Chap 1-2-3 Assignment

Which Country Gains More from trade?

-Each country gains from international trade, Trade is a positive sum activity. The gainers are the consumers of imported products and the producers of exportable products. The losers are the producers of import competing products and the consumers of exportable products.

Highlight the current patterns in International Trade.

1) China is now the leading exporting country. 2) The U.S. is the major trading partner for many countries. 3) Developed countries account for the bulk of world trade 4) Developed countries trade primarily with each other

Explain the effects of Immigration on receiving economy.

1) Immigrant labors and employer in receiving country benefit. 2) The firms employing the immigrants benefit. 3) Consumers who buy products that immigrants produce benefit. 4) The workers who compete with the immigrants for jobs will lose. 5) Overall the net effect to the receiving country is positive.

Effects in the Importing Country

1. Lowers the market price. 2. Raises the quantity consumed. 3. Lowers the quantity produced of that product.

Explain the four controversial developments in International Economics? Explain any two in detail. Recent Developments

1. The Trade War of 2018 , By mid-2018 the United States had instigated a trade war with many countries by imposing a global tariff on import of certain goods. 2. Immigration, Immigration policies have been set in place to reduce and restrict immigration. Opponents of immigration stress a range of problems they believe arise from immigration, including : A. General losses to the economy. B. local workers who compete with the immigrants for jobs will lose. C. The fiscal burden from immigrants' use of government services (health care, schooling, etc.). D. Slow integration of immigrants into the new national culture, values, and language. E. Potential increase in crime. Because local 3. China's Exchange Rate 4.Brexit

Effects in the Exporting Country

1.Raises the quantity produced. 2.Lowers the quantity consumed. 3.Raises the market price of the product.

Why United States started a trade war with other countries? Outline four reasons.

A: US policy makers argue that tariffs on the imports from China, Mexico, EU, and other countries will: 1. Reduce trade deficits 2. Protect local industry 3. Create more jobs 4. Ensure national security

Highlight the problems of immigration.

About 260 million people, 3 percent of the world's population, live outside the country of their birth. For most industrialized countries the percentage of the country's foreign-born population is high.In the USA Many of the foreign-born are illegal immigrants—over 1/4 of the total for the USA .

Discuss main policies that each country can manipulate separately.

Among the most important policies that each country can manipulate separately are policies toward: 1.International movement of resources 2.Government taxation and spending 3.Money and Exchange rates

With no trade, differences in the price of a product between national markets creates an arbitrage opportunity that can lead to international trade.

Arbitrage is buying something in one market and reselling the same thing in another market to profit from a price difference , Demand and supply conditions differ between countries, so prices differ between countries if there is no international trade.

What do you mean by Free Trade Equilibrium?

As international trade in a product develops between the two countries, it affects the equilibrium price in importing and exporting countries.

The supply of money in a country is controlled by the

Central bank of the country , The size of the money stock in a country is primarily controlled by its central bank.

What is consumer surplus? Using real world data, what information would you need to measure. consumer surplus for a product?

Consumer surplus is the increase in the economic well being of consumers. Consumer surplus happens when the price that consumers pay for a product or service is less than the price, they're willing to pay.

Which of the following statements is true?

Developed countries trade primarily with each other

Money and Exchange rates

Each country determines the exchange rate regime that will apply to its currency. Some governments strive to keep their currency within a narrow range. As a result, currencies become over-valued or under-valued, leading to excessive trade deficits or surpluses.

A country cannot set its own policies toward the international movement of productive resources.

FALSE

According to the theory of comparative advantage, trade will not occur if one country is less efficient in the production of all products.

FALSE

Free trade is a zerosum activity because a county always gains at the expense of its trading partner.

FALSE

If a country does not have an absolute advantage in the production of at least one commodity, then it cannot gain from free trade.

FALSE

If country X has a higher labor productivity than the rest of the world in the production of a good, then country X has a comparative advantage in the production of the good.

