Macroeconomics FINAL FINAL FINAL
Will a country do better importing or exporting a good for which it has a comparative advantage?
*A country will do better exporting a good for which it has a comparative advantage.* A country does better exporting a good for which it has a comparative advantage and importing goods for which other countries have a comparative advantage.
How does a depreciation of a currency change the price of imports and exports? Explain using the U.S. dollar and the Chinese yuan.
*A depreciation of the U.S. dollar will lead to an increase in the relative price of goods from China.* The depreciation of a currency means that it takes fewer foreign currency units to buy one domestic currency unit. In the case of the United States and China, when the dollar depreciates, the price of U.S. exports to China declines and the price of U.S. imports from China increases as more U.S. dollars would be needed to buy a Chinese import.
In a normal downturn, an economy is expected to recover quickly and return to its potential output to its long-term growth trend. How is a structural stagnation different from a normal downturn?
*A structural stagnation is a downturn followed by a period of slow growth that is not expected to speed up any time soon without major structural changes in the economy. Structural stagnations are far less responsive to expansionary demand-side policies.* In a structural stagnation, the economy does not expand sufficiently after a recession to return to its long-term growth trend. Structural changes, which take a long time, are needed in order to get the economy back on track.
What does the secular stagnation theory state?
*Advanced countries would eventually stop growing because investment opportunities would be eliminated. Without new investment opportunities, the investment component of aggregate demand will wither, and along with it economic growth.* The secular stagnation theory states that advanced countries will eventually stop growing because investment opportunities will eventually be met. This slows the growth of aggregate demand, hindering economic growth and eventually stopping the growth completely.
From the standpoint of adjustment costs to trade, which would a country prefer—inherent or transferable comparative advantage? Why?
*An inherent comparative advantage because it would not lose that comparative advantage or face the adjustment costs that accompany the change of comparative advantages.* A country would prefer to have an inherent comparative advantage because it would not lose that comparative advantage or face the adjustment costs that accompany the change of comparative advantages.
How do structural problems from the aftermath of a financial crisis make policy more difficult?
*During a financial crisis, fiscal policy and monetary policy are both in high gear. These policies cannot be sustained over time. As the government's demand policy is changed from expansionary to neutral and fiscal policies are changed to contractionary, government policy will exert a slowing effect on the economy, thus making policy more difficult.* The structural problems resulting from the financial crisis—housing overhang, a reduction in perceived wealth, and the need to unwind expansionary policies in a way that limits contractionary pressures—all make policy more difficult because policy makers cannot rely on standard policies of expansionary monetary and fiscal policies. Instead each problem must be addressed with specific programs. The overhang requires government policies that will help eliminate the excess supply of housing. The decline in perceived wealth requires policies that will raise asset prices, and the risk of unwinding fiscal and monetary policy will require policymakers be careful when reversing policy.
True or false? Globalization is a one-time event, and thus does not present a problem for the future of the United States. Explain your answer.
*False. Globalization is not a one-time event. It is an ongoing process in which developing countries compete in more and more activities as they move trade from natural resources to low-skill manufacturing to increasingly complicated goods and services.* False. Globalization is not a one-time event. It is an ongoing process in which countries gain and lose comparative advantages, depending upon technology, social institutions, natural resources and other factors. For example, in the coming years, developing countries will continue to move up the value-added chain, providing competition for a greater array of goods for the United States.
True or false? Since globalization causes structural problems, it should be restricted. Explain your answer.
*False. Globalization is simply competition on the global level. It should not be restricted.* *Because of globalization, tradable goods are much cheaper. It has increased the overall world growth rate and increased U.S. consumption even as U.S. potential output was reduced.* False. Globalization should not be restricted because while it may cause short-term costs, there are long-term benefits to globalization. Specifically, trade increases specialization, which lowers costs and stimulates technological development. Both raise the trend growth rate, which translates into higher production and consumption. The structural problems reflect short-term problems that can be resolved over time. Once they are resolved, the economy will again grow at its long-term growth rate.
True or false? If you have a job in the nontradable sector, you don't have to worry about the structural effects of globalization. Explain your answer.
