International Economics
A managed floating exchange rate refers to?
an exchange rate that is not pegged, but does not float freely.
An increase in the real exchange rate (real depreciation of domestic currency) will result in?
an increase in net exports.
If the central bank purchases assets, it will result in?
an increase in the money supply.
The GATT was?
an international treaty governing trade.
The Ricardian model attributes the gains from trade associated with the principle of comparative advantage result to?
differences in labor productivity.
The potential for gains from the rearrangement of production among countries is due to?
differing opportunity costs.
A self-fulfilling currency crisis implies that?
outflows caused by an expectations shift resulted in a possibly unnecessary crisis.
If there is a decline in output, to keep the exchange rate fixed, the central bank has to?
sell foreign assets.
In the figure to the right, the importing country imposes a tariff that raises the domestic price from PW to PT but lowers the foreign export price from PW to P*T. The net welfare COST of this tariff on the importing country is given by?
(b + d − e).
The degree of specialization predicted by the basic Ricardian model?
is much more extreme than is observed in the real world.
A country has a comparative advantage in producing a good if?
its opportunity cost of producing that good is lower than elsewhere.
What is the main problem with imposing labor standards to prevent child labor and poor working conditions in the exporting sector of a less-developed country?
Less-developed countries are opposed to them.
A pollution haven is said to exist when?
an economic activity becomes concentrated in countries or regions having less strict environmental controls than elsewhere.
We have the following data for a hypothetical open economy: GNP = $9,000 Consumption (C) = $7,200 Investment (I) = $1,400 Government Purchases (G) = $1,600 What is the value of the current account balance?
$-1200 Y = C + I + G + EX−IM CA = EX−IM $12,000=$8,000+$800+$1,600+ CA
Given the following Balance of Payment data for a given country: Current Account Balance: $1,400 Capital Account Balance: $80 What must be the Financial Account Balance?
$-1480
We have the following data for a hypothetical open economy: GNP = $10,000 Consumption (C) = $8,200 Investment (I) = $1,400 Government Purchases (G) = $1,600 Tax Collections (T) = $1,200 What is the value of total savings S? What is the value of the current account balance CA?
$200 ($12,000−$1,400−$8,000+$1,400−$1,200) $-1200 ($12,000−$8,000−$1,400−$1,200)
Unit Labor Requirements Home: 10 (cloth), 20 (widgets) Foreign: 60 (cloth), 30 (widgets) Given the information in the table above, Foreign's opportunity cost of cloth is?
2.0
In the figure to the right, the importing country imposes a tariff that raises the domestic price from $8 to $12 but lowers the foreign export price from $8 to $4. The net welfare gain from this tariff for the importing country is?
$4
This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Home for each of two goods. Home: aLS=1 hour per pound (shrimp), aLG=3 hours per gallon (glue) where: aLS=number of labor hours needed to produce a unit of shrimp in Home aLG=number of labor hours needed to produce a unit of glue in Home PS=the price per pound of shrimp PG=the price per gallon of glue If the price per gallon of glue (PG) is $12, the hourly wage rate in the glue sector of Home's economy will be?
$4
Which of the following functions corresponds to a liquidity preference function and correctly identifies the relationship between the left-hand side variables and the right-hand side variables? (Note that Md is the quantity of money demanded, P the price level, i interest rates, Y real income, and f is the function operator that relates inputs to an output.)
(M^d)/P = f (i-, Y+)
Assume that the Uncovered Interest Parity (UIP) holds. If the rate of return on a euro asset is 6 percent and the rate of return on a comparable dollar asset is 3 percent, the expected rate of dollar depreciation must be?
-3%
Which of the following is not part of the definition for Gross National Product?
...produced within a country's borders...
Suppose the Central Bank is trying to keep the exchange rate fixed; however, investors expect the exchange rate to depreciate. The graph on the right depicts an initial equilibrium in the economy with the fixed exchange rate. Note: 'E' = E$/€. 1.) Using the line drawing tool, add a new AA curve corresponding to increased expectations, before the Central Bank reacts, and label it "AA2." 2.) To reflect how the Central Bank reacts to keep the exchange rate fixed, using the line drawing tool, add a third AA schedule corresponding to the equilibrium with new expectations and the old exchange rate. Label it "AA3."
1. AA2 is above AA3. 2. AA3 is first. We can see that as a result of expected depreciation, output will stay the same. As the Central Bank is adjusting to keep exchange rate fixed, the money supply will fall and the interest rate will rise.
Refer to the diagram to the right. 1) Using the triangle drawing tool, shade in the area that represents the production distortion due to the imposition of a tariff 't'. Label this area 'PD. 2) Using the triangle drawing tool, shade in the area that represents the consumption distortion due to the imposition of a tariff 't'. Label this area 'CD. What is the numeric value of the distortion caused by the tariff?
1. Mini triangle to the left touching red line 2. Mini triangle to the right touching blue line $48.75 (add the areas of triangles PD + CD together) 10.2 reference graph
Consider the simultaneous equilibrium in the US money market and the foreign exchange market. In this problem we will analyze the effect of a decline in real GNP in the US. In the US money market, a decline in the US real GNP will cause the interest rate to fall. The figure on the right shows expected return on euro deposits as a function of the dollar/euro exchange rate E$/€. 1) Using the line drawing tool, draw a line representing the return on dollar deposits. Label this line 'RET-$1'. 2) Using the line drawing tool, draw a new line on the same graph representing the return on dollar deposits as the US real GNP falls. Label this line 'RET-$2'. As the result of this shock, the dollar will depreciate.
