems in Japanese industries.

In​ theory, the​ equality: current account​ + capital account​ + financial account​ = 0 must hold. In reality a statistical discrepancy is often included to achieve this balance. Which account is the likely culprit of this​ discrepancy?

The financial account.

Suppose the​ one-year forward ​$/€ exchange rate is ​$1.5 per euro and the spot exchange rate is ​$1.6 per euro. What is the forward premium on euros​ (the forward discount on​ dollars)? Given the above​ information, what is the difference between the interest rate on​ one-year dollar deposits and that on​ one-year euro deposits​ (assuming no political​ risk)?

The forward premium on euros is -6.3%. 100×​(1.79−1.77​)/1.77 The difference between the dollar interest rate and the euro interest rate R$−R€=-6.3%.

Consider​ Home's production possibilities curve shown to the right. Which of the following does the absolute value of its slope​ convey? (wine is on y-axis, chocolate is on x-axis)

The opportunity cost of chocolate in terms of wine.

Calculate the dollar rate of return on a 10,000 pound sterling deposit in a London bank in a year when the interest rate on pounds is 8 percent and the​ dollar/pound exchange rate moves from $1.34 per pound to $1.38 per pound.

The rate of return will be 11%. The dollar depreciation is ​($1.38−​$1.34​)/$1.34= 0.03​, or 3 percent...so that plus 8 = 11%.

In Munich a bratwurst costs 4 euros; a hot dog costs $3.00 at​ Boston's Fenway Park. At an exchange rate of $1.60​/per euro, what is the price of a bratwurst in terms of hot​ dogs? All else​ equal, how does this relative price change if the dollar appreciates to $1.10​?

The relative price of bratwurst is 2.13 hot dogs. Now the relative price of bratwurst is 1.47 hot dogs. ​Compared with the initial​ situation, a hot dog has become more expensive relative to a bratwurst.

In an open economy holding GNP and consumption spending constant and where private savings equals domestic​ investment, a government budget deficit must be matched by?

a current account deficit.

If a country changes its exchange​ rate, the value of its foreign​ reserves, measured in the domestic​ currency, also changes. This latter change may represent a​ domestic-currency gain or loss for the central bank. What happens when a country devalues its currency against the reserve​ currency? If this change in the exchange rate is​ expected, how will it affect the cost of holding foreign​ reserves? If this change in the exchange rate is​ unexpected, how will it affect the cost of holding foreign​ reserves?

The value of foreign reserves measured in local currency will increase. There will be no change in the cost of holding foreign reserve. There will be a capital gain on foreign reserves.

What is the main problem with imposing environmental​ standards?

They can cause potential export industries to shut down in poor countries.

Why are international negotiations important in order to reduce tariff rates​ worldwide?

They help avoid trade wars.

A decrease in the money supply leads to an increase in the value of the U.S. dollar and a decrease in the value of foreign currency. A decrease in the money supply leads to an increase interest rates.

This in​ turn, leads to a decrease in net exports and aggregate demand. ​This, in​ turn, leads to a decrease in investment spending by firms and aggregate demand.

Mexico and Brazil have very different trading patterns. Mexico trades mainly with the United States and Brazil trades about equally with the United States and with the European Union. Mexico does much more trade relative to its GDP. These differences can be explained via the gravity model. Which of the following equations is the most general form of the gravity​ model?

Tij = A x (Yai x Ybj)/ Dcij))

Canada and Australia are​ (mainly) English-speaking countries with populations that are not too different in size​ (Canada's is 60 percent​ larger). But Canadian trade is twice as​ large, relative to​ GDP, as​ Australia's. Why should this be the​ case? ​(Mark all that​ apply.)

Transportation costs for imports and exports are higher in Australia because the distance goods must travel & Canada is close to a major economy.

The following table gives hypothetical data for the world corn market. Cost per Bushel of Corn​ (U.S. dollars) U.S. ​$5 Brazil ​$7 Mexico ​$9 Suppose Mexico initially imposes a $3 per bushel tariff on foreign corn. In this case Mexico will import _____ corn? Now let Mexico and Brazil form a customs​ union, with the tariff on outside corn maintained at ​$3 per bushel. In this case Mexico will import _____ corn​ and, as a​ consequence, will experience a welfare change that is _____. The customs union has proven detrimental to Mexico because it led to?