*False. People working in the nontradable sector are indirectly affected by the structural effects of globalization, since unemployed workers from the tradable sector compete for jobs in the nontradable sector.* False. Even though jobs in the nontradable sector do not face direct foreign competition, the health of the nontradable sector depends on employment and income in the tradable sector. As incomes in the tradable sector decline, those working in that sector will have less income to spend in the nontradable sector. This reduces demand for nontradable goods, which will lower production and raise unemployment in the nontradable sector. In addition, there will be downward pressure on wages in the nontradable sector as unemployed workers in the tradable sector look for jobs in the nontradable sector.
What are the beliefs of the structural stagnation hypothesis?
*Globalization causes structural problems that primarily affect advanced economies, which will keep their economic growth below world economic growth into the foreseeable future as much of the growth takes place in developing countries.* Structural stagnation argues that for advanced economies, globalization has caused several structural problems that have slowed growth. Once the structural problems have been addressed, the economy will return to its long-term growth trend. By that time, however, the economy's share of world output will have declined.
How has globalization made the rich richer and poor poorer in the United States?
*Globalization led to outsourcing of low income manufacturing jobs while increasing demand for high income financial jobs.* Outsourcing has reduced the demand for manufactured jobs, reducing employment and income in that industry. Manufacturing supported the middle class for a number of years. Globalization has also created demand for technology, finance, and trade, which require higher skills and pay higher incomes. Because globalization increases the market for their skills, income in these sectors has increased enormously. The overall result is a greater disparity in income.
How are economies of scale, comparative advantage, and trade restrictions related?
*If a country has a comparative advantage in producing a certain good, trade restrictions would decrease competition, allowing an increase in sales and production of that good, which leads to economies of scale.* Economies of scale refer to the situation in which costs per unit of output fall as output increases. Trade restrictions would reduce competition, allowing domestic firms to sell and produce more of that good and realize the economies of scale.
What are some reasons why a small country might not get the gains of trade?
*If traders face little competition.* International traders in small countries often have little competition and so keep large shares of the gains from trade for themselves; hence, the people of a small country may not get the gains from trade.
How do inherent comparative advantages differ from transferable comparative advantages?
*Inherent comparative advantages are those that are based on factors that are relatively unchangeable, while transferable comparative advantages are those based on factors that can change relatively easily.* Inherent comparative advantages are those that are based on factors that are relatively unchangeable, while transferable comparative advantages are those based on factors that can change relatively easily.
Why does globalization tend to make the distribution of income less equal?
*International traders and workers have done well from globalization, but the unskilled and not highly skilled in the tradable sector have been most hurt by globalization through job loss or wage cuts. Workers in nontradable sectors are affected because of the indirect competition for jobs from those who have lost jobs in the tradable sector.* Globalization has made the distribution of income more unequal by lowering income for the unskilled and not-highly skilled workers in the tradable sector. Workers in the nontradable sector also face lower income. In contrast, globalization has raised incomes for international traders. Because facilitating trade takes fewer people, the income gain has gone to a small number of people. The declining incomes of many and the rising income of few has led the distribution of income to be more unequal.
How does internationalizing the debt reduce crowding out?
*Internationalizing the debt increases the supply of loanable funds so the interest rate does not necessarily increase.* To finance the debt, the U.S. government has to sell more bonds. Because foreigners also demand these bonds (demand is greater), the government doesn't have to pay as high interest rates as it would if only U.S. investors demanded government bonds. Thus, the interest rate doesn't rise as much and crowding out is reduced.There's another way to avoid the crowding out that results from financing the deficit: Foreigners could buy the debt at the existing interest rate. This is called internationalizing the debt, and that is what happened to the U.S. economy in recent years.
Is the United States justified in complaining about Japan's and China's use of an export-led growth policy? Why or why not?
*It depends. The United States both benefits and endures undesired consequences from the policy. It also depends on whether a nation should put its goals ahead of, or secondary to, international goals.* The answer to this question hinges on what is meant by "justified." If that means the United States is complaining about the actual negative consequences it experiences because of this policy, such as a higher trade deficit and possibly an artificially high value for the dollar, one can say the complaint is justified. If the argument centers on fairness, the issue is clearly complicated by the question of whether a nation should put its goals ahead of, or secondary to, international goals. However, the United States does benefit from Japan's and China's export-driven policies in the form of cheaper imported goods.