1. RET-$1 is the vertical line after RET-$2. 2. RET-$2 is the first vertical line.
Consider the simultaneous equilibrium in the US money market and the foreign exchange market. In this problem we will analyze the effect of a decline in the euro interest rate. Start with the money market equilibrium. As a result of a decline in the euro interest rate, while all other exogenous variables remain unchanged, the interest rate in the US will remain unchanged. The figure on the right shows the return on dollar deposits as a function of the dollar/euro exchange rate E$/€. 1) Using the 3-point curve tool, draw a curve representing the dollar return on euro deposits. Label this line 'RET-€1'. 2) Using a 3-point curve tool, draw a new line on the same graph representing the dollar return on euro deposits as the euro interest rate falls, and label it 'RET-€2'. As the result of a decline in the euro interest rate, the dollar will depreciate.
1. RET-€1 downward curve on top. 2. RET-€2 downward curve below it.
Refer to the diagram to the right. The closed-economy equilibrium price is $14. The world price is $10. By how much will domestic (Home) supply be reduced by allowing international trade? What is the quantity of imports at the world price of $10?
10 units (compare the quantity supplied at the domestic equilibrium price and at the world price); Imports= 20 units (subtract the two quantities on x-axis)
Suppose a bond issued by the European Central Bank and denominated in euros pays 4% per year. Today the exchange rate is 1.49 dollars per euro. It is expected that the exchange rate in one year will be 1.64 dollars per euro. What is the annual dollar return on this bond?
14% ...R€+Ee$/€/E$/€ − 1 = 0.04 +1.64/1.49−1 = 0.14 or 14%
Suppose the return on a European bond is 8 percent per year. If we expect the US dollar to depreciate with respect to the euro by 10 percent in the next year, what is the expected dollar return on this European bond?
18%
This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign and Home for each of two goods. Home: aLC=6 hours per pound (cheese), aLW=5 hours per gallon (whiskey) Foreign: a*LC=2 hours per pound (cheese), a*LW=6 hours per gallon (whiskey) where: aLC=number of labor hours needed to produce a unit of cheese in Home aLW=number of labor hours needed to produce a unit of whiskey in Home; a*LC=number of labor hours needed to produce a unit of cheese in Foreign a*LW=number of labor hours needed to produce a unit of whiskey in Foreign PC=the absolute or money price of cheese on world markets PW=the absolute or money price of whiskey on world markets. In post-trade equilibrium with PC=PW=$20, the wage of workers in Foreign relative to the wage of workers in Home will be equal to?
2.5
In 2013, what percent of all world consumption (private and public, including real investment) was imported?
30%
Assume the U.S. currently grows 2.3 million tons of fresh winter fruit and that the resources absorbed in the production of this fruit could have produced 300,000 laptop computers. Therefore, the opportunity cost of those 2.3 million tons of fruit is ??? computers. Suppose that South America could have instead produced those 2.3 million tons of fruit at an opportunity cost of 150,000 laptops. Because of the difference in opportunity costs between the two regions, it can be shown that trade gives the possibility of?
300,000; a mutually beneficial rearrangement of world production.
Refer to the diagram to the right. The closed-economy equilibrium price is $14. The world price is $4. What is the quantity of imports at the world price of $4? Imports=? By how much will imports be reduced with the introduction of the $2 tariff? Imports decrease by? How much tariff revenue is generated by the $2 addition? Tariff revenue=?
50 units; 10 units; $80
The nation of Acirema is "small," unable to affect world prices. It imports peanuts at the price of $10 per bag. The demand curve is: D=400−10P, and the supply curve is: S=50+5P. Calculate and graph the following effects of an import quota that limits imports to 50 bags. 1) Using the line drawing tool, draw the nation's supply and demand curves on the graph to the right. Properly label these curves. 2) Indicate the world price without the quota. Using the line drawing tool, draw a horizontal line at the correct price. Label the line Pw. 3) Indicate the domestic price with a quota that limits imports to 50 bags. Using the line drawing tool, draw a horizontal line at the correct price. Label the line Pq. The quota rents are $? The consumption distortion loss is $? The production distortion loss is $?
9.9 reference graph $500; $500; $250
What is the definition of a "small" country?
A country that cannot affect its terms-of-trade.
What is the "arbitrage" opportunity in the foreign exchange market?
A difference between the exchange rates in different trading centers.
Which of the following is not a key assumption that allows strategic trade policy to work effectively in the Brander-Spencer example of Airbus and Boeing?
A subsidy enables both firms to operate profitably.
On the Environmental Kuznets Curve shown in the figure to the right, China's transformation since 1980 can be displayed as the movement from?
A to B. (first two upwards points)
In the Output-Exchange rate space, draw the AA schedule using the line or curve drawing tool. Label this schedule 'AA'. Note: 'E' = E$/€. As you move down the AA curve, the interest rate?
AA curve is upwards sloping! Rises.
Suppose the economy is initially in equilibrium as depicted on the graph to the right. Note: 'E' = E$/€. The government implements a permanent expansionary monetary policy, which corresponds to an increase in the US (domestic) money supply. Using the line drawing tool, draw on the same graph a new AA line or new DD line. Properly label your line.
AA2 is above the AA1 line. As a result of permanent expansionary monetary policy in the short run, output will rise and the exchange rate will rise. In the long run, the economy will slowly adjust to a new equilibrium since the change was permanent. In this new equilibrium, compared to the initial equilibrium, output will be the same as before, and the exchange rate will be higher.
Refer to the diagram to the right. Complete the following table. Without Trade: Consumer Surplus x Producer Surplus With Trade: Consumer Surplus x Producer Surplus What area represents the gains from trade?
