Econ. Final Exam

If wheat costs four dollars per bushel in the United States and two British pounds per bushel in Great Britain, then in the presence of purchasing-power parity the exchange rate should be

$2.00 per pound.

Size of consumer surplus

A decrease in the market price will lead to an increase in the quantity purchase and a larger consumer surplus. Conversely, a higher market price will reduce the amount purchase and shrink the consumer surplus

Tariff

A tax levied on a product when it crosses national borders

a) What predictions does the purchasing power parity make concerning the impact of domestic inflation on the home country's exchange rate? b) Identify 2 limitations of the purchasing power parity theory.

A. Purchasing-power-parity is the law of one price. It asserts that alike goods should be sold everywhere at identical tag when converted to a current currency, assuming that it's costless to ship the excellent between nations, there're a lot of no barriers to trade, and markets are competitive. It rests on the assumption that sellers will search for out the highest conceivable prices and buyers the lowest ones. B. One of the possible limitations could be that the taxes are not accounted for and that purchasing power parity is harder to measure.

Explain why international investors are especially concerned about the real interest rates as opposed to the nominal interests?

Affirm the U.S. interest rate rises by approximately its inflation rate so as the genuine interest rate stays unchanged. The double in the nominal interest rate under these conditions would not draw foreign investors to invest in dollar-denominated securities in the U.S. due to the U.S. inflation would bring on the dollar to depreciate. This will then cause higher nominal interest rates on U.S. securities because they will be will be thrown off balance by the depreciation of the dollar. There then would not be any additional gain for investing in the U.S.

The United States realizes several benefits from the dollar serving as the main reserve currency of the world, including

Americans can buy goods at a marginally cheaper price than households in other nations who must exchange their currency with each purchase and pay a transaction cost, Americans can borrow at lower interest rates for homes and automobiles, the U.S. government can finance larger deficits longer and at lower interest rates.

Growing market

An import tariffs is a less restrictive trade barrier then equivalent import quota. With an import tariff the adjustment that occurs in response to an increase in domestic demand is an increase in the amount of the product that is imported. With an import quota an increase in demand induces an increase in product price. The price increase leads to rise in production and the fall in consumption of the import competing good while the level of imports remain constant

Social regulations

Attempts to correct a variety of undesirable side effects in an economy that relate to health safety in the environment affect some markets left to themselves often ignore. Applies to a particular issue such as environmental quality and affects the behavior of firms in many industries such as automobiles steel and chemicals

When tariff is Introduced to small nation

Because a small nation is not important enough to influence world market conditions the world supply price remains constant unaffected by the tariffs. This lack of price change means that the terms of trade remain unchanged. The introduction of the tariff raises the home price by the full amount of the duty and the increase falls entirely on the domestic consumer. The overall supply shifts upward by the amount of the tariff. The effect of the tariff are to impede imports and protect domestic producers

"Buy American"

Because government agencies are large buyers of goods and services they are attractive customers for foreign suppliers. However most governments favor domestic suppliers over foreign ones in the procurement of materials and products

President Donald Trump declared a 20 percent border tax on imports from Mexico to pay for the border wall. Which is the MOST likely effect of the border tax?

Both Mexico and America will pay for the wall

Welfare effects of export subsidies

Can be analyzed in terms of the consumer and producers surpluses. The export subsidy results in a decrease in the consumer surplus and an increase in the producer surplus. US producers gain at the expense of the US consumer and taxpayer. Entails a deadweight loss of welfare to the US economy

Absolute quotas

Can be analyzed in terms of the same welther effects identified for tariffs. (Redistributive effect, protective effect, revenue effect and consumption effect)

In recent years, the two largest holders of U.S. government securities have been

China and Japan.

German has a current account surplus yet it has challenges with it. Explain 2 problems that are likely encountered by a country with a current account surplus?

