chapter 20: international trade and finance

Suppose that a small island nation, Runau, had the imports and exports shown in the table for 2018 and 2019. By how much did its trade deficit change?

-5 million dollars

If the tiny nation of Lorland devotes all its resources to strawberries, it can produce 16 strawberries per day. If it devotes all its resources to balloons, it can produce 80 balloons per day. These are the only goods that Lorland can produce. What is the opportunity cost of 1 balloon in Lorland?

0.2 strawberries/balloon

Assume that a nation initially only consumes blue jeans that are produced domestically. The figure below depicts the impact of this nation deciding to engage in free trade in the market for jeans. According to the graph below, what is the quantity of blue jeans imported from foreign countries following the shift to free trade?

40 MILLION PAIRS OF JEANS

Given that the production possibilities frontiers (PPFs) for Mexico and the United States are as shown, which of the options given is Mexico's best possible consumption outcome, assuming that it can trade with the United States using a 1:1 food-clothing ratio?

400 units of clothing and 500 tons of food

The graph below depicts the impact of a tariff in the market for shoes. If a nation initially participates in free trade and enjoys a price of $100 per pair of shoes, then a 20% shoe tariff would reduce the welfare of domestic consumers by the total of areas A, B, PS, and T.Of these areas representing a loss to domestic consumers, select the area(s) that represent deadweight loss.

A B

Which of these scenarios is the best example of dumping?

A Chinese company sells raw silk for $18 per kilogram domestically and for $5 per kilogram in India.

Imagine that the United States and Mexico produce only sugar and oil. The United States can produce a barrel of oil at an opportunity cost of 2 tons of sugar, whereas Mexico can produce a barrel of oil at an opportunity cost of 3 tons of sugar. Fill in the blanks to complete the passage.

If Mexico and the United States faced these opportunity costs, then to benefit from trade Mexico should specialize in producing SUGAR. That is, THE UNITED STATES would use some of the oil it produces and export the rest to MEXICO in exchange for sugar. In order for the trade to be beneficial to both nations, the trade ratio must be between 2 and 3 tons of sugar per barrel of oil.

Fill in the labels so that the graph describes supply, price, and quantity in an economy completely closed to imports, an economy with free trade, and an economy with tariffs on imports.

PRICE BOTTOM TO TOP Pfree trade Pwith tariff Pdomestic only SHOES BOTTOM TO TOP Sfree trade Swith tariff Sdomestic only

Imagine that the government of France imposes a tariff on imported wineglasses. (You may assume there was no tariff on wineglasses previously.) Which of these consequences would you expect to result from the new tariff? Which would not result?

RESULT OF THE NEW TARIFF The price of wineglasses in France will increase. French consumers will buy fewer wineglasses. French government revenue will increase. NOT A RESULT OF THE NEW TARIFF French producers will sell fewer wineglasses. Total welfare in France will increase.

Which of the following outcomes can we expect to result from the Chinese government intentionally devaluing the yuan? Which will not?

RESULT OF YUAN DEVALUATION More yuan are in circulation in world currency markets. Aggregate demand in China increases. NOT A RESULT OF YUAN DEVALUATION Quantity of foreign demand for Chinese exports decreases. Chinese workers' real wages increase.

Which of these are reasons for the intense increase in international trade that has occurred over the last 75 years? Which are not?

Reason(s) lower shipping costs reduced trade barriers increased specialization among nations Not a Reason higher tariffs

Fill in the blanks to complete the following passage concerning the U.S. balance of trade, based on the figure.

Since at least 1975, the United States has had a NEGATIVE balance of trade, also known as a TRADE DEFICIT. However, it is clear that this trend is driven primarily by only one of the components of U.S. trade. If the distinction is made between the trade of goods versus the trade of services, it turns out that the United States enjoys a trade surplus for SERVICES, but a trade deficit for GOODS.

The graph below depicts the impact of a tariff in the market for shoes. If a nation initially participates in free trade and enjoys a price of $100 per pair of shoes, then a 20% shoe tariff would reduce the welfare of domestic consumers by the total of areas A, B, C, and T.Of these areas representing a loss to domestic consumers, select the area(s) that would become a gain to the domestic government that imposes the tariff.

T

Apply the correct label to indicate the result of each event for the dollars-per-yuan exchange rate between the United States and China.