ACH; BCH AEG; BFG CEF
Refer to the balance sheet below for the Bank of Pecunia. Suppose the Bank of Pecunia goes to the foreign exchange market and purchases $220 worth of foreign assets. If the Bank of Pecunia paid for its purchase with domestic currency, fill in the new balance sheet for the Bank of Pecunia below.
Add the $220 to each section except to "Domestic Assets" & "Deposits held by private banks". When the Bank of Pecunia purchases $220 worth of foreign assets, there is an increase in the domestic money supply.
The multi−good (2−country) model differs from the two country, two product model, in that in the former?
All of the above. -one cannot determine which country will export which product given only labor productivity data. -the relative wage ratio will determine the pattern of trade ( which good is exported by which country. -full specialization is less likely to hold in equilibrium.
When the dollar is worth less in relation to currencies of other countries (for example relative to the Japanese Yen in the diagram to the right), are you more likely to buy American-made or foreign-made electronics? Are U.S. companies that manufacture semi-conductors happier when the dollar is strong or when it is weak? What about an American company that is in the business of importing electronic consumer goods into the United States?
American (domestic) products. When the dollar is weaker. When the dollar is stronger.
How is an export subsidy by a large country different from an import quota by a large country?
An export subsidy worsens terms of trade while an import quota improves them.
The figure to the right shows the domestic tobacco market for a small country which initially faces a world price of $24 per unit. Use the line drawing tool, to show the effect of this country's imposition of a $4 tariff on foreign tobacco. Properly label this line. According to your graph, the small country tariff?
At $28 draw a straight horizontal line across (Pw+t); is passed on in its entirety to the domestic market and also cuts imports.
Devaluation is often used by countries to improve their current accounts. The current account, however, equals national saving less domestic investment. Given the assumptions we made about saving and investment, how will devaluation affect national saving and investment? What is the effect on saving? What is the effect on investment?
Both public saving and private saving will rise; Investment will remain the same.
An import tariff imposed by a large country affects income distribution in the following way?
Consumers lose in the importing country and gain in the exporting country, while producers gain in the importing country and lose in the exporting country.
Using the line drawing tool, show the effect of a decline in the dollar interest rate. Properly label this line. This shock will lead to a dollar?
R2 (vertical blue line) behind RS (vertical red line) w E euro return curve crossing both like upside-down rainbow (green line); depreciation.
The graph on the right represents initial output in the short run. Suppose tax rates increase. Using the line drawing tool, draw a new line depicting the new aggregate demand. Label this line 'D2'.
D2 goes below D1! If tax rates increase, output in the short run will fall.
In the Output-Exchange rate space, draw a DD schedule using a line or curve drawing tool. Label this relationship 'DD'. Note: 'E' = E$/€. The DD curve describes the link between the exchange rate and the output in the short run. Through which variable does this link operate?
DD curve is upwards sloping! Current account.
Suppose a temporary rise occurs in world demand for domestic products. Using the line drawing tool, illustrate the impact of this event. Properly label your line. Now let the government use temporary monetary contraction to restore full employment. In this case the policy re-establishes full employment?
DD2 is below the DD1 line & AA1 intersects DD1 right in the middle! ;the currency to further appreciate.
Suppose the economy is initially in the long-run equilibrium as depicted on the graph to the right. Note: 'E' = E$/€. The government implements a temporary expansionary fiscal policy, which corresponds to an increase in US government spending or a fall in the US tax rates. Using the line drawing tool, draw a new AA line or DD line. Properly label this line.
DD2 is below the DD1 line. As a result of temporary expansionary fiscal policy, output will rise and the exchange rate will fall in the short run.
The earliest statement of the principle of comparative advantage is associated with?
David Ricardo.
Correctly sign the relationship between the following components and aggregate demand ('+' a positive relationship, '−'a negative relationship).
Disposable income + Taxes - Investment Spending + Government Spending + Real Exchange Rate +
Does any of the discussion in this chapter lead you to believe that dollar deposits may have liquidity characteristics different from those of other currency deposits? How would the differences affect the interest differential between, say, dollar and Mexican peso deposits? How may the liquidity of euro and yen deposits be changing over time as capital markets become increasingly integrated?
Dollar deposits are more liquid than deposits in most other currencies. Dollar deposits will tend to offer lower interest rate than peso deposits. Both yen and euro deposits are likely to become more liquid.
This exercise employs aspects of the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Home for each of the two goods. Chocolate: aLC= 1 hour per pound Whiskey: aLW= 3 hours per gallon where... aLC=number of labor hours needed to produce a unit of chocolate in Home aLW=number of labor hours needed to produce a unit of whiskey in Home. Using the line drawing tool, draw the production possibilities frontier for chocolate and whiskey in Home, given that there are 120 total labor hours (L) available. Label this curve PPF.
Draw a line from 40(y) to 120(x).
In the accompanying diagram the curves labeled SB and CC show, for soybeans and cigars respectively, how the land-labor ratio chosen for each good's production varies with the wage-rental (w/r) ratio. Using the line drawing tool, show, for an arbitrary wage-rental (w/r) ratio, how the land-labor ratio varies across the two industries. Label this line 'w/r'. From the intersection points of the CC and SB curves with the (w/r) line it can be deduced that cigars are the ??? good.
Draw line straight horizontally across; labor−intensive
The table below contains the unit labor requirements in Home and Foreign for each of five goods as well as the relative productivity advantage of Home. Assume there are no transportation costs. Fill in the five blanks in the table below. (Enter your responses rounded to one decimal place where necessary.)? Given the data in the preceding table, we know that if the relative Home wage (w/w*) = 1?
EX.) 4, 20, 5; Home produces cell phones, jackets, laptops, and MP3 players and Foreign produces MP3 players and sneakers.