Current account surpluses means having positive current account balances and that a country has more exports than imports of goods and services. Having those current account surpluses causes countries to face upward pressure on their currency as well. Two problems that are likely encountered by a country with a current account surplus could be lower domestic employment, weak growth and limited demand. This could be because of the economic growth being dominated by exports causing the domestic saving to be higher and the consumer spending to be lower. In other words, their growth would be coming from exports rather than consumer spending.

Tariff Rate Quota

Displays both tariff like and quota like characteristics. Allows a specified number of goods to be imported at a lower tariff rate where areas any imports above this level face a higher tariff therefore there's no absolute limitation on the amount of the product that may be imported during the quota. And this is a two-tier tariff

Outsourcing

Domestic manufacturers purchase resources or perform assembly functions outside the home country. This is used because there is lower production cost overseas including lower wage rates. Domestic workers often challenge this practice because they say that cheap foreign labor takes away their jobs and imposes downward pressure on the wages of those workers who are able to keep their jobs

Two types of subsidies

Domestic production subsidy and export subsidy

Exchange rate determination in the short run is underlied by which of the following?

Expected returns on financial assets affect investment flows in the short run.

Specific Tariff

Express in terms of a fixed amount of money per physical unit of the imported product Ex: US importer of a German computer may be required to pay duty to the US government of $100 per computer regardless of the computers price. Therefore if 100 computers are imported the tariff revenue of the government equals 10,000 inequality

Arguments in favor of trade restrictions

Free trade is fine in theory, but it does not apply in the real world. Modern trade theory assumes perfectly competitive markets whose characteristics do not reflect real world market conditions. Moreover even though protectionist may consider economic losses occur with tariffs and other restrictions, they often argue that non-economic benefits such as national security more than offset the economic losses. In seeking protection from imports domestic industries and labor unions attempt to secure their economic welfare

Persistent dumping

Goes on indefinitely, in an effort to maximize economic profits a producer may constantly sell abroad at a lower price than at home

Export subsidy

Goes to producers of goods that are to be sold overseas. Most common product groups on which export subsidies are applied or are agriculture and dairy products.

Domestic production subsidy

Granted to producers of import competing goods. Purpose is to encourage the output and thus vitality of import competing producers. Affects the national welfare of the United States

Consumer surplus depicted graphically

Height of the market demand curve indicates the maximum price the buyers are willing and able to pay for each successive unit of the good and in a competitive market buyers pay single price the equilibrium price for all units purchased.

Example for windfall profit allocation

If grocers in the United States behave as competitive buyers they will bid against one another to buy European cheese. The delivered price of cheese will be driven up from 2.50 to 5 dollars per pound. European exporting companies thus capture the windfall profit of the quota. The windfall profit captured by European exporters becomes a welfare loss for the US economy in addition to the deadweight losses resulting from the protective and consumption effects

Consumption effect

Is the residual not accounted for elsewhere. The residual arises from the decrease in consumption resulting from the tariffs artificially increasing the price. A loss of welfare occurs because of the increased priced and lower consumption

To maintain that South Koreans are dumping their cars in the United States is to maintain that

Koreans are selling cars in the United States below their production cost.

Welfare Effects of a domestic Contant requirement

Leads to rising production cost and prices to the extent the manufactures are forced to locate production facilities and a high cost nation. Although the content requirement helps preserve domestic jobs it imposes welfare losses on domestic consumers

Export tariff

Less common tariff, which is a tax imposed on an exported product. Often used by developing nations

Small nations welfare

Levying an import tariff lowers it's national welfare this is because there's no favorable welfare affect resulting from the tariff that would offset the dead weight loss of the consumer surplus

Lobbying against domestic Content requirements

Manufacturers generally lobby against because they prevent manufactures from obtaining inputs at the lowest cost thereby contributing to higher product prices and loss of competitiveness

Suppose Mexico and the United States were the only two countries in the world. There exists an excess supply of pesos on the foreign exchange market. This suggests that

Mexico's current account is in deficit.