THE RATE GOES DOWN The U.S. Fed sells a large block of U.S. Treasury securities, receiving dollars as payment. China's central bank buys a large block of U.S. Treasury securities, making payment in yuan. THE RATE GOES UP China's central bank sells off a large block of U.S. Treasury securities, receiving yuan as payment. The U.S. Fed buys a large block of U.S. Treasury securities, using dollars.

True or False: For any exchange between two currencies, there are two different exchange rates, either of which can be used in currency exchange calculations.

TRUE

True or False: If the United States imposes new tariffs on foreign car imports, domestic manufacturers will sell more cars.

TRUE

True or False: Just as the demand for farm labor is derived from the demand for food crops, the demand for a currency is derived from the demand for goods priced in that currency.

TRUE

Two isolated nations, Alphaland and Betaton, are considering opening their borders to trade with each other. Both nations consume only two goods: salt and pepper. Alphaland can produce either 80 tons of salt per day or 5 tons of pepper per day, while Betaton can produce either 3 tons of salt per day or 1 ton of pepper per day. Which trade ratios would make both nations better off, and which would not?

WOULD BENEFIT BOTH NATIONS 10 tons of salt for 1 ton of pepper 5 tons of salt for 1 ton of pepper WOULD NOT BENEFIT BOTH NATIONS 2 tons of salt for 1 ton of pepper 20 tons of salt for 1 ton of pepper

True or False: A country's trade deficit often increases during periods of currency appreciation.

true

In an exchange of money between U.S. dollars and Turkish lira, if the exchange rate is 0.4 dollars per lira, what is the rate in liras per dollar?

2.5 liras/dollar

Fill in the blanks to complete the passage about the relationship between demand for a country's goods and services and demand for a country's currency.

A rise in demand for goods and services translates into GREATER demand for the means of payment. A country's goods and services must ultimately be paid for in the currency of the country where the goods or services are PRODUCED. If the demand for the goods and services rises, that country's currency APPRECIATES against other currencies.

Imagine a world with two countries, Amicia and Franconia, where people consume only cake and pie. Assume that an Amician worker takes 1.5 hours to make a cake and 1.5 hours to make a pie. Further, assume that a Franconian worker takes only 1 hour to make a cake but 2 hours to make a pie. Fill in the blanks to complete the table showing the opportunity cost of each production activity for each country.

AMICIA 1 PIE 1 CAKE FRANCONIA 1/2 PIE 2CAKES

Suppose there is a shift in the international market for Japanese cars. Order the following events to show how a shift in consumer preferences can affect exchange rates.

American consumers start to prefer Japanese cars to American cars. More dollars are exchanged for yen to pay Japanese suppliers. The yen appreciates relative to the dollar. The shifting exchange rate drives up the price of Japanese cars in the United States.

Fill in the blanks to complete the passage about international finance.

An EXCHANGE RATE reflects the amount of one currency required to purchase one unit of another currency. To put it simply, it is the PRICE of foreign currency. This rate is set by SUPPLY AND DEMAND in foreign exchange markets. When a currency becomes more valuable in the market, this is called APPRECIATION; when a currency becomes less valuable, this is called DEPRECIATION.

Match each of the following motivations for trade restrictions to the argument against that reason.

FAVORS TO SPECIAL INTERESTS Regardless of how many producers benefit from trade restrictions, even more consumers will be hurt because of higher prices. PROTECTING INFANT INDUSTRIES Well-established industries are able to lobby for trade restrictions to stay in place. NATIONAL SECURITY INTERESTS In practice, tariffs are often used to limit imports from friendly nations

The demand for British pounds is initially at D1. If the U.S. dollar depreciates relative to the pound, where will the demand for pounds be after the depreciation? Select the correct curve label.

D2

This figure depicts the growth of U.S. trade for services only between 1970 and 2019, as a percentage of U.S. GDP. Label the "exports" and "imports" lines appropriately.

EXPORTS BLUE IMPORTS RED

Fill in the blanks to complete the passage about the U.S. trade balances in goods and services.

From the graphs above, it is evident that the United States imports about 50% more in GOODS than it exports, but exports about 50% more in SERVICES than it imports. It is also evident, from a comparison of the vertical scales, that the United States imports about FOUR TIMES as much in goods as in services and that it exports about TWICE as much in goods as in services.

