Econ 13 Homework #2

Using the term "spillover" is a less formal means of describing a. an externality b. social costs c. private costs d. market failure

(International Finance) a. an externality

How can increased investment help a country achieve increased economic growth? What are the costs involved?

(Growth) A country that invests substantially in human and physical capital will be able to produce a greater quantity of goods and services in future periods, experiencing a higher standard of living as a result. Countries that tend to grow most rapidly are those that devote a larger share of available resources to producing capital goods instead of consumption goods.

What are some factors that would enhance human capital deepening?

(Growth) The proportion of the U.S. population with a high school and a college degree is rising. The idea of human capital deepening also applies to the years of experience that workers have, but the average experience level of U.S. workers hasn't changed much in recent decades. Thus, the key dimension for deepening human capital in the U.S. economy focuses more on additional education and training than on a higher average level of work experience.

__________ is output per hour in the business sector. a. Net exports b. Productivity c. Investment d. Per Capita GDP

(Growth) b. Productivity

A country will roughly double its GDP in twenty years if its annual growth rate is: a. 12 percent. b. 7.5 percent. c. 3.5 percent. d. 2.5 percent.

(Growth) c. 3.5 percent

Identify the firms that would be most concerned about exchange rates and explain the reasons for their concerns.

(International Finance) Firms that depend on export sales, or firms that rely on imported inputs to production, or even purely domestic firms that compete with firms tied into international trade are concerned about exchange rates because sharp movements in exchange rates can lead to dramatic changes in profits and losses.

Identify the exchange rate that equalizes the prices of internationally traded goods across countries and briefly discuss the main functions this exchange rate serves

(International Finance) The exchange rate that equalizes the prices of internationally traded goods across countries is called the purchasing power parity or PPP exchange rate. The purchasing power parity exchange rate serves two main functions. First, PPP exchange rates can be useful for making comparisons between countries because they stay fairly constant from day to day or week to week and only change modestly, if at all, from year to year. Second, over a period of years, exchange rates do tend to move in the general direction of the PPP exchange rate and there is some value to knowing in which direction the exchange rate is more likely to shift over the long run.

Briefly discribe how the foreign exchange market works. Include a discussion of the behind-the-scenes workings and provide an indication of the size of transactions that can be involved

(International Finance) The foreign exchange market works through financial institutions, and it operates on several levels. Behind the scenes banks turn to a smaller number of financial firms known as "dealers," who are actively involved in large quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the "interbank market," although a few insurance companies and other kinds of financial firms are involved. Trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars.

In 2008, 1 Swiss franc cost .56 British pounds and in 2010 it cost .51 British pounds in 2010. How much would 1 British pound purchase in Swiss francs in 2008 and 2010? a. 2008: 1.79 francs, 2010: 1.96 francs b. 2008: 1.78 francs, 2010: 1.98 francs c. 2008: 1.71 francs, 2010: 2.00 francs d. 2008: 1.73 francs, 2010: 1.97 francs

(International Finance) a. 2008: 1.79 francs, 2010: 1.96 francs

_______________ include both the private costs incurred by firms and also costs incurred by third parties outside the production process. a. Social costs b. Private costs c. Market costs d. External costs

(International Finance) a. Social costs

For firms engaged in international lending and borrowing, ____________________ can have an enormous effect on profits. a. swings in exchange rates b. trade-offs and risks c. foreign portfolio investment d. foreign direct investment

(International Finance) a. swings in exchange rates

If 112 Japanese yen purchased $1.00 U.S. in 2008 and 83 Japanese yen purchased $1.00 U.S. in 2009, then a. the dollar depreciated against the yen b. the dollar appreciated against the yen c. the yen depreciated against the dollar d. the yen weakened against the dollar

(International Finance) a. the dollar depreciated against the yen

A stronger euro is less favorable for a. German tourists traveling abroad b. American tourists traveling in France c. Canadian firms selling in Germany d. Canadian investors with money investments in Germany

(International Finance) b. American tourists traveling in France

People or firms use one currency to purchase another currency at the _______________________. a. international currency exchange b. foreign exchange market c. foreign currency exchange d. international parity market

(International Finance) b. foreign exchange market

If the U.S. dollar weakens, which of the following parties will benefit? a. countries exporting to the U.S. b. Australian firms selling in the U.S. c. U.S firms selling in Europe d. Japanese investors who have money in the U.S.