U.S. corn; Brazillian; A loss; All of the above... - costlier corn - trade diversion - less efficient resource use.

The U.S. labor movement—which mostly represents​ blue-collar workers rather than professionals and highly educated workers—has traditionally favored limits on imports from​ less-affluent countries. Is this a shortsighted policy or a rational one in view of the interests of union​ members? How does the answer depend on the model of​ trade?

Using the Ricardian​ model, this policy would not be rational.​ However, considering the​ Heckscher-Ohlin model, which specifically addresses income​ distribution, unskilled​ labor, the scarce​ resource, loses from trade.

Multinationals generally have production plants in a number of countries. ​ Consequently, they can move production from expensive locations to cheaper ones in response to various economic developments—a phenomenon called outsourcing when a domestically based firm moves part of its production abroad. If the dollar depreciates​, what would you expect to happen to outsourcing by American​ companies?

We would expect outsourcing by American companies to diminish.

Evaluate the following​ statement: Mexico is quite close to the​ U.S., but it is far from the European Union​ (E.U.). So it makes sense that it trades largely with the U.S. Brazil is far from​ both, so its trade is split between the two. Do you agree or​ disagree? Based on the gravity​ model, I would...

agree. The gravity model predicts trade volume is proportional to the product of the GDPs of the trading partners and inversely related to the distance from each other.

Home has​ 1,200 units of labor available. It can produce two​ goods, apples and bananas. The unit labor requirement in apple production is​ 3, while in banana production it is 2. a. Using the line drawing​ tool, draw​ Home's production possibility frontier. Label the curve PPF. b. What is the opportunity cost of apples in terms of​ bananas? c. In the absence of​ trade, what would the price of apples in terms of bananas​ be? Why?

a. Draw a line from 600(y) to 400(x). b. 1.5 bananas c. 1.5 bananas per​ apple; without​ trade, the relative prices of the goods are equal to their relative unit labor requirements.

Because of its politically sensitive​ nature, the last economic sector to be liberalized via multilateral trade negotiations has been?

agriculture.

A sterilized foreign exchange intervention?

always leaves the money supply unchanged.

Home has​ 1,200 units of labor available. It can produce two​ goods, apples and bananas. The unit labor requirement in apple production is​ 3, while in banana production it is 2. There is now also another​ country, Foreign, with a labor force​ (L) of 800. Foreign's unit labor requirement in apple production aLA is​ 5, while in banana production aLB it is 1. a. Derive the equation for​ Foreign's production possibility frontier​ (assume the quantity of bananas is the dependent ​variable)​? b. Which of the 4 diagrams represents the world relative supply curve given the above​ information?

a. QsubB = (800/1)-(5/1)xQsubA b. Choice C (starts at 1.5(y), sharp turn straight up at 0.5(x))

The figure to the right shows an exporting​ country's market after its government pays a subsidy to domestic producers that raises the domestic price from PW to PS but lowers the price in the importing country from PW to P*S. As a result of this​ subsidy, the private sector​ (consumers and​ firms) in the exporting country experiences a net gain given by? On the other​ hand, the payment of the subsidy burdens the exporting country​ government, leading to a net welfare loss for the exporting country given by?

area​ (c) area​ (b + d​ + e​ + f ​ + g)

Suppose the economy is hit by a favorable aggregate demand shock. In response to this​ shock, the central bank reacts to maintain a fixed exchange rate. As a result of these​ changes...? The graph on the right depicts the initial equilibrium in the economy with the fixed exchange rate. Using the line drawing tool​, add new AA and DD lines corresponding to a favorable aggregate demand​ shock, and label them ​"AA2​" and ​"DD2​."

both AA and DD will shift; AA2 goes above AA1 & DD2 goes under DD1. We can see that a favorable aggregate demand shock will lead to a rise in output. In order to maintain a fixed exchange rate, the money supply will rise.

Despite major​ gains, Chinese manufacturing workers have much lower productivity than their U.S. counterparts. Chinese service workers are relatively more​ productive, but most services​ aren't tradable. So which matters for Chinese wages—manufacturing or service​ productivity? For Chinese wages?

both sectors matter because Chinese wages are a function of productivity and prices in all sectors.