Import tariff

Most wide spread tariff which is a tax Levied on an imported product. This tax is collected before the shipment can be unloaded at a domestic Port, the collected money is called a customs duty

Ad valorem (of value) tariff

Much like a sales tax, is expressed as a fixed percentage of the value of the imported product

Subsidies

National government grant these to their producers to help improve their market position. By providing domestic firms a cost advantage it allows them to market their products at prices lower than warranted by their actual costs or profit considerations. And this can include cash disbursements, tax concessions, insurance arrangements, and loans below market interest rates

Sporadic dumping

Occurs when a firm disposes of excess inventories on foreign markets by selling abroad at lower prices than at home. May be the result of misfortune or poor planning by foreign producers. Although this may be beneficial to importing consumers it can be quite disruptive to import competing producers who face falling sales and short run losses, it is hard to grant tariff protection under these circumstances

Predatory dumping

Occurs when a producer temporarily reduces the prices charged abroad to drive foreign competitors out of business, when the producer succeeds in acquiring a monopoly position prices are then raised with its market power. The new price level must be sufficiently high to offset any losses that occurred during the period of cutthroat pricing and the firm would be confident in its ability to prevent the entry of potential competitors long enough for it to enjoy economic profits

Where does the Subsidy revenue go in a domestic production subsidy

Part of it is redistributed to the more efficient US producers in the form of a producer surplus. There's also a protective effect where more costly domestic output is allowed to be sold in the market as a result of the subsidy. To the United States as a whole, the protective effect represents a deadweight loss of welfare

Global quota

Permits a specified number of goods to be imported each year but does not specify from where the product is shipped or who is permitted to import

Pros and cons of ad Valorem tarrifs

Pros: can be applied to products with a wide range of grade variations in, can distinguish among small differentials and product quality to the extent that they are reflected in product price, tends to maintain a constant degree of protection for domestic producers during periods of changing prices Cons: The determination of duties has suffered from administrative complexities the main problem has been trying to determine the value of an imported product a process referred to as customs valuation. Import prices tend to fluctuate over time making the valuation process rather difficult, another customs valuation problem stems from variations in the methods used to determine a commodities value(free on board (FOB) and Insurance freight(CIF))

Pros and cons of specific tariff

Pros: relatively easy to apply and administer particularly to standardize commodities and staple products Cons: degree of protection it affords domestic producers varies inversely with changes in import prices. Specific terriff thus cussion domestic producers progressively against foreign competitors who cut their prices

Pros and cons of compound tariff

Pros: specific portion of the duty neutralizes the cost disadvantage of domestic manufacturers that result from tariff protection granted to domestic suppliers of raw materials while the ad Valorum portion of the duty grants protection to the finished goods industry

Dumping

Recognized as a form of international price discrimination, dumping occurs when foreign buyers are charged lower prices than domestic buyers for an identical product after allowing for transportation cost and tariff duties. Selling in foreign markets at price below the cost of production is also considered dumping

Producer surplus depicted graphically

Represented by the area above the supply curve and below the goods market price. The height of the market supply curve indicates the lowest price at which producers are willing to supply, this minimum price increases with a level of output because of rising marginal cost

Revenue effect in quotas

Represents a windfall profit also known as a quoted rent. This quote accrues to whoever has the right to bring imports into the country and sell these goods in the protected market

Corporate average fuel economy standards (CAFE)

Represents the foundation of US energy conservation policy applying to all passenger vehicles sold in the United States the standards are based on the average fuel efficiency of all the equals sold by all manufactures

Revenue affect

Represents the government's collections of duty. Found by multiplying the number of imports times the tariff. This revenue represents the portion of the loss in consumer surplus in monetary terms that is transferred to the government. For the nation as a whole the revenue effect does not result in an overall welfare loss, the consumer surplus is merely shifted from the private to public sector

Quotas Versus Tariffs

Revenue effect of absolute quotas differs from the of import tariffs. These commercial policies can also differ in the impact they have on the volume of trade. During periods of growing demand an absolute quota restricts the volume of imports by a greater amount than does an equivalent import tariff

