Internation Economics Final

Which of these is a serious international economic problem facing the world today?

- The rise of protectionism in developed countries and the high structural unemployment in Western Europe - Large volatility and disequilibria in exchange rates and frequent crises in emerging markets - The restructuring problems of Eastern Europe and the former Soviet Union and the deep poverty of some of the poorest developing countries All answers are correct

In the wake of the 2008-2009 global financial crisis the following is a potential economic problem facing the world today

- continued poverty in many developing nations - a large U.S. balance of payments deficit - rising trade protection All answers are correct

The spot sale of a currency combined with a forward repurchase of the same currency is a

Currency swap

Commercial bank deposits outside the country of their issue are commonly referred to as

Eurocurrency

Which of the following was a primary cause of the U.S. balance of payments deficits during the late 1960s?

Increased foreign competition Domestic inflation Capital outflows All answer are correct

The opposite of hedging is

Speculation

Explain one reason for increasing opportunity costs?

The more you produce something, the more opportunity cost. One reason for increasing opportunity cost is to produce the additional good.

What are the primary reasons for the existence of multinational corporations?

The primary reasons are included MNCs can better direct production to low-cost nations, integration may increase profits through better control of supply chains, and MNCs can artificially change prices to only show profits in low-tax nations (transfer pricing).

What is the significance of the slope of the production possibility frontier?

The slope is the the opportunity cost of the good on the x (horizontal) axis.

An increase in the pound price of the dollar represents:

an appreciation of the dollar

An international cartel refers to:

an organization of exporters

Community indifference curves:

are negatively sloped are convex to the origin should never cross all answers are true

Over the last fifty years the current account balance of the United States has

been deteriorating

A production frontier that is concave from the origin indicates that the nation incurs increasing opportunity costs in the production of:

both commodities

Technical progress that increases the productivity of L proportionately more than the productivity of K is called:

capital saving

A customs union that allows for the free movement of labor and capital among its member nations is called a:

common market

The imposition of a tariff will

decrease imports, increase domestic production, and decrease consumption

Which are is not an advantage of export-oriented industrialization? - It overcomes the smallness of the domestic market and allows developing nations to take advantage of economies of scale - domestic industries grow accustomed to protection and have an incentive to become more efficient - the expansion of manufactured exports is not limited by the size of the domestic market - production of manufactured goods for export requires and stimulates efficiency throughout the economy

domestic industries grow accustomed to protection and have an incentive to become more efficient

If a small nation increases the tariff on its import commodity, its:

domestic price of the commodity increases

Increasing returns to scale means that

doubling all inputs leads to a more than proportional increase in output.

A difference in relative commodity prices between two nations can be based upon a difference in:

factor endowments tastes technology All of these answers are correct

Moving to an indifference curve farther out from the origin shows

higher satisfaction

International capital flows

increase world social welfare overall.

The primary exports of developing nations tend to face demand that is _______ and supply that is _______.

inelastic; inelastic

The fundamental cause for the collapse of the Bretton Woods System was:

lack of an adequate adjustment mechanism

The present international monetary system is a:

managed exchange rate system

Doubling only the amount of L available under constant returns to scale:

more than doubles the output of the L-intensive commodity

Over the last five decades, relative to the United States, real wages among industrialized countries have

moved closer together.

With free trade and increasing costs:

neither nation will specialize completely in production

The temporary sale of a commodity at below cost or at a lower price abroad in order to drive foreign producers out of business is called:

predatory dumping

The imposition of an import tariff by a small nation:

reduces the nation's welfare

According to the H-O model, trade reduces international differences in:

relative and absolute factor prices

Destabilizing speculation refers to the:

sale of the foreign currency when the exchange rate falls or is low

The brain drain refers to the transfer of:

skilled labor and professionals from less advanced to more advanced nations

Portfolio investments refer primarily to:

stocks and bonds

In the absence of trade, technical progress

tends to increase the nation's welfare.

One important reason for the collapse of the Bretton Woods system was

the U.S. balance of payments deficit

Two nations will trade a good until

the relative costs of that good are equal between the two nations

Every point on a given indifference curve shows

the same level of satidfaction

If two nations have identical production possibilities frontiers, it is possible for them to experience gains from trade if

they have different tastes and preferences

Which is not a dynamic benefit from the formation of a customs union?

trade creation

The United States can be characterized as relatively capital abundant and labor scarce. Thus, according to the H-O model,

wages in the United States will be reduced by trade.

The international investment position of a nation

- Is also called the balance of indebtedness - Is usefulness is in projecting the future flow of income from foreign investments and payments on foreign investments in the nation - The total amount and the distribution of a nation's assets abroad, and foreign assets in the nation at the end of the year - All of the above

If nation A can produce 5 units of good X or 10 units of good Y and nation B can produce 4 units of good X or 12 units of good Y we can conclude that both nations would gain from trade if nation A sold _____ units of good _____ for one unit of good _____

2.5; X; Y

Portfolio theory tells us that by investing in securities with yields that are inversely related over time: a higher yield can be obtained for the same level of risk a given yield can be obtained at a smaller risk a two-way capital flow may be required to achieve a balanced portfolio

All of these are correcr

Why might U.S. labor oppose U.S. direct investments abroad?