Unlike the eight previous rounds of world trade negotiations since the creation of GATT in​ 1948, the Doha round appears to be the first to have?

broken down with no agreement.

Imperfect asset​ substitutability?

can arise if different assets have different levels of risk.

In the diagram to the right the curve labeled SS displays the relationship between the relative price of cigars to soybeans (PC/PS​) and the​ wage-rental ratio​ (w/r). From the slope of this​ curve, it can be determined that?

cigars are labor-intensive and

In the diagram to the right the curve labeled SS displays the relationship between the relative price of cigars to soybeans (PC/PS​) and the​ wage-rental ratio​ (w/r). From the slope of this​ curve, it can be determined that?

cigars are labor-intensive and while soybeans are capital-intensive.

In the diagram to the right the curve labeled SS displays the relationship between the relative price of cigars to soybeans (PC/PS​) and the​ wage-rental ratio​ (w/r). From the slope of this​ curve, it can be determined that? (upward slope curve)

cigars are labor-intensive and while soybeans are capital-intensive.

Foreign assets?

consists mainly of foreign currency bonds owned by the central bank.

Suppose that the resource base in Country X can produce either 100 units of alpha or 300 units of beta. Similarly, suppose that Country​ Y's resource base is capable of producing 100 units of alpha or 200 betas.​ Clearly, the opportunity cost of 100 alphas is lower in ??? Based on this​ result, it would be best for Country X to concentrate on good ???

country Y; beta Hypothetical Changes in Production Country X: -100 alpha, +300 beta Country Y: +100 alpha, -200 beta Total: 0 alpha, +100 beta

Our usual models of trade assume that jobs lost in one industry will be offset by jobs gained in other industries. The Autor et al. paper​ argued, however, that communities that lose manufacturing jobs to imports end up losing other jobs as well. Is this a​ contradiction? The Autor et al. paper?

does not contradict our usual models because the gains and losses from trade may not occur in the same place.

Suppose the United Colonies​ (a hypothetical​ country) happens to be the​ world's most​ capital-abundant country. According to the​ factor-proportions (aka​ Heckscher-Ohlin) model, the U.C. would be expected to? The following table contains information for the United Colonies for a recent year. Compute the​ capital-labor ratio for​ U.C.'s imports and exports and record the values in the​ table's boxes. ​(Enter your responses as​ integers.) Are the​ table's results consistent with the​ Heckscher-Ohlin model's​ prediction?

export​ capital-intensive goods and import​ labor-intensive goods; $2400/8=300, $2100/12=175; no!

This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign and Home for each of two goods. Home: aLC=1 hour per pound (candy), aLW=3 hours per gallon (whiskey) Foreign: a*LC=5 hours per pound, a*LW=4 hours per gallon ​where: aLC=number of labor hours needed to produce a unit of candy in​ Home aLW=number of labor hours needed to produce a unit of whiskey in​ Home a*LC=number of labor hours needed to produce a unit of candy in​ Foreign a*LW=number of labor hours needed to produce a unit of whiskey in​ Foreign PC=the money price per pound of candy​; PW ​= the money price per pound of whiskey. In the absence of trade between Home and Foreign the unit labor requirements given above indicate that the relative price of candy (PC​/PW​) will be lower in ??? Once Home and Foreign engage in​ trade, the world equilibrium relative price of candy ​(PC​/PW​) will be determined by the ??? In the graphical portrayal of world​ equilibrium, the relative demand curve of candy is​ downward-sloping and the relative supply curve of candy is shaped​ as ???

home; relative supply and demand of candy; a step function

The​ "theory of the second​ best" states that?

in the presence of a market​ failure, government intervention may improve welfare.

In the context of the​ "2 by 2 by​ 2" idealized​ factor-proportions model, assume the following facts about the​ world: In each country​ (Home and​ Foreign) coal is the​ labor-intensive good; Home is the​ labor-abundant country. From these few​ facts, it can be asserted that before trade? According to the​ model, the establishment of trade between Home and Foreign will ultimately bring?

in​ Home, workers earn​ less, land earns​ more, and the relative price of coal is lower than in Foreign; an equalization of both the relative prices of goods and factor prices.