Free trade arguments

States that if each nation produces what it does best imp permits trade, over the long run all will enjoy lower prices and higher levels of output, income and consumption that could be achieved in isolation

Tariffs vs quotas

Tariffs allow for some degree of competition but absolute quotas suppresses competition. The degree of protection provided by a tariff is determined by the market mechanism but a quota forecloses the market mechanism. Tariffs generate Revenue for the government but this is revenue that would be lost to the government under a quota unless it charged a license fee on importers. As a result member countries of the world trade organization agree to a eliminate absolute quotas and replace them with Tariffs rate quotas and eventually Tariffs

Subsidy versus tariffs and quotas

Tariffs and quotas involve larger sacrifices and national welfare than occur under an equivalent subsidy. Tariffs and quotas distort choices for domestic consumers resulting in a decrease in the domestic demand for imports and permitting less efficient home production to occur. This results in the consumption effect of protection where a deadweight loss occurs. This welfare loss is absent in the subsidy case

Consumer surplus

The difference between the amount that buyers would be willing and able to pay for a good in the actual amount they do pay

Producer surplus

The difference between total revenue and total variable cost

Describe three differences between tariffs and subsidies?

The first difference between a tariff and a subsidy is that a tariff is a tax placed on imports to protect domestic industries from foreign competition and a subsidy is the amount of money paid by the government to a firm to encourage output and leverage competition. Another difference between the two is that a tariff has a higher welfare loss compared to a subsidy which actually has a lower welfare loss. The third difference is that in a tariff, domestic consumers have less products and pay a higher price compared to a subsidy where there is not an increase in price and there is not a decrease in quantity either.

three differences between tariffs and quotas?

The first difference between tariffs and quotas is that a tariff is a charge applied on the value of goods imported from another country compared to a quota which limits the quantity of a good imported from another country. Another difference between the two is that a tariff increases the GDP and a quota does not have any impact on the GDP. Lastly, a tariff will fall in consumer surplus while rising in producer surplus compared to a quota where it results in a fall in consumer surplus.

What are the intent and impact of domestic content requirements?

The intent of domestic content requirement is to limit outsourcing and for domestic suppliers that produce certain good and services do not lose out to cheap imports. The intent is usually to spark development of domestic industries. The impact it has is that it leads to rising production costs and prices to the point that manufactures are obligated to locate production facilities in a high cost nation. It also imposes welfare losses on domestic consumers.

producer surplus

The revenue producers receive over and above the minimum amount required to induce them to supply a good. This minimum amount has to cover the producers total variable cost

Redistributive effect

The transfer of the consumer surplus in monetary terms to the domestic producers of the import competing product. Does not result in an overall loss of welfare for the economy

Which of the following is NOT a rationale for tariffs?

They improve the terms of trade for small and large nations

Deadweight loss of the tariff

This equals protective effect plus consumption effect

Domestic Content requirements

This is used to limit the practice of outsourcing and organized labor has lobbied for the use of this. These requirements stipulate the minimum percentage of a products total value that must be produced domestically if the product is to qualify for zero tariff rates. The effect of this is to pressure both domestic and foreign firms that sell products in the home country to use domestic inputs workers in the production of those products

Selective quota

To avoid the problems of a global quota system, import quotas have usually been allocated to specific countries

Where does the windfall profit go

To determine the distribution of the quotas revenue affect, it is useful to think of a series of exchanges. The distribution of the quotas revenue of fact will be determined by the prices that prevail in the exchanges between groups. Who obtains this windfall profit will depend on the competitive relation between the exporting and importing companies concerned

Tariff effect

Very small nation, a tariff placed on an imported product is shifted totally to the domestic consumer via a higher product price. Consumer surplus falls as a result of the price increase. The nations welfare decreases by an amount equal to the protective affect and consumption affect, the so-called deadweight losses due to a tariff

Small nation

Would be a price taker, nation whose imports constitute a small portion of the world market supply, face a constant world price level for its import commodity, not important enough to influence the terms at which they trade

compound tariff

a combination of an ad valorem and a specific tariff

Which of the following will result in a depreciation of the U.S. dollar against the Mexican peso?

a decrease in the Mexican demand for U.S. imports

A producer successfully practicing international dumping would charge

a relatively higher price in the more inelastic market.