FALSE

In March of 2018 the U.S. threatened to impose tariffs on Japanese's imports.

FALSE

In a two country two commodity model, if a country has higher labor productivity in producing both the goods, it must produce and export both the goods to the other country.

FALSE

Most international trade takes place between developing countries

FALSE

The act of buying at a low price in one place and selling at a high price in another place is called relative pricing.

FALSE

The net economic gains from free trade are usually negative.

FALSE

The opportunity cost of producing a good is the additional labor cost incurred to produce an extra unit of the good.

FALSE

When free trade begins, producers in the importing nation gain while producers in the exporting nation are worse off.

FALSE

A computer programmer working in India relocates to the United States. This is an example of

Factor mobility

what is factor mobility ?

Factor mobility refers to the ability to move factors of production - labor, capital or land - out of one production process into another

Which of the following is NOT a fiscal policy?

Increasing the money supply to expand aggregate demand , Monetary policy is the process by which a nation changes the money supply.

An increase in the imports of clothing into the United States from India will hurt the _____ and benefit the _____.

Indian consumers; Indian clothing producers

What is International Economics? Outline two broad sub-fields within international economics.

International Economics is the study of economic interactions between countries. There are two broad subfields within the discipline: international trade and international finance.

International trade takes place on account of many reasons. Discuss any four.

International trade takes place on account of many reasons such as: 1. Factors of production availability in different countries differs. 2. Technological advancement of different countries differs. 3. Labor and entrepreneurial skills differ in different countries. 4. Factors of production are highly immobile between countries.

Which one among the following is a NOT correct statement about International trade?

Labor, land, and capital are mobile across national borders as within the country

Which of the following is true of mercantilism?

Mercantilism believed that national well-being was based on national holdings of gold

What is producer surplus ? Using real world data, what information would you need to measure producer surplus for a product?

Producer surplus is the increase in the economic well being of producers. A producer surplus is generated by market prices in excess of the lowest price producers would otherwise be willing to accept for their goods. Producer surplus is a measure of producer welfare. It is shown graphically as the area above the supply curve and below the equilibrium price.

Adam Smith's theory of absolute advantage is based on the labor theory of value.

TRUE

Arbitrage is buying something in one market and reselling the same thing in another market to profit from a price difference.

TRUE

Arbitrage is the act of buying at one place and selling at another place in order to profit from the price differences that exist between the two places.

TRUE

By increasing the exchange-rate value of the yuan, the Chinese government was able to better manage its domestic economy.

TRUE

Consumer surplus is the net economic benefit to consumers who are able to buy a good at a price lower than the highest price that they are willing to pay.

TRUE

Economic analysis concludes that trade is a positive-sum activity and both countries generally gain from trade.

TRUE

Expansionary fiscal policy can be used by governments to stimulate the economy during a recession.

TRUE

If the world price is higher than the no trade domestic price, then domestic producers gain and domestic consumers lose as a result of free trade.

TRUE

Immigration policies have been set in place to reduce and restrict immigration.

TRUE

In the two country two good model, both countries can gain from trade as long as their relative advantages and disadvantages in producing different goods are different.

TRUE

Land is considered to be the least mobile factor internationally.

TRUE

National sovereignty means that no one person or group is in charge of the international economy.

TRUE

Producer surplus is the increase in the economic well being of producers who are able to sell the product at a market price higher than the lowest price that would have drawn out their supply.

TRUE

Straight line production possibility curves indicate that the opportunity cost of producing additional units of each good is constant.

TRUE

The exchange rate is a key price that affects international trade flows of goods and services and international financial flows.

TRUE

The net national gain from trade can be measured by the change in consumer and producer surplus that results from trade.

TRUE

The price elasticity of demand measures the responsiveness of consumers to changes in the price of a product.

TRUE

When free trade begins, producers in the exporting nation gain while producers in the importing nation are worse off.