We have focused on the case of trade involving only two countries. Suppose that there are many countries capable of producing two goods (apples and bananas), and that each country has only one factor of production, labor. The graph to the right shows the world relative supply and relative demand curves. As in the two country case, the flat sections of the RS curve are countries with different unit labor requirement ratios aLA/aLB. Referring to the graph, countries to the left of the equilibrium relative price would ??? apples to the countries to the right of the intersection.
EXPORT
Suppose the dollar interest rate and the pound sterling interest rate are the same, 6 percent per year. What is the relation between the current equilibrium dollar/pound exchange rate and its expected future level? Suppose the expected future exchange rate, $1.88 per pound, and the US interest rate remain constant, while Britain's interest rate rises to 11 percent per year. What is the new equilibrium dollar/pound exchange rate?
Expected dollar/pound exchange rate is equal to the current one. New equilibrium exchange rate is $1.97 per pound.
Classify each of the following transactions as belonging primarily to the sphere of international trade analysis (T) or international monetary analysis (M). (Enter T for Trade or M for Monetary.)
Foreigners purchase U.S. dollars. (M) The U.S. imports crude oil from the Middle East. (T) The U.S. imposes tariffs on foreign steel. (T) The Chinese government purchases U.S. treasury bonds. (M) The Chinese currency is seen as being undervalued. (M0
The coordination of international macroeconomic policies among sovereign nations?
Has only recently been advocated by economists.
International capital markets?
Have grown significantly since the 1960s & link the capital markets of individual markets.
Unit Labor Requirements Home: 10 (cloth), 20 (widgets) Foreign: 60 (cloth), 30 (widgets) Given the information in the table above?
Home has a comparative advantage in cloth.
This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign and Home for each of two goods. Use this information to answer the question that follows. Home: aLC=1 hour per pound (candy), aLW=3 hours per gallon (whiskey) Foreign: a*LC=5 hours per pound (candy), a*LW=4 hours per gallon (whiskey) where: aLC=number of labor hours needed to produce a unit of candy in Home aLW=number of labor hours needed to produce a unit of whiskey in Home a*LC=number of labor hours needed to produce a unit of candy in Foreign a*LW=number of labor hours needed to produce a unit of whiskey in Foreign. Which of the following statements is true?
Home has the absolute advantage in both candy and whiskey production and the comparative advantage in candy production.
This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign and Home for each of two goods. Use this information to answer the question that follows. Home: aLC=1 hour per pound (cheese), aLW=3 hours per gallon (whiskey) Foreign: a*LC=5 hours per pound (cheese), a*LW=4 hours per gallon (whiskey) where: aLC=number of labor hours needed to produce a unit of cheese in Home aLW=number of labor hours needed to produce a unit of whiskey in Home a*LC=number of labor hours needed to produce a unit of cheese in Foreign a*LW=number of labor hours needed to produce a unit of whiskey in Foreign Which of the following statements is true?
Home has the absolute advantage in both cheese and whiskey production and the comparative advantage in cheese production.
This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign and Home for each of two goods. Home: aLC=1 hour per pound (chocolate), aLW=3 hours per gallon (whiskey) Foreign: a*LC=5 hours per pound (chocolate), a*LW=4 hours per gallon (whiskey) where: aLC=number of labor hours needed to produce a unit of chocolate in Home aLW=number of labor hours needed to produce a unit of whiskey in Home a*LC=number of labor hours needed to produce a unit of chocolate in Foreign a*LW=number of labor hours needed to produce a unit of whiskey in Foreign PC=the money price per pound of chocolate PW = the money price per pound of whiskey
Home; relative supply and demand of chocolate; a step function
Give an intuitive explanation for the optimal tariff argument.
In a large country, a tariff can favorably shift the terms of trade such that the tariff revenue exceeds the welfare loss.
International economics can be divided into two broad subfields?
International trade & international money.
Transactions that involve the physical movement of goods or a tangible commitment of resources are the domain of?
International trade analysis.
"It has been all downhill for the West since China entered the world market; we just can't compete with hundreds of millions of people willing to work for almost nothing." Assuming that the statement above fails to connect wages and productivity, which of the following statements is true?
It is cheaper to produce some goods in the U.S. because productivity is higher here.
Private saving can be given by the following equation: Sp=I+CA+(G−T). This equation can be rewritten as: CA = Sp−I+(T−G). Nowadays, some people recommend restrictions on imports from China (and other countries) to reduce the American current account deficit. How would higher U.S. barriers to imports affect private saving, domestic investment, and government deficit? Do you agree that import restrictions would necessarily reduce a U.S. current account deficit?
It is impossible to tell without a general equilibrium model; No, because we cannot tell what general equilibrium effects will be.
What is the main critique against the WTO with respect to environmental protection? How does the WTO justify its position on trade disputes that involve environmental issues?
It doesn't do enough to impose tougher environmental standards on developing countries; It forces member countries to apply the same standards to imported goods that it applies to domestically produced goods.
The graph on the right depicts real money supply. Using the three-point drawing tool, draw the aggregate money demand curve in the diagram to the right. Label this line 'L(R,Y)1'. Now, suppose that real GNP rises. On the same graph, using another 3-point curve tool, draw the new aggregate real money demand. Label this line 'L(R,Y)2'.
L(R,Y)2 is above L(R,Y)1. As the result of a rise in real GNP, equilibrium in the money market will be at a higher interest rate. Real money holdings will remain unchanged.
The United States' imports from 1945 through 1970 were more capital-intensive than its exports. One would have expected that the United States would have imported more labor-intensive goods and exported capital-intensive goods during this period. This phenomenon that occurred in the United States is known as the? During the time period 1945-1970 the U.S. exported more?