Because the unemployment rate would increase and lower wages.

The Statistical discrepancy is needed to ensure that

Current account minus capital account equal financial account

Doubling the amount of L and K under constant returns to scale does all of the following except: - Doubles the output of the L-intensive commodity - Leaves the shape of the production frontier unchanged - Doubles the output of the K-intensive commodity - Doubling the amount of L and K under constant returns to scale does all of the following except: a. doubles the output of the L-intensive commodity b. doubles the output of the K-intensive commodity c. leaves output unchanged. d. leaves the shape of the production frontier unchanged

Doubling the amount of L and K under constant returns to scale does all of the following except: a. doubles the output of the L-intensive commodity b. doubles the output of the K-intensive commodity c. leaves output unchanged. d. leaves the shape of the production frontier unchanged

Which of these is true? - Not all trade will result in gains from exchange - The gains from trade will offset the typical losses from specialization - Gains from trade normally stem from both gains from exchange and gains from specialization - all of these are false

Gains from trade normally stem from both gains from exchange and gains from specialization

Which of the following statements is correct? - In a free-trade area, member nations harmonize their monetary and fiscal policies - In a customs union, member nations apply a uniform external tariff - A customs union is a higher form of economic integration than a common market - Within a customs union there is unrestricted factor movement

In a customs union, member nations apply a uniform external tariff

If, for every debit or credit in the balance of payments, an offsetting credit or debit, respectively, of an equal amount is entered, how can a nation have a deficit or a surplus in the balance of payments?

In the real world, there are errors and omissions, and thus the difference between total debits and total credits is recorded as the statistical discrepancy, which leads to a deficit or a surplus.

Primary income receipts include the

Income earned on foreign investments

What international transactions are included in the current account? What is meant by net lending and net borrowing in the current account?

International transactions included in the current account are primary income and secondary income. Primary income, is investment income received from and paid to foreign residents. Secondary income, transfer payments sent and received from abroad. Net lending is when the exports exceeds the value of its imports and net borrowing is vise versa.

Define and discuss the differences between intra-industry trade and inter-industry trade.

Intra-industry trade refers to the exchange of similar types of goods or services within the same industry or product category. Inter-industry trade involves the exchange of goods or services across different industries or product categories. Intra-industry refers to two-way trade while the inter-industry trade refers to one-way trade in the sector. Intra-industry involves trade within the same industry, often characterized by product differentiation. Inter-industry involves trade across different industries, indicating a broader exchange of goods with varying characteristics.

Which of these is not true for a nation that is in equilibrium in isolation?

It consistently consumes inside its production frontier

Explain why import substitution strategies have largely been less than successful.

It is because it may be difficult to set up export industries due to competition from more established industries. High rate of effective protection and subsidies led to inefficient industries.

Which is false about the United States balance of payments in 2013? Its current-account deficit was larger than its trade deficit It borrowed heavily from abroad It was the most indebted nation in the world It had a very large trade deficit

Its current-account deficit was larger than its trade deficit

Which of the following is an example of intra-industry trade?

Japan and the United States both import and export cars.

Which of these are true for a nation that is in equilibrium in isolation?

Marginal Rate of Transformation of X for Y equals MRS of X for Y, and they are equal to Px/Py The indifference curve is tangent to the nation's production frontier It reaches the highest indifference curve possible with its production frontier

A difference in relative commodity prices between nations can be based on a difference in:

Technology, Tastes, Factor endowments

International trade can be based on economies of scale even if both nations have identical:

Technology, Tastes, Factor endowments

How do differing environmental standards between countries affect international trade, and why can this create problems?

The differing environmental standards would help to increase or decrease the comparative advantages of a country, which would give the countries more opportunities to trade. This would create problems when it would make the competition become unfair.

What is the international investment position and how has it changed for the United States over the last fifty years.

The international investment position can be used to project the future flow of income from abroad and payments on liabilities abroad. It increases U.S. consumption leads to payments abroad both now and in the future.

Which of the following is NOT an explanation for the growth of the trade deficit in the United States over the last thirty years the higher growth rate of the U.S. in the 1990s The weak dollar in the 2010's the rising value of the dollar in the 1980s the rising price of oil in the 1970s

The weak dollar in the 2010's

The WTO was established during the

Uruguay Round

What is vertical integration and how is it related to direct foreign investment?

Vertical integration allows a corporation to obtain control of a needed raw material and thus ensure uninterrupted supply at the lowest possible cost, or acquire later stages in the production processes or ownership or distribution network abroad. It is done to avoid tariffs and other restrictions that nation impose on imports, or to take advantage of government subsidies encourage direct foreign investment.