Given a system of floating exchange rates, stronger U.S. preferences for imports would trigger

an increase in the demand for imports and an increase in the demand for foreign currency.

Increased tariffs on U.S. steel imports cause the dollar to ____ in the ____

appreciate, long run

Government subsidies may take the form of all of these EXCEPT

bank credits

The redistributive effect of an import tariff is the transfer of income from the domestic

buyers to domestic producers of the good.

The value of direct investment by Ford Motor Co. in Canada is included in the U.S.

capital and financial account.

If Canada was to levy a quota on chocolate imported from Denmark

consumer surplus would decline in Canada.

Low real interest rates in the United States tend to

decrease the demand for dollars, thus causing the dollar to depreciate.

Import quotas will increase the price consumers pay for imported goods and

decrease the volume of imports.

Suppose that the United States eliminates its tariff on steel imports, permitting foreign-produced steel to enter the U.S. market. Steel prices to U.S. consumers would be expected to

decrease, and the foreign demand for U.S. exports would increase.

Which is true about an elimination of nontariff barriers on import of furniture?

decreases profits of import-competing furniture producers

Assume that the United States faces an 8 percent inflation rate, while no (zero) inflation exists in Japan. According to the purchasing-power parity theory, the dollar would be expected to

depreciate by 8 percent against the yen.

When evaluating the financial investments in the home country and a foreign country, investors generally consider

domestic and foreign interest rates and expected fluctuations in the exchange rate.

The primary benefit of tariff protection goes to

domestic producers of the good produced

Import quotas tend to lead to all of the following EXCEPT

domestic producers of the imported good being harmed

In certain industries, Japanese employers do not lay off workers. Therefore, they sometimes have excess supplies of goods that they cannot sell on the home market without lowering prices. To hold down losses, they sell goods in overseas markets at prices well beneath those in Japan. This practice is best referred to as

dumping

The U.S. balance of trade position is in part determined by

exchange rates, growth of foreign consumers' incomes, relative prices in world markets

In the short run, exchange rates respond to market forces, such as

expectations of future exchange rates.

The asset market theory of exchange rate determination suggests that the most important factor influencing the demand for domestic and foreign securities is

expected return on these assets relative to one another.

Which type of tariff is prohibited by the United States Constitution?

export tariff

The imposition of a domestic content requirement by the United States would cause consumer surplus for Americans to

fall

The current account of the United States includes all of the following EXCEPT

gold flows between the United States and foreign central banks.

Over its history, suppose that South Africa has borrowed more from the rest of the world than it has lent to the rest of the world. This means that South Africa

has realized continuous deficits in its current account.

Similar to import tariffs, quotas on imports result in

higher prices for domestic consumers.

Subsidies to domestic firms may lead to

higher volume of exports.

Protective effect

illustrates the loss to the domestic economy resulting from wasted resources used to produce additional products at increasing unit cost. Arises because less efficient domestic production is substituted for more efficient foreign production. This area depicts a loss to the economy

Arguments for U.S. trade restrictions include all of the following except

improving incomes for developing countries

A deficit in the U.S. current account is offset by a surplus

in the U.S. capital and financial account

Tariff affects on the nations welfare

include a revenue effect, redistribution effect protective effect and consumption effect, The tariff provides the government with additional tax revenue and benefits domestic auto producers however at the same time it waste resources and harms the domestic consumer

Nontariff barriers on import of automobiles tend to Correct Answer

increase cost of imported automobiles

Reducing a current account surplus requires a country to

increase the government's deficit and increase private investment relative to saving.