Leontief paradox; technologically-intensive goods.
The figure on the right shows aggregate real money demand L(R,Y) and the initial money supply. Now, suppose the price level rises (this is a one-time change). Using the line drawing tool, draw the new real money supply on the same graph and label it 'MS2 '.
MS2 is directly vertical behind MS1. As the result of this change in the price level, equilibrium interest rate will rise.
The international debt crisis of early 1982 was precipitated when _____ could not pay its international debts.
Mexico.
What is the short-run effect on the exchange rate of an increase in domestic real GNP, given expectations about future exchange rates?
Money demand increases, the domestic interest rate increases, and the domestic currency appreciates.
In the real world, the dividing line between trade and monetary issues is?
Neither simple nor clear-cut.
The figure on the right shows the United States' end-of-year international investment position (IIP) as a percent of its nominal GDP for the period 1976-2012. The United States has run current account deficits in almost every year since the mid-1980s. Do the data in the graph therefore surprise you?
No, increasingly large current account deficits coupled with slowing growth in nominal GDP imply the trend shown for (IIP/NGDP) at right. Reference 13.9 graph
This exercise applies the basic Ricardian model of one factor (labor) and two goods to the national economy of Home. Assume the following: aLS=number of labor hours needed to produce a unit of steel in Home aLC=number of labor hours needed to produce a unit of canvas in Home PS=the price per ton of steel PC=the price per bolt of canvas Which of the following conditions signifies that workers in Home will all want to work in the steel sector?
PS/PC>aLS/aLC
What is the main reason explaining why agriculture enjoys protective tariffs in the U.S.?
Producers (who gain) are well organized, while consumers (who lose) are not.
France, in addition to its occasional stabs at strategic trade policy, pursues an active nationalist cultural policy, promoting French art, music, fashion, cuisine, and so on. This may be primarily a matter of attempting to preserve a national identity in an increasingly homogeneous world, but some French officials also defend this policy on economic grounds. In what sense could some features of such a policy be defended as a kind of strategic trade policy?
Promoting French culture is a strategic trade policy in that it promotes tourism and industries related to French culture such as the textile and wine industries.
Using the diagram on the right, show what effect a devaluation will have on the current account. Note: 'E' = E$/€. 1) Using the line drawing tool, shift any lines, making sure to label them appropriately. 2) Using the point drawing tool, label new equilibrium "B". The sample correct answer is drawn for the case of devaluation. What is the intuition for this effect of devaluation on the current account?
Reference 18.5 graph. As a result of a devaluation, the current account will rise. Imports fall and exports rise as domestically-produced goods become less expensive.
Over the last few decades, East Asian economies have increased their share of world GDP. Similarly, intra-East Asian trade—that is, trade among East Asian nations—has grown as a share of world trade. More than that, East Asian countries do an increasing share of their trade with each other. Using the gravity model, explain why East Asian countries do an increasing share of their trade with each other.
Since the GDP of East Asian countries has grown, the product of any two East Asian countries' GDP is now larger. And as the gravity model predicts, the trade volume between them has grown.
If the United States had its way, it would demand that Japan spend more money on basic research in science and less on applied research into industrial applications. Explain why in terms of the analysis of appropriability.
The benefits to the United States of Japanese basic research would exceed the benefits from Japanese research targeted to specific problems in Japanese industries.
In theory, the equality: current account + capital account + financial account = 0 must hold. In reality a statistical discrepancy is often included to achieve this balance. Which account is the likely culprit of this discrepancy?
The financial account.
Suppose the one-year forward $/€ exchange rate is $1.5 per euro and the spot exchange rate is $1.6 per euro. What is the forward premium on euros (the forward discount on dollars)? Given the above information, what is the difference between the interest rate on one-year dollar deposits and that on one-year euro deposits (assuming no political risk)?
The forward premium on euros is -6.3%. 100×(1.79−1.77)/1.77 The difference between the dollar interest rate and the euro interest rate R$−R€=-6.3%.
Consider Home's production possibilities curve shown to the right. Which of the following does the absolute value of its slope convey? (wine is on y-axis, chocolate is on x-axis)
The opportunity cost of chocolate in terms of wine.
Calculate the dollar rate of return on a 10,000 pound sterling deposit in a London bank in a year when the interest rate on pounds is 8 percent and the dollar/pound exchange rate moves from $1.34 per pound to $1.38 per pound.
The rate of return will be 11%. The dollar depreciation is ($1.38−$1.34)/$1.34= 0.03, or 3 percent...so that plus 8 = 11%.
In Munich a bratwurst costs 4 euros; a hot dog costs $3.00 at Boston's Fenway Park. At an exchange rate of $1.60/per euro, what is the price of a bratwurst in terms of hot dogs? All else equal, how does this relative price change if the dollar appreciates to $1.10?
The relative price of bratwurst is 2.13 hot dogs. Now the relative price of bratwurst is 1.47 hot dogs. Compared with the initial situation, a hot dog has become more expensive relative to a bratwurst.
In an open economy holding GNP and consumption spending constant and where private savings equals domestic investment, a government budget deficit must be matched by?
a current account deficit.
If a country changes its exchange rate, the value of its foreign reserves, measured in the domestic currency, also changes. This latter change may represent a domestic-currency gain or loss for the central bank. What happens when a country devalues its currency against the reserve currency? If this change in the exchange rate is expected, how will it affect the cost of holding foreign reserves? If this change in the exchange rate is unexpected, how will it affect the cost of holding foreign reserves?
The value of foreign reserves measured in local currency will increase. There will be no change in the cost of holding foreign reserve. There will be a capital gain on foreign reserves.