(International Finance) c. U.S firms selling in Europe

Market-oriented environmental tools _______________ for firms to take the social costs of pollution into account and ____________________ in reacting to these incentives. a. draw distinctions; lower the social costs incurred b. lack incentives; prohibit firms from having flexibility c. create incentives; allow firms some flexibility d. specify particular technology; lower the social costs incurred

(International Finance) c. create incentives; allow firms some flexibility

Market failure describes a situation in which the market itself ______________________ in a way that balances social costs and benefits. a. remains outside the transaction b. incurs the costs outside the production process c. fails to allocate resources efficiently d. avoids externalities

(International Finance) c. fails to allocate resources efficiently

The objective of imposing a higher pollution tax is to a. ensure firms have pollution charge credits for all reduced emissions. b. provide incentive for firms to maintain regulation emission levels c. provide adequate incentive for firms to reduce their emissions by more d. ensure firms must pay the pollution charge for all reduced emissions

(International Finance) c. provide adequate incentive for firms to reduce their emissions by more

Which of the following is an example of a pegged currency? a. U.S. dollar b. British pound c. Euro d. Chinese yuan

(International Finance) d. Chinese yuan

If government policy allows a country's currency to be determined in the exchange rate market, then that currency will be subject to a. a hard peg policy b. purchasing power parity c. depreciation d. a floating exchange rate

(International Finance) d. a floating exchange rate

If $1.00 U.S. bought $1.40 Canadian dollars in 2006 and in 2010 it bought $1.00 Canadian dollar, then a. the U.S. dollar appreciated against the Canadian dollar b. the Canadian dollar weakened against the Canadian dollar c. the U.S. dollar strengthened against the Canadian dollar d. the Canadian dollar appreciated against the U.S. dollar

(International Finance) d. the Canadian dollar appreciated against the U.S. dollar

What are the effects of a tariff, and who benefits and who loses when tariffs are imposed? What are the effects of a quota, and who benefits and who loses when quotas are imposed?

(International Trade and Protectionism) A tariff raises the domestic price of the good the tariff is placed on. The higher price benefits domestic producers and the tariff revenue benefits the government, both at the expense of domestic consumers. A quota raises the domestic price of the good with the quota imposed on it. The higher price benefits domestic producers and the foreign producers who are allowed to sell the good at a higher price, both at the expense of the domestic consumer

Define protectionism as a policy and describe what a country stands to lose when it enacts such a policy

(International Trade and Protectionism) Protectionism is a policy where the domestic consumers of a product (consumers may include either households or other firms) are required to pay higher prices to benefit domestic producers of that product. In addition, when a country enacts protectionism, it loses the economic gains it would have been able to achieve through a combination of comparative advantage, learning, and economies of scale

__________ means selling goods below their cost of production. a. Protectionism b. Dumping c. Import quotas d. Non-tariff barriers

(International Trade and Protectionism) b. Dumping

The infant industry argument for protectionism suggests that an industry must be protected in the early stages of its development so that: a. firms will be protected from subsidized foreign competition b. domestic producers can attain the economies of scale to allow them to compete in world markets d. there will be adequate supplies of crucial resources in case they are needed for national defense d. it will not be subjected to a takeover from a foreign competitor

(International Trade and Protectionism) b. domestic producers can attain the economies of scale to allow them to compete in world markets

Low-wage U.S. workers suffer from protectionism in all the industries that they don't work in, because: a. protectionism provides a barrier to entry to the job markets that the low-wage earners want entry to b. protectionism forces them to pay higher prices for basic necessities like clothing and food c. protectionism will encourage foreign workers to apply for American jobs. d. protectionism will prevent them from applying for those jobs in other industries

(International Trade and Protectionism) b. protectionism forces them to pay higher prices for basic necessities like clothing and food

The race to the bottom scenario of global environmental degradation is explained roughly like this: a. Companies seek to reduce their costs of operations on plant and equipment design and this results in higher levels of pollution b. Companies seek the lowest market prices on products in order to gain market share, resulting in inferior goods and increased waste and pollution c. Profit-seeking multinational companies shift their production from countries with strong environmental standards to countries with weak standards, thus reducing their costs and increasing their profits d. Companies seek to influence environmental legislation standards are set to the lowest possible standards in the USA in order to maximize profits

(International Trade and Protectionism) c. Profit-seeking multinational companies shift their production from countries with strong environmental standards to countries with weak standards, thus reducing their costs and increasing their profits

Import tariffs generally ____ the output of domestic producers of the affected products and also ____ the output of domestic exporters. a. decrease; decrease b. decrease; increase c. increase; decrease d. increase; increase

(International Trade and Protectionism) c. increase; decrease

A tariff differs from a quota in that a tariff is: a. levied on imports, whereas a quota is imposed on exports b. levied on exports, whereas a quota is imposed on imports c. a tax levied on exports, whereas a quota is a limit on the number of units of a good that can be exported d. a tax imposed on imports, whereas a quota is an absolute limit to the number of units of a good that can be imported

(International Trade and Protectionism) d. a tax imposed on imports, whereas a quota is an absolute limit to the number of units of a good that can be imported

What is comparative advantage, and why is it important in international trade?