Suppose that it currently costs 17 Mexican pesos to buy one U.S. dollar. With that as the reference point, decide whether each situation corresponds to a price above or below 17 pesos/dollar.

PRICE ABOVE 17 PESOS/DOLLAR A peso can buy less in the way of U.S. goods. The dollar has gone up in value. PRICE BELOW 17 PESOS/DOLLAR It takes more dollars to buy pesos. The peso has appreciated.

The tiny isolationist nations of Lorland and Zhangia are considering opening their borders to trade with each other. Both nations produce only two goods: smoothies and sandals. Currently, a worker in Lorland can produce 2 smoothies per day or 8 sandals per day, while a worker in Zhangia can produce 1 smoothie per day or 5 sandals per day. Using this information, please match each nation and good to the most accurate description.

LORLAND the nation that will specialize in producing smoothies once trading begins SMOOTHIES the good that Lorland will export to Zhangia after trading begins ZHANGIA the nation that will specialize in producing sandals once trading begins SANDALS the good that Lorland will import from Zhangia after trading begins

Which items represent the United States's main service exports, and which do not?

MAIN SERVICE EXPORTS travel services education services financial services NOT MAIN SERVICE EXPORTS legal services construction services

Which two factors most directly affect the demand for a country's currency on the international currency market?

MOST DIRECTLY AFFECTS DEMAND the demand for the country's goods and services the exchange rates with other currencies DOES NOT MOST DIRECTLY AFFECT DEMAND central bank actions to increase or decrease the money supply strong economic growth

Use the production possibilities frontiers (PPFs) for Mexico and the United States to fill in the blanks to complete the passage.

Mexico and the United States each produce both food and clothing, in the quantities shown. Mexico could produce 150 additional tons of food at the cost of 450 units of clothing, so its opportunity cost of 1 ton of food is 3 units of clothing. The United States could produce as many as 600 additional tons of food at the cost of 300 units of clothing, so its opportunity cost of 1 ton of food is 0.5 unit of clothing.

Match each good to its status in U.S. trade with Canada and Mexico.

NATURAL GAS A major import from Canada AGRICULTURAL PRODUCTS a major export to Canada GOLD a major import from Mexico MEAT a major export to Mexico

Which of the following graphs best represents a fictional country engaging in exchange rate manipulation to intentionally devalue its currency, called the rallod?

ONE BLUE LINE ->ARROW POINTED TO RED LINE

Fill in the blanks to complete the passage about trade barriers to protect infant industries.

One argument for trade barriers is that domestic industries sometimes need trade protection WHILE THEY develop the capacity to compete internationally. Unfortunately, however, for POLITICAL reasons, trade barriers are harder to REMOVE than they are to ESTABLISH.

Fill in the blanks to complete the passage about international trade and specialization.

The citizens of Sealand like both fish and cookies. So do the citizens of Molossia. Each country can produce both goods, but the countries can also trade with each other. If Molossia has a HIGHER opportunity cost of producing fish than Sealand does, then Molossia has a(n) COMPARATIVE advantage in producing cookies. Molossia should produce COOKIES, and it should trade for FISH.

Which of the following would cause a rightward shift in the demand for Mexican pesos?

The desire for Mexican-grown produce increases.

Fill in the blanks to complete the following passage concerning globalization.

The increasing interdependence of national economies is the essence of GLOBALIZATION. Between 1970 and 2019, world trade DOUBLED as a percentage of world GDP. World trade equaled 10% of world GDP in 1970 and 22% by 2019.

How does a country's business cycle generally affect the international trade balance?

The trade deficit tends to shrink during economic downturns.

Suppose Mexico's opportunity cost for producing 1 unit of food is 3 units of clothing and the United States' opportunity cost for producing 1 unit of food is 0.5 units of clothing. Trade at a ratio of 1:1 is beneficial to both countries. How beneficial would it be for Mexico if the trading ratio were 1 unit of clothing for every 2 units of food?

This is even better than 1:1.

Fill in the blanks to complete the passage about Nicaragua's economy.

To grow its way out of poverty, Nicaragua has established "free zones" where companies can produce goods for EXPORT and avoid the various corporate taxes that apply to goods produced for the DOMESTIC market. Several U.S. APPAREL companies have taken advantage of the opportunity to manufacture goods in an environment with reduced production costs. But while these businesses employ Nicaraguan WORKERS, they do not produce goods available to Nicaraguan CONSUMERS.