What is the main problem with imposing environmental standards?
They can cause potential export industries to shut down in poor countries.
Why are international negotiations important in order to reduce tariff rates worldwide?
They help avoid trade wars.
A decrease in the money supply leads to an increase in the value of the U.S. dollar and a decrease in the value of foreign currency. A decrease in the money supply leads to an increase interest rates.
This in turn, leads to a decrease in net exports and aggregate demand. This, in turn, leads to a decrease in investment spending by firms and aggregate demand.
Mexico and Brazil have very different trading patterns. Mexico trades mainly with the United States and Brazil trades about equally with the United States and with the European Union. Mexico does much more trade relative to its GDP. These differences can be explained via the gravity model. Which of the following equations is the most general form of the gravity model?
Tij = A x (Yai x Ybj)/ Dcij))
Canada and Australia are (mainly) English-speaking countries with populations that are not too different in size (Canada's is 60 percent larger). But Canadian trade is twice as large, relative to GDP, as Australia's. Why should this be the case? (Mark all that apply.)
Transportation costs for imports and exports are higher in Australia because the distance goods must travel & Canada is close to a major economy.
The following table gives hypothetical data for the world corn market. Cost per Bushel of Corn (U.S. dollars) U.S. $5 Brazil $7 Mexico $9 Suppose Mexico initially imposes a $3 per bushel tariff on foreign corn. In this case Mexico will import _____ corn? Now let Mexico and Brazil form a customs union, with the tariff on outside corn maintained at $3 per bushel. In this case Mexico will import _____ corn and, as a consequence, will experience a welfare change that is _____. The customs union has proven detrimental to Mexico because it led to?
U.S. corn; Brazillian; A loss; All of the above... - costlier corn - trade diversion - less efficient resource use.
The U.S. labor movement—which mostly represents blue-collar workers rather than professionals and highly educated workers—has traditionally favored limits on imports from less-affluent countries. Is this a shortsighted policy or a rational one in view of the interests of union members? How does the answer depend on the model of trade?
Using the Ricardian model, this policy would not be rational. However, considering the Heckscher-Ohlin model, which specifically addresses income distribution, unskilled labor, the scarce resource, loses from trade.
Multinationals generally have production plants in a number of countries. Consequently, they can move production from expensive locations to cheaper ones in response to various economic developments—a phenomenon called outsourcing when a domestically based firm moves part of its production abroad. If the dollar depreciates, what would you expect to happen to outsourcing by American companies?
We would expect outsourcing by American companies to diminish.
Evaluate the following statement: Mexico is quite close to the U.S., but it is far from the European Union (E.U.). So it makes sense that it trades largely with the U.S. Brazil is far from both, so its trade is split between the two. Do you agree or disagree? Based on the gravity model, I would...
agree. The gravity model predicts trade volume is proportional to the product of the GDPs of the trading partners and inversely related to the distance from each other.
Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2. a. Using the line drawing tool, draw Home's production possibility frontier. Label the curve PPF. b. What is the opportunity cost of apples in terms of bananas? c. In the absence of trade, what would the price of apples in terms of bananas be? Why?
a. Draw a line from 600(y) to 400(x). b. 1.5 bananas c. 1.5 bananas per apple; without trade, the relative prices of the goods are equal to their relative unit labor requirements.
Because of its politically sensitive nature, the last economic sector to be liberalized via multilateral trade negotiations has been?
agriculture.
A sterilized foreign exchange intervention?
always leaves the money supply unchanged.
Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2. There is now also another country, Foreign, with a labor force (L) of 800. Foreign's unit labor requirement in apple production aLA is 5, while in banana production aLB it is 1. a. Derive the equation for Foreign's production possibility frontier (assume the quantity of bananas is the dependent variable)? b. Which of the 4 diagrams represents the world relative supply curve given the above information?
a. QsubB = (800/1)-(5/1)xQsubA b. Choice C (starts at 1.5(y), sharp turn straight up at 0.5(x))
The figure to the right shows an exporting country's market after its government pays a subsidy to domestic producers that raises the domestic price from PW to PS but lowers the price in the importing country from PW to P*S. As a result of this subsidy, the private sector (consumers and firms) in the exporting country experiences a net gain given by? On the other hand, the payment of the subsidy burdens the exporting country government, leading to a net welfare loss for the exporting country given by?
area (c) area (b + d + e + f + g)
Suppose the economy is hit by a favorable aggregate demand shock. In response to this shock, the central bank reacts to maintain a fixed exchange rate. As a result of these changes...? The graph on the right depicts the initial equilibrium in the economy with the fixed exchange rate. Using the line drawing tool, add new AA and DD lines corresponding to a favorable aggregate demand shock, and label them "AA2" and "DD2."
both AA and DD will shift; AA2 goes above AA1 & DD2 goes under DD1. We can see that a favorable aggregate demand shock will lead to a rise in output. In order to maintain a fixed exchange rate, the money supply will rise.
Despite major gains, Chinese manufacturing workers have much lower productivity than their U.S. counterparts. Chinese service workers are relatively more productive, but most services aren't tradable. So which matters for Chinese wages—manufacturing or service productivity? For Chinese wages?
both sectors matter because Chinese wages are a function of productivity and prices in all sectors.
Unlike the eight previous rounds of world trade negotiations since the creation of GATT in 1948, the Doha round appears to be the first to have?
broken down with no agreement.
Imperfect asset substitutability?
can arise if different assets have different levels of risk.