Why do smaller countries usually get most of the gains from trade?
*More trade opportunities are opened up for small countries.* Smaller countries tend to get more of the gains from trade because more opportunities are opened up for them. This is true only under the condition that competition among traders prevails.
Why are politicians so uneasy about discussing the structural problems caused by globalization?
*Most are reluctant to say that U.S. wages need to fall relative to foreign wages. Thus most political policies provide the illusion of an effective policy but do not offer a serious solution to the structural problems facing the United States.* Politicians do not like to propose policies that have clear downsides, and the solutions to structural problems are likely to hurt the average American in the short run. Therefore, one will see that most politicians prefer to avoid talking about the structural problems and rather act as if the current economic slowdown will recover with standard monetary and fiscal policies.
How does the outsourcing of manufacturing production benefit production in the United States?
*Outsourcing hurts some U.S. workers, but since it improves global income, it can lead to additional demand for goods produced in the United States.* While the loss of a comparative advantage in the manufacturing sector might have hurt the United States' economy in some ways, it has freed resources for the sectors in which the United States does have a comparative advantage. Today that comparative advantage is facilitating international trade. This change creates a demand for U.S. advertising, management, and distribution of goods. This creates jobs and income in those sectors.
Would you expect the resource curse to improve or worsen the distribution of income in a country?
*The resource curse will reduce the comparative advantage of other tradable goods.* The resource curse would worsen the distribution because it would cause an appreciation in the value of the currency, lowering the world price level, making the trade position for tradable goods worse. That is, a country's exports would cost more and its imports would cost less. The resource sector benefits because by definition, foreign countries demand the resource. Tradable goods sectors tend to employ a large number of workers as compared with natural resource sectors. Resource sectors tend to have fewer employees, concentrating the rise of income among a few compared with other tradable goods sectors.
Why would a country have trade assistance programs? What makes them difficult to implement?
*To compensate domestic producers who lose as a result of reductions in trade restrictions.* *Losses from free trade become exaggerated and magnified.* A country would have trade adjustment assistance programs in an effort to facilitate free trade by compensating domestic producers who lose as a result of reductions in trade restrictions. They are difficult to implement because losses from free trade often become exaggerated and magnified, causing the costs of the assistance programs to outweigh the gains.
Why does competition among traders affect how much of the gains from trade is given to the countries involved in the trade?
*Traders will compete with one another, giving countries greater and greater amounts of the gains from trade to gain their business.* Traders get bigger gains from trade in newly opened markets where strong competition among traders has not yet developed. The more competition that exists in international trade, the more the traders will compete with one another and will offer to arrange trades for less and less. With more competition, gains to traders will be reduced, leaving more gains for citizens of the countries involved in the trade.
Why don't foreign countries want the U.S. dollar to fall precipitously?
*U.S. imports would decline, depressing growth in other world economies.* If the U.S. economy were to collapse, U.S. imports would decline, depressing growth in other world economies. Thus, we can expect foreign governments to step in to support the dollar and slow its fall, if the private demand for U.S. assets decreases.
Countries must choose an exchange rate policy. a. Why is currency stabilization limited through direct purchases? b. What are a country's other options?
*a.A country must use official or foreign reserves, which are limited, to purchase its currency.* *b.Monetary and fiscal policies or trade policy* a. Currency stabilization is limited through direct purchases because a country must use official reserves (also known as foreign reserves) to purchase its currency. Eventually it will run out of reserves. b. Its other options are to use monetary and fiscal policies or trade policy.
You observe that over the past decade a country's trade deficit has risen. a. What monetary or fiscal policies might have led to such a result? b. You also observe that interest rates have steadily risen along with a rise in the exchange rate. What policies would lead to this result? c. Could another explanation be that people in other countries wanted to hold lots of that country's debt?