TRUE

Government taxation and spending

Tax cuts boost demand by increasing disposable income and by encouraging businesses to hire and invest more. Tax increases do the reverse. These demand effects can be substantial when the economy is weak but smaller when it is operating near capacity. Government spending can be a useful economic policy tool for governments.

Which of the following is an impact of increased illegal immigration on an economy?

The demand for local labor in the receiving country declines

The value of a country's currency in terms of some other country's currency is called

The exchange rate

Which of the following groups is most likely to be benefitted when a country engages in free trade?

The manufacturers of exportable goods

How does trade affect production and consumption in each country?

The move from no trade to a free trade equilibrium changes the product price from its no trade value to the free trade equilibrium , The price change in each country results in changes in quantities consumed and produced. As international trade in a product develops between the two countries, it affects the equilibrium price in importing and exporting countries.

Which of the following is international trade?

Trade between countries . · International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services.

Distinguish between Absolute Advantage VS comparative advantage theories of International trade.

a. Absolute Advantage is the inherent ability of a country that allows that country to produce specific goods in an efficient and effective manner at a relatively lower marginal cost. A country has an absolute advantage in producing a good if it can produce that good at lower marginal cost, lesser manpower, lesser time and lesser cost without compromising the quality. Comparative Advantage refers to the country's capability of producing the specific good at lower marginal cost and opportunity cost in comparison to other countries. In absolute advantage where the emphasis is only on marginal cost, comparative advantage takes into account both marginal and opportunity cost.

Highlight what do you mean by the concept of "Absolute advantage".

a. Absolute advantage is the ability of an individual, company, region, or country to produce a greater quantity of a good or service with the same quantity of inputs per unit of time, or to produce the same quantity of a good or service per unit of time using a lesser quantity of inputs, than another entity that produces the same good or service. An entity with an absolute advantage can produce a product or service at a lower absolute cost per unit using a smaller number of inputs or a more efficient process than another entity producing the same good or service.

Discuss how do absolute advantage and comparative advantage relate to each other?

a. Absolute advantage looks at the efficiency of producing a single product. This analysis helps countries avoid the production of products that would yield little or no demand, leading to losses. A country's absolute advantage, or disadvantage, in a particular industry, can play an important role in the types of goods it chooses to produce. Comparative advantage takes a more holistic view, with the perspective that a country or business has the resources to produce a variety of goods. The opportunity cost of a given option is equal to the forfeited benefits that could have been achieved by choosing an available alternative in comparison. In general, when the profit from two products is identified, analysts would calculate the opportunity cost of choosing one option over the other.

Explain through example Adam Smith theory of Absolute advantage for free trade.

a. According to Adam Smith, who is regarded as the father of modern economics, countries should only produce goods in which they have an absolute advantage. An individual, business, or country is said to have an absolute advantage if it can produce a good at a lower cost than another individual, business, or country. This greater overall efficiency in production creates an absolute advantage, which allows for beneficial trade—this is because producers can specialize and then, through trade, benefit from other producers' specialization. Furthermore, when a producer has an absolute advantage, it also means that fewer resources and less time are needed to provide the same amount of goods as compared to the other producer.

International trade and domestic trade differ because of:

a. All Three · Trading between countries differ from domestic internal trade, i.e., trade within a country in different. The following points may be noted in this context: 1 Differences Regarding Mobility of Labour and Capital: 2) Differences in Natural and Economic Conditions: 3) Differences in Banking Systems and Economic Policies: 4) Currency: foreign exchange rates often vary and an adverse movement in the conversion rate may involve a trader in a loss. 5) Systems of Payment: As far as payment is concerned there may be more delay and less certain in foreign trade than in case of domestic trade. 6) Distance: The risks involved in transporting goods increase with the distance and the frequency with which the goods are handled 7) Customs Duties and Import Quotas: Certain goods may be subject to heavy duties or tariffs. This often makes it almost impossible for exports to compete in price with home products. Furthermore, exports may be limited by quotas imposed by importing countries. Competition: At home, a manufacturer may be protected from foreign competition by duties or quotas imposed by the government.