In the diagram to the right the curve labeled SS displays the relationship between the relative price of cigars to soybeans (PC/PS) and the wage-rental ratio (w/r). From the slope of this curve, it can be determined that?
cigars are labor-intensive and
In the diagram to the right the curve labeled SS displays the relationship between the relative price of cigars to soybeans (PC/PS) and the wage-rental ratio (w/r). From the slope of this curve, it can be determined that?
cigars are labor-intensive and while soybeans are capital-intensive.
In the diagram to the right the curve labeled SS displays the relationship between the relative price of cigars to soybeans (PC/PS) and the wage-rental ratio (w/r). From the slope of this curve, it can be determined that? (upward slope curve)
cigars are labor-intensive and while soybeans are capital-intensive.
Foreign assets?
consists mainly of foreign currency bonds owned by the central bank.
Suppose that the resource base in Country X can produce either 100 units of alpha or 300 units of beta. Similarly, suppose that Country Y's resource base is capable of producing 100 units of alpha or 200 betas. Clearly, the opportunity cost of 100 alphas is lower in ??? Based on this result, it would be best for Country X to concentrate on good ???
country Y; beta Hypothetical Changes in Production Country X: -100 alpha, +300 beta Country Y: +100 alpha, -200 beta Total: 0 alpha, +100 beta
Our usual models of trade assume that jobs lost in one industry will be offset by jobs gained in other industries. The Autor et al. paper argued, however, that communities that lose manufacturing jobs to imports end up losing other jobs as well. Is this a contradiction? The Autor et al. paper?
does not contradict our usual models because the gains and losses from trade may not occur in the same place.
Suppose the United Colonies (a hypothetical country) happens to be the world's most capital-abundant country. According to the factor-proportions (aka Heckscher-Ohlin) model, the U.C. would be expected to? The following table contains information for the United Colonies for a recent year. Compute the capital-labor ratio for U.C.'s imports and exports and record the values in the table's boxes. (Enter your responses as integers.) Are the table's results consistent with the Heckscher-Ohlin model's prediction?
export capital-intensive goods and import labor-intensive goods; $2400/8=300, $2100/12=175; no!
This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign and Home for each of two goods. Home: aLC=1 hour per pound (candy), aLW=3 hours per gallon (whiskey) Foreign: a*LC=5 hours per pound, a*LW=4 hours per gallon where: aLC=number of labor hours needed to produce a unit of candy in Home aLW=number of labor hours needed to produce a unit of whiskey in Home a*LC=number of labor hours needed to produce a unit of candy in Foreign a*LW=number of labor hours needed to produce a unit of whiskey in Foreign PC=the money price per pound of candy; PW = the money price per pound of whiskey. In the absence of trade between Home and Foreign the unit labor requirements given above indicate that the relative price of candy (PC/PW) will be lower in ??? Once Home and Foreign engage in trade, the world equilibrium relative price of candy (PC/PW) will be determined by the ??? In the graphical portrayal of world equilibrium, the relative demand curve of candy is downward-sloping and the relative supply curve of candy is shaped as ???
home; relative supply and demand of candy; a step function
The "theory of the second best" states that?
in the presence of a market failure, government intervention may improve welfare.
In the context of the "2 by 2 by 2" idealized factor-proportions model, assume the following facts about the world: In each country (Home and Foreign) coal is the labor-intensive good; Home is the labor-abundant country. From these few facts, it can be asserted that before trade? According to the model, the establishment of trade between Home and Foreign will ultimately bring?
in Home, workers earn less, land earns more, and the relative price of coal is lower than in Foreign; an equalization of both the relative prices of goods and factor prices.
Some retailers in advanced countries sell products from developing countries with low wages but assure customers that these goods are produced under tolerable working conditions. Is demanding that kind of guarantee the same thing as putting a tariff on low-wage exports? Demanding the working conditions guarantee? Is there any way demanding a working conditions guarantee can benefit workers overseas? Demanding tolerable working conditions?
is different than a tariff because it increases consumer demand; could benefit overseas workers if they are paid higher wages.
A country engaging in trade according to the principles of comparative advantage gains from trade because it?
is producing imports indirectly more efficiently than it could domestically.
According to Ricardo, a country will have a comparative advantage in the product in which its?
labor productivity is relatively high.
The diagram to the right depicts a country's production possibilities frontier, labeled TT1. Assume that cigars are labor-intensive and sugar is land-intensive. Output is at point 1, where the slope of the production possibilities frontier equals the negative of the relative price of cigars, −PC/PS. Suppose that one (and only one) of the economy's two resources increases by an amount such that the labor-intensive good's maximum output increases by 100% (i.e., by a factor of 2), while the land-intensive good's maximum output increases by just 25%. Given these divergent increases, it has to be the case that the resource that increased was ??? Using the three-point curved line drawing tool, show this biased expansion of production possibilities. Properly label this curve.
labor; draw rainbow curve from 5(y-one above what was given) to 10(x- double of what was given).
The diagram to the right depicts pre-trade equilibria in Uplandia (point 1) and Downlandia (point 3). RD represents the relative demand for coal in each country, while the respective relative coal supply curves are RSU for Uplandia and RSD for Downlandia. Assuming that sugar is land-intensive and coal is labor-intensive, it must be true, given that RSU is to the right of RSD, that Uplandia is the ???-abundant country. Knowing that trade between these countries will result in a world relative coal price between the pretrade prices, it will also happen that?
labor; workers in Uplandia and landowners in Downlandia are made better off.