Supporting the price of a commodity by buying it when its price is low is:

a buffer stock

Imagine a two-nation (A and B) world, with two-commodities (X and Y), and it is established that nation A has a comparative advantage in commodity X. In this case, nation B must have:

a comparative advantage in commodity Y

A shortage of pounds under a flexible exchange rate system results in:

a depreciation of the dollar

We say that commodity Y is K-intensive with respect to X when:

a lower L/K ratio is used in the production of Y than X

Under a gold standard,

balance of payments imbalances should be quickly corrected by gold flows.

With trade, nations can attain an indifference curve that is

beyond the indifference curve it could attain without trade

Direct investments usually involve the transfer of all of the above except: bonds capital technology

bonds

According to the theory of covered interest arbitrage, if the interest differential in favor of the foreign country exceeds the forward discount on the foreign currency, there will be a:

capital outflow under covered interest arbitrage

According to the factor price equalization theorem, a nation that has a relative capital abundance should specialize in goods that are ______ intensive resulting in an increase in the price of ______.

capital; capital

When a nation has increasing returns to scale, the shape of its production possibility frontier is

convex to the origin (bows outward from the origin)

You used to be able to purchase .85 Euro with one dollar, now you can purchase .9 Euro with one dollar. The Euro has

depreciated

If the terms of trade increase in a two-nation world, those of the trade partner:

deteriorate

On which of the following principles does GATT rest?

elimination of nontariff barriers consultation among nations in solving trade disputes nondiscrimination All answer are correct

The exchange rate is kept nearly the same across different monetary centers by:

exchange arbitrage

If the equilibrium price of corn in Nation A is below the international trade price, Nation A would be more likely to

export corn

In the H-O model, international trade is based mostly on a difference in:

factor endowments

In general, for the last 50 years tariff rates around the world have been

falling

What did the Mercantilists NOT advocate?

free trade

The North American Free Trade Agreement (NATFA) and its replacement, the USMCA, is best defined as a

free trade area

The Bretton Woods System was a:

gold-exchange standard

Over time, the economic interdependence of nations has:

grown

Intra-industry trade takes place:

in order to take advantage of economies of scale

The formation of a trade-creating customs union where all economic resources of member nations are fully employed before and after the formation of the customs union leads to an:

increase in the welfare of member and nonmember nations

Transport costs:

increase the price in the importing country.

International trade will ______ the price of a nation's abundant resources and _____ the price of a nation's scarce resources

increase; decrease

An import quota does all of the following except: - increases domestic social welfare - reduces domestic consumption - increases the domestic price of the imported commodity - increases domestic production

increases domestic social welfare

Foreign direct investment benefits the host nation because it:

increases the K/L ration increases per capita income increases the productivity of labor All answer are correcr

An increase in the demand of the imported commodity subject to a given import quota:

increases the domestic production of the commodity

According to the Stolper-Samuelson theorem, the imposition of a tariff by a nation:

increases the real return of the nation's scarce factor

An increase in tastes for the import commodity in both nations:

increases the volume of trade

A trade-diverting customs union:

increases trade among members but reduces trade with non-members

Which of the following was not negotiated under the Uruguay Round? - reduction of subsidies on industrial products and on agricultural exports - reduction of tariffs on industrial goods - replacing quotas with tariffs - increasing nontariff barriers among developing nations

increasing nontariff barriers among developing nations

Developing nations often experience wildly fluctuating export prices for their primary products because of:

inelastic and unstable demand and supply

A customs union is more like to lead to trade creation and increased welfare under the following condition

lower trade barriers with the rest of the world

All of the following are examples of protectionism except tariffs voluntary export restraints most favored nation treatment dumping

most favored nation treatment

Expanding or opening international trade in a nation usually affects all members of society:

most positively but some negatively

If the autarky (no trade) Px/Py is lower in nation 1 than in nation 2 without trade:

nation 2 has a comparative advantage in commodity Y

According to traditional trade theory, a developing nation should export the commodity:

of its comparative advantage

The purchase of parts and components from overseas to reduce production costs is

outsourcing

A U.S. importer scheduled to make a payment of €100,000 in three months can hedge his foreign exchange risk by:

purchasing €100,000 in the forward market for delivery in three months

The Rybczynski theorem postulates that doubling L at constant relative commodity prices:

reduces the output of the K-intensive commodity

A trade-creating customs union is one where:

some domestic production in a member nation is replaced by lower-cost imports from another member nation

The global financial crisis of 2008-2009 began as a

subprime mortgage crisis in the U.S.

A ratio of the index of the price of a nation's exports to the index of the price of a nation's imports is known as the nation's

terms of trade

The model we call the gravity model of international trade predicts that trade between two nations is larger

the closer the two nations the more open are the two nations the larger the two nations All of these are correct

Hedging refers to:

the covering of a foreign exchange risk

If SR=$1/€1 and the three-month FR=$0.99/€1: (SR=spot rate, FR = forward rate)

the euro is at a three-month forward discount of 1%

A tariff in a small country will benefit

the government imposing the tariff.

Which is not a significant reason for private foreign direct investments? - to maximize profits and diversify risks - to take advantage of temporary favorable currency fluctuation - to avoid tariffs - horizontal and vertical integration

to take advantage of temporary favorable currency fluctuation