Outline the main idea behind the theory of comparative advantage in trade theory.

a. Eighteenth-century economist David Ricardo created the theory of comparative advantage. He argued that a country boosts its economic growth the most by focusing on the industry in which it has the most substantial comparative advantage. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. The theory of comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production. Comparative advantage suggests that countries will engage in trade with one another, exporting the goods that they have a relative advantage in.

Explain the Ricardo theory of Comparative advantage through example.

a. For example, oil-producing nations have a comparative advantage in chemicals. Their locally produced oil provides a cheap source of material for the chemicals when compared to countries without it. A lot of the raw ingredients are produced in the oil distillery process. As a result, Saudi Arabia, Kuwait, and Mexico are competitive with U.S. chemical production firms. Their chemicals are inexpensive, making their opportunity cost low. b. Another example is India's call centers. U.S. companies buy this service because it is cheaper than locating the call center in America. Indian call centers aren't better than U.S. call centers. Their workers do not always speak English very clearly. But they provide the service cheaply enough to make the tradeoff worth it.

Discuss the Concept of Free Trade in details. Outline the doctrine of mercantilism for international trade.

a. Free trade is a trade policy that does not restrict imports or exports. It can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold liberal economic positions while economically left-wing and nationalist political parties generally support protectionism the opposite of free trade. b. Mercantilism was one of the earliest efforts to develop an economic theory. This theory stated that a country's wealth was determined by the amount of it's gold and silver holdings. In its simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. It relates to policies which confine imports, increase stocks of gold and protects domestic industries.

International trade and domestic trade differ because of:

a. Trade restrictions b. Immobility of factors c. Different government policies

Define the Production-Possibility Curve. How its important in International trade.

a. production possibility curve. A graphical representation of the alternative combinations of the amounts of two goods or services that an economy can produce by transferring resources from one good or service to the other. b. countries could decide to specialize in producing the goods for which they have a comparative advantage. Each can trade its specialized product to the other and both countries will be able to enjoy both products at a lower cost. Quality will improve, too, since each country is making what it makes best. Determining how countries exchange goods produced by comparative advantage ("the best for the best") is the backbone of international trade theory. This method of exchange via trade is considered an optimal allocation of resources. It means that national economies, in theory, will no longer be lacking anything that they need.

If country X has higher labor productivity in production of umbrellas than the rest of the world, we would say that country X has a(n) ___ in the production of umbrellas.

absolute advantage

Fiscal policy

can be defined as the use of government spending and/or taxation as a mechanism to influence an economy.

There are two types of fiscal policy

expansionary fiscal policy, and contractionary fiscal policy.

International movement of resources

international factor movements occur in three ways: immigration/emigration, capital transfers through international borrowing and lending, and foreign direct investment. International factor movements also raise political and social issues not present in trade in goods and services. Nations frequently restrict immigration, capital flows, and foreign direct investment.

fiscal policy

is a tool of the government , The two main tools of fiscal policy are taxes and spending. Taxes influence the economy by determining how much money the government has to spend in certain areas and how much money individuals should spend.

Expansionary fiscal policy

is an increase in government spending or a decrease in taxation, while contractionary fiscal policy is a decrease in government spending or an increase in taxes.

When Adam Smith presented his theory of absolute advantage, he assumed that all "value" in an economy was determined by and measured in terms of the _____ used in the production of the various goods.

labor hours

An increase in the imports of clothing into the United States from India will benefit the _____ and hurt the _____.

the U.S. consumers; the U.S. clothing producers.

Labor productivity refers to:

the number of units of output that a worker can produce in one hour.

If a country exports the good that it can produce at a low opportunity cost and imports those goods that it would otherwise produce at a high opportunity cost, we say that such trade is based on:

the theory of comparative advantage.