Suppose the U.S. foreign assets are 66 percent of the U.S. GDP, and the U.S. foreign liabilities are 96 percent of the U.S. GDP. Moreover, suppose that 51 percent of U.S. foreign assets are denominated in foreign currencies, while all liabilities to foreigners are denominated in U.S. dollars. How will a 14 percent depreciation of the dollar affect foreigners' net foreign claims on the U.S. measured in U.S. dollars (as a percent of U.S. GDP)? Foreigners will experience a net capital _____ equal to _____ percent of U.S. GDP.
loss; 5
Suppose that Canada and Brazil are trading manufactured goods and food. The figure to the right shows the Brazilian budget constraint. The absolute value of the slope of this constraint signifies the relative price of ??? Note that Brazilian food consumption, DBF, is 50 units and is exceeded by its production of food, QBF, which is 70 units. Using the triangle drawing tool, sketch Brazil's trade triangle. (mini triangle touching line and all 3 rectangles) According to this trade triangle Brazil receives, for its exports of 20 units of food, a total of ??? manufactured goods (look at other axis for units under triangle)
manufactured goods; 2
The claim that trade exploits a country and makes it worse off if its workers receive much lower wages than workers in other countries is shown by the Ricardian model to?
miss the point because it fails to consider the alternative, which would be even lower wages.
Brander-Spencer analysis states that?
monopoly profits can be moved from one country to another by a government subsidy.
GNP (Gross National Product) equals GDP plus?
net receipts of factor income from the rest of the world.
A nation engaging in trade according to the Ricardian model will find its consumption bundle?
outside its production possibilities frontier.
The opportunity cost of money holdings is?
the alternative interest income foregone from not holding some other asset.
The left- and right-hand figures given above show the Home and Foreign markets for barley. The center figure shows the world barley market, containing Home's import demand (MD) and Foreign's export supply (XS). In the absence of both transportation costs and artificial trade barriers, the world barley market achieves equilibrium with?
the price at $12, trade volume at 2 million tons, and total world output at 8 million tons.
The notion that trade policy often imposes costs on large numbers of people, and benefits only a few is explained by?
the problem of collective action.
The asymmetry of a reserve currency system refers to the fact that?
the reserve country has a fixed exchange rate but can still use domestically-oriented monetary policy.
Given the model of competition among political parties used by political scientists, the most likely tariff policy would be?
the tariff rate favored by the median voter.
Economists use the term opportunity cost to refer to?
the value of the next best alternative occurring as a result of making a particular choice.
A similar contradiction was actually detected for the post-WWII United States by Russian-born economist Wassily Leontief (1906-1999) in a landmark 1953 study. One possible explanation for the apparent "paradox" for the United States (as well as for the hypothetical United Colonies shown above) is that?
while the country is abundant in physical capital, it is even more abundant in human capital.
The figure to the right shows the market in an importing country after its government imposes a quota that restricts imports to 2 units and (as a consequence) increases the domestic price from $4 to $6. As a result of this quota, consumers in the importing country experience a welfare loss valued at ___ while producers realize a gain of ___? Also created by the imposition of a quota are quota rents, which accrue to whomever is assigned the rights to sell in the domestic market. According to the figure, these rents have a monetary value of ___?
$15; $9; $4
The following table defines terms relevant to the basic Ricardian model of one factor and two goods. aLC=number of labor hours needed to produce a unit of cheese in Home aLW=number of labor hours needed to produce a unit of wine in Home a*LC=number of labor hours needed to produce a unit of cheese in Foreign a*LW=number of labor hours needed to produce a unit of wine in Foreign PC=the price per pound of cheese on world markets PW=the price per gallon of wine on world markets. Which of the following conditions will induce Foreign to specialize in cheese? Suppose Foreign were to trade with Home at the relative price of (PC/PW) = 0.5. Using the line drawing tool, add the consumption possibilities frontier for Foreign to its production possibilities frontier. Properly label this line.
(PC/PW)>(a*LC/a*LW); Draw a line from 60(y) to 120(same x)
The following table defines terms relevant to the basic Ricardian model of one factor and two goods. aLC=number of labor hours needed to produce a unit of candy in Home aLW=number of labor hours needed to produce a unit of wine in Home a*LC=number of labor hours needed to produce a unit of candy in Foreign a*LW=number of labor hours needed to produce a unit of wine in Foreign PC=the price per pound of candy on world markets PW=the price per gallon of wine on world markets Which of the following conditions will induce Home to specialize in candy? Suppose Home were to trade with Foreign at the relative price of (PC/PW) = 1.0. Using the line drawing tool, add the consumption possibilities frontier for Home to its production possibilities frontier. Properly label this line.
(PC/PW)>(aLC/aLW); CPF line from 120(y) to 120(x)
Do data on the U.S. official settlements balance give an accurate picture of the extent to which foreign central banks buy and sell dollars in currency markets?
No, this account provides only a partial picture because it shows a net value of all transactions.
This exercise applies the basic Ricardian model of one factor (labor) and two goods to the national economy of Home. Assume the following: aLS=number of labor hours needed to produce a unit of sugar in Home aLC=number of labor hours needed to produce a unit of canvas in Home PS=the price per ton of sugar PC=the price per bolt of canvas Which of the following conditions signifies that workers in Home will all want to work in the sugar sector?
PS/PC>aLS/aLC
This exercise applies the basic Ricardian model of one factor (labor) and two goods to the national economy of Home. Assume the following: aLS=number of labor hours needed to produce a unit of sugar in Home aLC=number of labor hours needed to produce a unit of canvas in Home PS=the price per ton of sugar PC=the price per bolt of canvas Which of the following represents the opportunity cost of sugar? In the absence of international trade, Home will have to produce both sugar and canvas for itself. However, it will do so only if?
aLS/aLC; all of the above are correct. (PS/aLS=PC/aLC. PS/PC=aLS/aLC. Workers are indifferent as to where (Sugar or Canvas) they work)