*a.Expansionary fiscal policy* *b.Expansionary fiscal policy* *c.Yes. Capital would be flowing into the country, which means there must be an offsetting trade deficit* a. An increase in the trade deficit is probably due to expansionary fiscal or monetary policy. Such expansionary policy would increase inflation, which would reduce competitiveness, and increase income, which would increase imports and increase the trade deficit.b. If interest rates have risen steadily along with a rise in the exchange rate, it is likely that fiscal policy has been very expansionary. Expansionary monetary policy would be accompanied by falling interest rates.c. The internationalization of debt would increase capital inflows into the country, which, in order for the balance of payments to be equal, would require a trade deficit.
In the 1990s, Japan's economic recession was much in the news. a. What would you suspect was happening to its trade balance during this time? b. What policies would you guess other countries (such as those in the Group of Eight) were pressuring Japan to implement?
*a.It depends on whether the fall in expenditures was caused by domestic or international demand.* a. If the recession was caused by a fall in domestic expenditures, we would expect that its trade balance was moving toward a surplus as imports lagged. If, however, the recession was caused by a fall in exports, we would expect that its trade balance was moving toward a deficit. b. The G-8 countries were trying to get Japan to boost its economy by increasing aggregate expenditures with expansionary monetary or fiscal policy.
Domestic policy as it relates to a country's currency is related to the state of the economy. a. Why didn't the United States have to implement contractionary policy following World War II even though the value of the dollar was high? b. Why didn't a decline in U.S. competitiveness in the 1970s require the United States to run contractionary policy? c. The trade deficit is creating a challenge to domestic policy today because:
*a.The United States had a strong competitive position and a trade surplus even though the value of the dollar was high.* *b.Foreign individuals and countries had an enormous demand for U.S. assets, which allowed the United States to import more than it exported and maintain a trade deficit.* *c.it means U.S. firms are not competitive and workers in the tradable sector are losing their jobs.* a. The United States had a strong competitive position and a trade surplus even though the value of the dollar was high. Thus, contractionary policy was not needed. b. Foreign individuals and countries had an enormous demand for U.S. assets, which allowed the United States to import more than it exported and maintain a trade deficit. Again, contractionary policy was not needed. c. The trade deficit is presenting a challenge today because it means U.S. firms are not competitive and workers in the tradable sector are losing their jobs. To restore its competitiveness, the United States will have to endure structural changes, such as reducing the value of the dollar, a fall in domestic wages, and/or an increase in U.S. productivity. During these structural changes, economic growth will be lower than its long-term rate. If one believes the problems are not structural, policy makers will have to run contractionary monetary and fiscal policy, which will slow the economy.
The underlying growth trend is important for policy because it
*determines how quickly an economy can grow without creating accelerating inflation.* The underlying growth trend determines how quickly an economy can grow without creating accelerating inflation. For policy makers, if an economy is growing more slowly than its long-term trend, they can run expansionary policies to grow the economy. If it is growing above its trend, policy makers will run contractionary policies to avoid inflation. The growth trend serves as a benchmark.
There are strong political forces to manage exchange rates because:
*exchange rates affect investors, firms, and consumers in an economy.* There are strong political forces that manage exchange rates because exchange rates affect investors, firms, and consumers in an economy. Investors prefer an exchange rate that they can predict and is not subject to wild fluctuations, because it reduces the risk of their investment. Firms prefer a predictable exchange rate so that they can estimate future production costs (to the extent that inputs are purchased from abroad). Consumers prefer the government keep the value of the exchange rate high to lower imported consumer goods, while domestic firms prefer a low value to limit foreign competition. All of these interest groups place pressure on government to manage the exchange rate.
A credible threat of trade restrictions could lead to lower trade restrictions because the country threatening trade restrictions would
*have the upper hand in strategic bargaining, enabling them to extract larger gains from trade including lowering trade restrictions.* A credible threat of trade restrictions would lead to lower trade restrictions because the other bargainer's belief that a country would implant trade restrictions gives the country the upper hand in strategic bargaining and enables the country to extract larger gains from trade. These gains could be lower trade restrictions.
What is the relationship between GATT and the WTO?
*the WTO is the successor to GATT.* The WTO is the successor to GATT. Both work toward agreements to reduce trade barriers. The WTO includes enforcement mechanisms that GATT did not have.
What are four reasons why economists' and laypeople's view of trade differ?