(International Trade) Comparative advantage states that aggregate output is maximized when countries specialize in the production of goods for which they are the lowest opportunity cost producer, and then trade for other goods. This explains how countries can improve their situation through trade, rather than producing all goods themselves.

Steve and Craig have been shipwrecked on a deserted island in the South Pacific. Their economic activity consists of either gathering pineapples or fishing. We know Steve can catch four fish in one hour or harvest two baskets of pineapples. In the same time Craig can reel in two fish or harvest two baskets of pineapples. Assume Craig and Steve both operate on straight-line production possibilities curves. What is Steve's opportunity cost of producing a basket of pineapples? Of a producing a fish? What is Craig's opportunity cost of producing a basket of pineapples? Of a producing a fish?

(International Trade) Steve's opportunity cost of a basket of pineapples is 2 fish; his opportunity cost of a fish is 2 basket of pineapples. Lee's opportunity cost of a basket of pineapples is 1 fish; his opportunity cost of a fish is 1 basket of pineapples.

In India one person can produce 330 pounds of rice or 110 shirts in one year. In China one person can produce 400 pounds of rice or 200 shirts in one year. Which of the following statements is true? a. India has a comparative advantage in the production of rice b. China has a comparative advantage in the production of rice c. China has both an absolute and comparative advantage in the production of rice d. India has an absolute advantage in the production of rice

(International Trade) a. India has a comparative advantage in the production of rice

The theory of comparative advantage shows that the gains from international trade do not just result from the absolute advantage of producing at lower cost, but also from pursuing comparative advantage and producing at a lower ________________. a. opportunity cost b. absolute cost c. relative cost d. comparative cost

(International Trade) a. opportunity cost

When one nation can produce a product at lower cost relative to another nation, it is said to have a(n) __________________ in producing that product. a. relative advantage b. absolute advantage c. economy of scale d. production efficiency

(International Trade) b. absolute advantage

Alpha can produce either 18 oranges or 9 apples an hour, while Beta can produce either 16 oranges or 4 apples an hour. The opportunity cost of producing 1 orange for Alpha and Beta, respectively, are: a. 0.25 apples; 0.5 apples b. 9 apples; 4 apples c. 0.5 apples; 0.25 apples d. 2 apples; 4 apples

(International Trade) c. 0.5 apples; 0.25 apples

Which of the following is true? a. A nation can have a comparative advantage in the production of a good only if it also has an absolute advantage b. A nation can have a comparative advantage in the production of every good, but not an absolute advantage c. A nation cannot have an absolute advantage in the production of every good d. A nation cannot have a comparative advantage in the production of every good

(International Trade) d. A nation cannot have a comparative advantage in the production of every good

Colombia produces coffee with less labor and land than any other country; it therefore necessarily has: a. a comparative advantage in coffee production b. both a comparative and absolute advantage in coffee production c. an absolute advantage and comparative disadvantage in coffee production d. an absolute advantage in coffee production

(International Trade) d. an absolute advantage in coffee production

The idea behind comparative advantage reflects the possibility that one party: a. may be able to produce everything relatively more efficiently than another party b. may be able to produce something at a lower dollar cost than another party. c. with an absolute advantage in producing two different may export goods both of those goods to the other party d. may be able to produce something at a lower opportunity cost than another party

(International Trade) d. may be able to produce something at a lower opportunity cost than another party

Briefly discuss the shortcomings of environmental command-and-control regulations

(Negative Externalities) Although environmental command-and-control regulations have helped to protect the environment, they have three shortcomings: they provide no incentive to go beyond the limits they set; they offer limited flexibility in where and how pollution will be reduced; and they often have politically motivated loopholes.

Briefly explain what is meant by the term "externality" and how it occurs

(Negative Externalities) An externality, which is sometimes also called a spillover, can have a negative or a positive impact on the third party. An externality occurs when an exchange between a buyer and seller has an impact on a third party who is not part of the exchange.