macro final exam
main sources of comparative advantage
1. Climate and natural resources 2.Relative abundance of labor and capital. 3. Technology 4. External economies These advantages result in lower costs to firms located in the area. Because these lower costs result from increases in the size of the industry in an area, economists refer to them as external economies.
Why do some people oppose the World Trade Organization (WTO)?
1. Some critics of the WTO support globalization in principle but believe that the WTO favors the interests of the high-income countries at the expense of the low-income countries. 2. Some opponents are specifically against the globalization process that began in the 1980s and became widespread in the 1990s. 3. Some opponents desire to erect trade barriers to protect domestic firms from foreign competition
3 real-world complications (keep purchasing power parity from being a complete explanation of exchange rates)
1. not all products can be traded internationally 2.products and consumer preferences are different across countries 3. countries impose barriers to trade
4 determinants of exchange rates in the long run
1. relative price levels 2.relative rates of productivity growth 3. preferences for domestic and foreign goods 4. tariffs and quotas
The World Trade Organization (WTO)
1. replaced the General Agreement on Tariffs and Trade (GATT) in January 1995. 2. is an international organization that oversees international trade agreements. 3.generally aids in negotiating trade agreements that include not only goods but also services and intellectual property.
By trading, countries are able to consume more than they could without trade. This outcome is possible because
1. world production of both goods increases after trade. 2. inefficiencies in resource allocation are reduced. 3. shifting production to the more efficient countrylong dash—the one with the comparative advantagelong dash—increases total production.
a floating currency
A country that allows demand and supply to determine the value of its currency has
technology
Broadly defined, technology is the process firms use to turn inputs into goods and services. At any given time, firms in different countries do not all have access to the same technologies. In part, this difference is the result of past investments countries have made in supporting higher education or in providing support for research and development.
Is fiscal policy in Peru likely to be more or less effective than it would be in a less open economy? Briefly explain.
Fiscal policy will have a smaller impact on aggregate demand in an open economy than in a less open economy.
Which of the following is a problem that can result from pegging a country's currency?
If the pegged value is above the market value, there may be a speculative run on the currency.
How does the additional policy channel available in an open economy affect monetary policy?
It increases the ability of an expansionary monetary policy to affect aggregate demand.
external economies
Once an industry becomes established in an area, firms that locate in that area gain advantages over firms located elsewhere. The advantages include the availability of skilled workers, the opportunity to interact with other firms in the same industry, and being close to suppliers
Relative abundance of labor and capital.
Some countries have many highly skilled workers and a great deal of machinery. Other countries have many unskilled workers and relatively little machinery. As a result, the nation with the skilled workers has a comparative advantage in the production of goods that require highly skilled workers or sophisticated machinery to manufacture, such as aircraft, semiconductors, and computer software. The nations with an abundance of low-skilled workers have a comparative advantage in the production of goods that require unskilled workers and small amounts of simple machinery, such as children's toys.
Which of the following statements is not correct about the effects of the euro?
The euro increased the ability of participating countries to run independent monetary policies.
Who is harmed when individual nations move from autarky to free trade?
The owners of the firms that went out of business.
toward managed floating exchange rates
Which of the following best describes the trend of the exchange rate systems in the world after the East Asian exchange rate crisis of the late 1990s?
We do not see complete specialization in the real world because
With two countries producing only two products, each country specializes in producing one of the goods. In the real world, many goods and services are produced in more than one country. For example, the United States and Japan both produce automobiles. We do not see complete specialization in the real world for three main reasons: 1. Not all goods and services are traded internationally. 2. Production of most goods involves increasing opportunity costs. 3. Tastes for products differ.
Expansionary monetary policy on the part of the central bank of the United Kingdomthe United Kingdom will cause:
a decrease in interest rates in the United Kingdomthe United Kingdom and a decrease in the value of the poundthe pound relative to other currencies.
currency depreciation
a decrease in the market value of one currency relative to another currency
twin deficits
a government budget deficit may lead to a current account deficit
quota
a numerical limit a government imposes on the quantity of a good that can be imported into the country
pegging
a policy by which a country keeps fixed the exchange rate between its currency and another country's currency
autarky
a situation in which a country does not with other countries
fixed exchange rate system
a system under which countries agree to keep the exchange rates among their currencies fixed for long periods
tariff
a tax imposed by governments on imports
exchange rate system
an agreement among countries about how exchange rates should be determined
voluntary export restraint (VER)
an agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from another country
open economy
an economy that has interactions in trade or finance with other countries
closed economy
an economy that has no interactions in trade or finance with other countries
saving and investment equation
an equation that shows that national saving is equal to domestic investment plus net foreign investment
In an open economy, an expansionary fiscal policy on the part of the government of CanadaCanada will cause:
an increase in interest rates in CanadaCanada which may have a larger crowding out effect than in a closed economy.