1. Economists can identify both the costs and benefits of trade. Laypeople often do not recognize that the decline in product prices is the result of trade, while they can readily identify that lost jobs are the costs. 2. Economists know that comparative advantage implies that each country is better at producing at least one good. Laypeople worry that since wages are lower in China, it has a comparative advantage in all goods and the United States will lose all its jobs. Economists admit that because the United States has a trade deficit, it will face difficult economic forces to restore a more nearly equal division of comparative advantage. 3. Economists recognize that trade occurs in more sectors than manufacturing. They see the comparative advantage that the United States has in trading services. Laypeople tend to see trade as trade in manufactured goods only. 4. Economists' models do not take into account the effect of trade on the distribution of income. A change in a country's comparative advantage will affect the distribution of income. Laypeople do take this into account.
What would be the effect on the U.S. trade deficit if China and Japan ran a contractionary fiscal policy?
A contractionary fiscal policy by Japan and China would decrease Japanese and Chinese imports of U.S. goods, and therefore, such action would increase the U.S. trade deficit, as exports fall.
Why can't a country target both its interest rate and exchange rate?
A country can't target both interest rates and exchange rates because targeting an exchange rate requires changing monetary policy to maintain that target. Since monetary policy affects interest rates, the country must give up this goal.
Which of the following is a potential side effect if the country's exchange rate falls?
A fall in the exchange rate would create some inflationary pressures as import prices rise and global prices are no longer holding down domestic prices.
Free Trade Association
A group of countries that have reduced or eliminated trade barriers among themselves.
What happens when exchange rates are low or high?
A high exchange rate for the dollar makes foreign currencies cheaper, lowering the price of imports, which benefits domestic consumers but places competitive pressure on domestic firms. A high exchange rate also tends to widen the trade deficit. On the contrary, a low exchange rate makes imports more expensive, hurting domestic consumers and putting inflationary pressure on the economy. But, it can cause a trade surplus. There are pros and cons to both high and low exchange rates.
Quota
A limit placed on the quantities of a product that can be imported
structural stagnation hypothesis
A macroeconomic hypothesis that sees the recent problems of the U.S. economy as directly related to the structural problems caused by globalization.
Tariff
A tax on imported goods
If expansionary monetary policy is anticipated, prices will rise while output and unemployment are unchanged
Anticipated changes in the money supply do not affect output or unemployment, but can affect prices. Anticipated increases in the money supply would raise prices, and anticipated decreases in the money supply would lower prices.
Select three sources of comparative advantage that the United States has and will likely maintain over the coming decade.
Any three of the following ten would be correct: (1) Skills of the U.S. labor force, (2) U.S. governmental institutions, (3) U.S. physical and technological infrastructure, (4) English as the international language of business, (5) wealth from past production, (6) U.S. natural resources, (7) cachet, (8) inertia, (9) U.S. intellectual property rights, and (10) a relatively open immigration policy.
What are three reasons countries restrict trade?
Countries restrict trade for many reasons. Any of the following are correct answers: 1. Unequal internal distribution of the gains from trade. 2. Companies that feel they are not getting a good deal from trades will lobby government to restrict trade. 3. Countries want to make threats of trade restrictions for the purpose of negotiating credible. 4. Learning by doing and economies of scale may reduce the cost of producing a domestic good, making those goods more competitive in the future. This may be particularly true for infant industries. 5. Sales of goods to foreign countries may threaten national security. 6. Countries may want to use trade restrictions as an international political tool. 7. Governments earn revenue from the tariffs that can be used to support government spending.
Wages in China are lower than those in the United States. This means that China has a comparative advantage in everything.
False. According to the theory of comparative advantage, if one country has a comparative advantage in one good, the other country must have a comparative advantage in another good.
Name three reasons economists support free trade.
From a global perspective, free trade increases total output. International trade provides competition for domestic companies, which forces domestic companies to remain competitive and efficient. By fostering international cooperation, international trade makes war less likely which is a significant contribution to national security.
strategic trade policy
Government policy aimed at improving the competitive position of a domestic industry and/or domestic firm in the world market
Which of the following is/are true?