Import quotas

increase the price to the domestic consumer.

Which argument in favor of tariffs states that developing industries should be initially shielded from competition?

infant-industry argument

The theory of purchasing power parity states that changes in the nominal exchange rate arise from differences in ______ among countries.

inflation rates

Which of the following does NOT explain long-run movements in exchange rates?

interest rate differences among nations

Long-run determinants of the dollar's exchange value include all of the following EXCEPT

interest rates in U.S. financial markets.

Assuming there is a burden from a current account deficit, that burden would have the least impact on a country if the current account deficit is used to finance

investment in plant and equipment.

A negative balance in the capital and financial account suggests that a country

is realizing a surplus on its current account.

Concerning a country's business cycle, rapid growth of production and employment is commonly associated with

large or growing trade deficits and current account deficits.

That identical goods should cost the same in all nations, assuming it is costless to ship goods between nations and there are no barriers to trade, is a reflection of the

law of one price.

A removal of an import quota tends to result in

lower import prices for domestic consumers.

For industrial nations, tariffs on raw materials are generally

lower than on manufactured products.

For the U.S. balance-of-payments statement, which of the following is NOT recorded in the capital and financial account?

net interest income from international investments

If Japan lends more to the rest of the world than it borrows from the rest of the world, Japan is a

net lending country.

If Ecuador is considered a "small" country, a tariff will ______ increase its national welfare.

never

If Brazil levies a tariff on oil that is so high that it effectively prohibits imports of oil, the tariff has

only a protective effect.

Suppose that Germany levies a tariff on oranges, but none are grown in Germany. This tariff has

only a revenue effect

An exchange rate is said to ____ when its short-run response to a change in market fundamentals is greater than its long-run response.

overshoot

For the United States, the largest component of its current account transactions consists of

payments for imports of goods and services and receipts from exports of goods and services.

The most vocal political pressure for tariffs is generally made by

producers lobbying for import tariffs.

The imposition of tariffs on imports results in deadweight welfare losses for the home economy. These losses consist of the

protective effect and the consumption effect.

Government imposed limits on the quantities of goods traded between nations are called

quotas

In general, tariffs tend to have

revenue effects, protective effects, and consumption effects.

Do current account deficits cost Americans jobs? Explain.

rising imports can decrease domestic employment and overall growth by subtracting from demand for domestically produced in the US resulting in layoff of American workers who were previously employed producing those items. Have found that employment statistics do not bear out the relation between rising current account deficit and lower employment

A domestic content requirement placed on automobiles would tend to result in

rising production costs of autos.

In recent decades, the U.S. has generated a ___________in its ________account.

surplus, services

Nontariff trade barriers include all of the following EXCEPT

tariffs

During the Great Recession of 2008-2009, the dollar increasingly was viewed as a safe-haven currency, as investors fled to it when they worried about the stability of the global economy. As investors fled to the dollar,

the demand for dollars increased and the dollar's exchange value appreciated.

Hyundai Inc is a South Korean company that manufactures automobiles. If Hyundai purchases sheet steel from U.S. Steel Inc., then

the demand for dollars increases, and the dollar appreciates against the won.

The international exchange value of the U.S. dollar is determined by

the international demand and supply for dollars.

If Mexico's labor productivity rises relative to Europe's labor productivity, then

the peso tends to appreciate against the euro in the long run.

If Canada runs a trade surplus with Mexico, and exchange rates are floating, then

the peso will depreciate relative to the dollar.

Antidumping law has been called unfair for all of the following reasons EXCEPT

they are based on average variable cost

If a tariff and an import quota lead to equivalent increases in the domestic price of steel, then

they have identical impacts on how much is produced and consumed.

Suppose that the yen-dollar exchange rate changes from 85 yen per dollar to 80 yen per dollar. One can say that the

yen has appreciated against the dollar, and the dollar has depreciated against the yen.