currency appreciation
an increase in the market value of one currency relative to another currency
world trade organization (WTO)
an international organization that oversees international trade agreements
The increase in interest rates as a result of the government of JapanJapan running a budget deficit will:
cause an increase in the value of the Yenthe Yen relative to other currencies and therefore increase imports and decrease exports.
official reserve transactions
changes in foreign holdings of dollars
speculators
currency traders who buy and sell foreign exchange in an attempt to profit from changes in exchange rates
an appreciation in the domestic currency
exports should fall and imports rise, reducing net exports, aggregate demand, and real gap
From the end of the Bretton Woods system in 1973 through August 2015, the U.S. dollar
gained more than 30% in value against the Canadian dollar and lost about 60% of its value against the Japanese yen.
exports
goods and service produced domestically but sold in other countries
imports
goods and services bought domestically but produced in other countries
trade surplus
if a country exports more goods than it imports
trade deficit
if a country imports more goods than it exports
One effect of tariffs and quotas
is to cost jobs outside the industries immediately affected
Under the Bretton Woods system, exchange rates were determined by
n international agreement to fix the value of the dollar in terms of gold and the value of all other currencies in terms of the dollar.
opposite signs
net capital flows and net foreign investment are always equal but have ...
external economies
reduction's in a firm's costs that result from an increase in the size of an industry
protectionism is usually supported by one of the following arguments
saving jobs protecting high wages protecting infant industries protecting national security
dumping
selling a product for a price below its cost of production
When the Federal reserve uses contractionary monetary policy to reduce inflation, it
sells treasury securities increasing interest rates, leading to a stronger dollar that lowers net exports in an open economy.
comparative advantage
the ability of an individual, a firm, or a country to produce a good or a service at a lower opportunity cost than competitors
absolute advantage
the ability to produce more of a good or service than competitors when using the same amount of resources
managed float exchange rate system
the current exchange rate system, under which the value of most currencies is determined by demand and supply, with occasional government intervention
net foreign investment
the difference between capital outflows from a country and capital inflows, also equal to net foreign direct investment plus net foreign portfolio investment
balance of trade
the difference between the value of the goods a country exports and the value of the goods a country imports
balance of services
the difference between the value of the services a country exports and the value of the services the country imports
portfolio investments
the flow of foreign funds into U.S. stocks and bonds
opportunity cost
the highest valued alternative that must be given up to engage in an activity
monetary union
the member countries all use the same currency and follow a joint monitary policy
fiscal union
the member countries pursue independent fiscal policies
floating currency
the outcome of a country allowing its currency's exchange rate to be determined by demand and supply
current account
the part of the balance of payments that records a country's net exports, net income on investments, and net transfers
financial account
the part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country
capital account
the part of the balance of payments that records relativiley minor transactions, such as migrants' transfers and sales and purchases of non produced, non financial assets
real exchange rate
the price of domestic goods in terms of foreign goods
globalization
the process of countries becoming more open to foreign trade and investment
The primary difference between a quota and a voluntary export restraint (VER) is that
the quota is unilaterally imposed by one nation on the other while the VER is the result of negotiations between nations.
terms of trade
the ratio at which a country can trade its exports for imports from other countries
balance of payments
the record of a country's trade with other countries in goods, services, and assets
Under the gold standard, exchange rates were determined by
the relative amounts of gold in each country's currency.
purchasing power parity
the theory that in the long run exchange rates move to equalize the purchasing powers of different currencies
protectionism
the use of trade barriers to shield domestic firms from foreign competition
nominal exchange rate
the value of one country's currency in terms of another country's currency
policy channels
the ways in which monetary policy and fiscal policy affect the domestic economy; an open economy has more than a closed
If China pegs its exchange rate with the U.S. dollar at a rate (in terms of yuan per dollar) above the equilibrium exchange rate, the result is
the yuan is undervalued.
If a country pegs its exchange rate with the dollar below the equilibrium value,
there will be an excess demand for that country's currency.
free trade
trade between countries that is without government restrictions
capital inflow
when a foreign investor buys a bond missed by a US firm or by the government or when a foreign firm builds a factory in the US
capital outflow
when an investor in the US buys a bond issued by a foreign company or government or when a US firm builds a factory in another country
foreign direct investment
when firms buy or build facilieties in foreign countries
contractionary monetary policy
when the fed wants to reduce aggregate demand to reduce inflation
a depreciation in the domestic currency
will increase exports and decrease imports, thereby increasing net exports. if real gap is currently below potential gdp, then this will increase net exports, aggregate demand, and real gdp