Having a trade deficit means a country is consuming more than it is producing, which can be good. But, a deficit also means that a country will have to finance its consumption by selling assets, on which interest or profit will have to be paid to foreigners in the future. A trade surplus will reverse the flow of capital, which will provide the domestic economy future interest and profits. However, current consumption is sacrificed. There are pros and cons to both trade deficits and trade surpluses.
What effect on the U.S. trade deficit would result if China and Japan ran an expansionary monetary policy?
If China and Japan ran an expansionary monetary policy, it would increase Chinese and Japanese imports of U.S. goods, and therefore, such action would decrease the U.S. trade deficit, as exports skyrocket.
If a country does not run a trade deficit, where does the world supply curve intersect the domestic equilibrium in the AS/AD model?
If the country does not run a trade deficit, the world supply curve intersects at the same location that the LAS, SAS and AD curves intersect—that is, at domestic equilibrium.
Select the schematic that shows the effect of domestic expansionary monetary policy on the trade deficit.
Increased money → Increased income → Increased imports → Increased trade deficit
infant industry argument
New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations.
What policies are needed to deal with the structural problems caused by globalization?
Policies to deal with the long-run structural problems include (1) decreasing the exchange rate value of the dollar, (2) instituting policies that will pressure workers to lower their reservation wages, (3) raise tariffs to increase the cost of imported goods, and (4) implementing policies that increase U.S. worker productivity such as job-training programs.
Which graph represents the Short-Run Phillips Curve?
The Short-Run Phillips Curve is a negative relationship between inflation and unemployment.
competitiveness
The ability of a country to sell its goods to other countries.
world supply curve
The amount of tradable goods that other countries will supply to a country at a given price level and exchange rate.
What are the costs of internationalizing the debt?
The costs of internationalizing the debt are that interest and profits must be paid on the capital owned by foreigners. Future consumption must be reduced to pay that amount. Also, foreign governments and individuals can potentially gain economic leverage over U.S. national institutions.
exchange rate
The measure of how much one currency is worth in relation to another.
value-added chain
The movement of trade from natural resources to low-skill manufacturing to increasingly complicated goods and services.
On January 1, 2005, quotas on clothing imports to the United States first instituted in the 1960s to protect the U.S. garment industry were eliminated. What was the likely effect on profits of foreign companies that sold clothing in the U.S. market?
The short-run effect of the removal of the quota is that profits declined because the equilibrium price declined (revenue falls when supply increases and demand is inelastic). If economies of scale lower average total costs by more than the decline in equilibrium price, in the long run profits might increase with the removal of the quotas.
globalized AS/AD model
The standard AS/AD model with an added world supply curve that captures the effect that globalization can have on an economy.
If expansionary monetary policy is unanticipated, prices will rise while output rises while unemployment falls
Unanticipated changes in the money supply affect prices, output, and unemployment. An unanticipated increase in the money supply would boost output and lower unemployment, while causing prices to rise.
currency depreciation
a decrease in the market value of one currency relative to another currency
Stagflation
a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)
Secular Stagnation Theory
a theory in which advanced countries such as the United States would eventually stop growing because investment opportunities would be eliminated
Congratulations! You've been hired as an economic adviser to the government of a country that has perfectly flexible exchange rates. State what monetary and fiscal policy you might suggest in each of the following situations: a. You want to lower the interest rate, decrease inflationary pressures, and lower the trade deficit. b. You want to lower the interest rate, decrease inflationary pressures, and lower the trade surplus. c. You want to lower the interest rate, decrease unemployment, and lower the trade deficit. d. You want to raise the interest rate, decrease unemployment, and lower the trade deficit.
a. Contractionary fiscal policy would lower inflation and the interest rate directly, and reduce the trade deficit by lowering income. It will also increase the capital inflow, which will tend to allow an increase in the trade deficit. Expansionary monetary policy would reduce the interest rate, but it would also spur inflation. b. These goals are difficult to achieve simultaneously. While one could use a combination of monetary and fiscal policies, expansionary monetary policy would lower the trade surplus and lower interest rates, but would cause upward pressure on prices. To offset this, contractionary fiscal policy could be used, but that would also result in increasing the trade surplus and raising interest rates. c. An expansionary monetary policy will reduce interest rates and reduce unemployment too, but it will increase the trade deficit. Expansionary fiscal policy will also reduce unemployment, but it increases interest rates and raises the trade deficit. d. This combination of goals is difficult to achieve. Expansionary fiscal policy will tend to reduce unemployment and increase interest rates, but it will also tend to increase the trade deficit. Contractionary monetary policy will offset the undesired effect on the trade deficit, but it will also offset the desired effects on unemployment and the interest rate.