Some retailers in advanced countries sell products from developing countries with low wages but assure customers that these goods are produced under tolerable working conditions. Is demanding that kind of guarantee the same thing as putting a tariff on​ low-wage exports? Demanding the working conditions guarantee? Is there any way demanding a working conditions guarantee can benefit workers​ overseas? Demanding tolerable working conditions?

is different than a tariff because it increases consumer demand; could benefit overseas workers if they are paid higher wages.

A country engaging in trade according to the principles of comparative advantage gains from trade because it?

is producing imports indirectly more efficiently than it could domestically.

According to​ Ricardo, a country will have a comparative advantage in the product in which its?

labor productivity is relatively high.

The diagram to the right depicts a​ country's production possibilities​ frontier, labeled TT1. Assume that cigars are​ labor-intensive and sugar is​ land-intensive. Output is at point​ 1, where the slope of the production possibilities frontier equals the negative of the relative price of​ cigars, −PC/PS. Suppose that one​ (and only​ one) of the​ economy's two resources increases by an amount such that the labor-intensive ​good's maximum output increases by 100​% ​(i.e., by a factor of 2​), while the land-intensive ​good's maximum output increases by just 25​%. Given these divergent​ increases, it has to be the case that the resource that increased was ??? Using the​ three-point curved line drawing tool​, show this biased expansion of production possibilities. Properly label this curve.

labor; draw rainbow curve from 5(y-one above what was given) to 10(x- double of what was given).

The diagram to the right depicts ​pre-trade equilibria in Uplandia​ (point 1) and Downlandia​ (point 3). RD represents the relative demand for coal in each​ country, while the respective relative coal supply curves are RSU for Uplandia and RSD for Downlandia. Assuming that sugar is​ land-intensive and coal is​ labor-intensive, it must be​ true, given that RSU is to the right of RSD​, that Uplandia is the ???​-abundant country. Knowing that trade between these countries will result in a world relative coal price between the pretrade​ prices, it will also happen that?

labor; workers in Uplandia and landowners in Downlandia are made better off.

Suppose the U.S. foreign assets are 66 percent of the U.S.​ GDP, and the U.S. foreign liabilities are 96 percent of the U.S. GDP. ​ Moreover, suppose that 51 percent of U.S. foreign assets are denominated in foreign​ currencies, while all liabilities to foreigners are denominated in U.S. dollars. How will a 14 percent depreciation of the dollar affect ​foreigners' net foreign claims on the U.S. measured in U.S. dollars​ (as a percent of U.S.​ GDP)? Foreigners will experience a net capital _____ equal to _____ percent of U.S. GDP.

loss; 5

Suppose that Canada and Brazil are trading manufactured goods and food. The figure to the right shows the Brazilian budget constraint. The absolute value of the slope of this constraint signifies the relative price of ??? Note that Brazilian food​ consumption, DBF​, is 50 units and is exceeded by its production of food, QBF​, which is 70 units. Using the triangle drawing tool​, sketch​ Brazil's trade triangle. (mini triangle touching line and all 3 rectangles) According to this trade triangle Brazil​ receives, for its exports of 20 units of​ food, a total of ??? manufactured goods (look at other axis for units under triangle)

manufactured goods; 2

The claim that trade exploits a country and makes it worse off if its workers receive much lower wages than workers in other countries is shown by the Ricardian model to?

miss the point because it fails to consider the​ alternative, which would be even lower wages.

​Brander-Spencer analysis states that?

monopoly profits can be moved from one country to another by a government subsidy.

GNP​ (Gross National​ Product) equals GDP plus?

net receipts of factor income from the rest of the world.

A nation engaging in trade according to the Ricardian model will find its consumption bundle?

outside its production possibilities frontier.

The opportunity cost of money holdings is?

the alternative interest income foregone from not holding some other asset.

The​ left- and​ right-hand figures given above show the Home and Foreign markets for barley. The center figure shows the world barley ​market, containing​ Home's import demand​ (MD) and​ Foreign's export supply​ (XS). In the absence of both transportation costs and artificial trade​ barriers, the world barley market achieves equilibrium with?

the price at $12​, trade volume at 2 million​ tons, and total world output at 8 million tons.

The notion that trade policy often imposes costs on large numbers of​ people, and benefits only a few is explained by?

the problem of collective action.