According to a study done at JPMorgan Chase, as world trade increased from about 12 percent of world output in the 1970s to about 25 percent of world output in the early 2000s, global differences in growth rates decreased, from around 3 percent in the 1970s to about 1 percent in the early 2000s. a. If that is true, would one expect more or less stabilization coming from trade with other countries? b. What does this convergence of growth rates suggest about the possibility of a global recession? c. If a global recession occurred, what policy recommendation would you put forward?
a. One would expect less stabilization, because economic conditions in one country will have a greater impact on the economies of other countries. When one country's income falls, foreign incomes will likely fall, too. This will lead to falling exports for the first country, which will further decrease income. b. This would increase the possibility of a global recession, especially whenever one country goes into a recession. c. One will need coordinated countercyclical policy (expansionary fiscal policy or monetary policy) organized through G-8, the World Bank, or another international organization.
Demonstrate graphically how the following are represented in the globalized AS/AD model for the United States. What happens to the trade deficit in each? a. Foreign wages rise. b. U.S. productivity rises. c. The value of the dollar rises. d. The U.S. imposes tariffs on imported goods.
a. The WAS curve shifts up. The trade deficit will decrease. b. The SAS curve shifts down. The trade deficit will decrease. c. The WAS curve shifts down. The trade deficit will increase. d. The WAS curve shifts up. The trade deficit will decrease.
Congratulations! You have been appointed an adviser to the IMF. A country that has run trade deficits for many years now has difficulty servicing its accumulated international debt and wants to borrow from the IMF to meet its obligations. The IMF requires that the country set a target trade surplus. a. What monetary and fiscal policies would you suggest the IMF require of that country? b. What would be the likely effect of that plan on the country's domestic inflation and growth? c. How do you think the country's government will respond to your proposals? Why?
a. You should suggest that the IMF require a contractionary policy for both monetary and fiscal policies to ease the trade deficit. However, you should suggest a relatively more contractionary fiscal policy so that the exchange rate would also fall while inflation falls, boosting exports (note that a contractionary monetary policy will raise interest rates and thereby raise exchange rates, which boost imports).b. This would tend to slow inflation after an initial burst due to a fall in the exchange rate on domestic inflation (caused by higher import prices). The policy, however, would hinder growth and push the economy into a (hopefully short-lived) recession.c. The country's government would not be happy about the proposal because its adoption might lead to a deep recession, which is politically unpopular.
currency appreciation
an increase in the market value of one currency relative to another currency
transferable comparative advantage
comparative advantages based on factors that can change relatively easily
inherent comparative advantage
comparative advantages that are based on factors that are relatively unchangeable
strategic bargaining
demanding a larger share of the gains from trade than you can reasonably expect
Commodities
economic goods or products before they are processed and/or given a brand name, such as a product of agriculture
economies of scale
factors that cause a producer's average cost per unit to fall as output rises
regulatory trade restriction
government-imposed procedural rules that limit imports
GATT (General Agreement on Tariffs and Trade)
international agreement first signed in 1947 aimed at lowering trade barriers
trade adjustment assistance program
programs designed to compensate losers for reductions in trade restrictions
sanction
restriction on the imports or exports of a country's goods
trade surplus
situation in which a country exports more than it imports
trade deficit
situation in which a country imports more than it exports
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
balance of trade
the difference in value between a country's imports and exports.
Resource Curse
the difficulties faced by resource-rich developing countries, including dependence on exporting one or a few commodities whose prices fluctuate, as well as potentials for corruption and inequality
policy coordination
the integration of a country's policies to take account of their global effects
reservation wage
the lowest wage a worker would accept for a given job
WTO (World Trade Organization)
the only international body dealing with the rules of trade between nations
learning by doing
the process by which a firm becomes more efficient at production as it produces more output
Globalization
the process by which businesses or other organizations develop international influence or start operating on an international scale.