The asymmetry of a reserve currency system refers to the fact that?

the reserve country has a fixed exchange rate but can still use​ domestically-oriented monetary policy.

Given the model of competition among political parties used by political​ scientists, the most likely tariff policy would be?

the tariff rate favored by the median voter.

Economists use the term opportunity cost to refer to?

the value of the next best alternative occurring as a result of making a particular choice.

A similar contradiction was actually detected for the​ post-WWII United States by​ Russian-born economist Wassily Leontief​ (1906-1999) in a landmark 1953 study. One possible explanation for the apparent​ "paradox" for the United States​ (as well as for the hypothetical United Colonies shown​ above) is that?

while the country is abundant in physical​ capital, it is even more abundant in human capital.

The figure to the right shows the market in an importing country after its government imposes a quota that restricts imports to 2 units and​ (as a​ consequence) increases the domestic price from ​$4 to ​$6. As a result of this​ quota, consumers in the importing country experience a welfare loss valued at​ ___ while producers realize a gain of​ ___? Also created by the imposition of a quota are quota​ rents, which accrue to whomever is assigned the rights to sell in the domestic market. According to the​ figure, these rents have a monetary value of​ ___?

​$15​; $9; $4

The following table defines terms relevant to the basic Ricardian model of one factor and two goods. aLC=number of labor hours needed to produce a unit of cheese in​ Home aLW=number of labor hours needed to produce a unit of wine in​ Home a*LC=number of labor hours needed to produce a unit of cheese in​ Foreign a*LW=number of labor hours needed to produce a unit of wine in​ Foreign PC=the price per pound of cheese on world​ markets PW=the price per gallon of wine on world markets. Which of the following conditions will induce Foreign to specialize in cheese​? Suppose Foreign were to trade with Home at the relative price of ​(PC​/PW​) ​= 0.5. Using the line drawing tool​, add the consumption possibilities frontier for Foreign to its production possibilities frontier. Properly label this line.

​(PC​/PW​)>(a*LC​/a*LW​); Draw a line from 60(y) to 120(same x)

The following table defines terms relevant to the basic Ricardian model of one factor and two goods. aLC=number of labor hours needed to produce a unit of candy in​ Home aLW=number of labor hours needed to produce a unit of wine in​ Home a*LC​=number of labor hours needed to produce a unit of candy in​ Foreign a*LW=number of labor hours needed to produce a unit of wine in​ Foreign PC=the price per pound of candy on world​ markets PW=the price per gallon of wine on world markets Which of the following conditions will induce Home to specialize in candy​? Suppose Home were to trade with Foreign at the relative price of ​(PC​/PW​) ​= 1.0. Using the line drawing tool​, add the consumption possibilities frontier for Home to its production possibilities frontier. Properly label this line.

​(PC​/PW​)>(aLC​/aLW​); CPF line from 120(y) to 120(x)

Do data on the U.S. official settlements balance give an accurate picture of the extent to which foreign central banks buy and sell dollars in currency​ markets?

​No, this account provides only a partial picture because it shows a net value of all transactions.

This exercise applies the basic Ricardian model of one factor​ (labor) and two goods to the national economy of Home. Assume the​ following: aLS=number of labor hours needed to produce a unit of sugar in​ Home aLC=number of labor hours needed to produce a unit of canvas in​ Home PS=the price per ton of sugar​ PC=the price per bolt of canvas Which of the following conditions signifies that workers in Home will all want to work in the sugar ​sector?

​PS/PC>aLS​/aLC

This exercise applies the basic Ricardian model of one factor​ (labor) and two goods to the national economy of Home. Assume the​ following: aLS=number of labor hours needed to produce a unit of sugar in​ Home aLC=number of labor hours needed to produce a unit of canvas in​ Home PS=the price per ton of sugar​ PC=the price per bolt of canvas Which of the following represents the opportunity cost of sugar​? In the absence of international​ trade, Home will have to produce both sugar and canvas for itself. ​However, it will do so only if?

​​aLS/aLC; all of the above are correct. (PS​/aLS​=PC​/aLC. PS​/PC​=aLS​/aLC. Workers are indifferent as to where ​(Sugar or Canvas​) they work)


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