ECON340 Wang - Int'L Economics Exam 2 Chapters 9, 11-15

From which of the following does a nation's demand for foreign exchange arise?

residents visiting foreign countries

When a small country experiences an upward shift in the demand curve, a given import tariff would result in ___ and ___.

same domestic price, more imports

If Japan ____, then Japan is guilty of dumping cars into the US market.

sells cars in the US for a price below production costs

Which of the following is a problem created in the host country by the multinational corporations?

All: MNCs dominate the host country's economy, Overexploitation of natural resources and environmental degradation, Diverting R&D funds from host country to the home country

Which of the following protectionist measures was adopted by the US Congress during the 1950s?

All: Peril-point provisions, Escape clause, National security clause

Which of the following statements is true about the prices of primary commodities?

All: Primary commodity prices tend to fluctuate dramatically over time, Primary commodity prices had gone up significantly in all categories from 1972 to 2017, Among all primary commodities, petroleum experienced the largest increase in price from 1972 to 2017.

Which of the following is one of the most serious problems facing developing countries today?

All: Stark poverty, Unsustainable foreign debt, Rising trade protectionism in developed countries against imports from developing countries

Which of the following is a form of export subsidies?

All: Tax relief to (potential) exporters, Subsidized loans to (potential) exporters, Low-interest loans to foreign buyers of the nation's exports

Which of the following would occur if the price level in the US decreases relative to the UK?

All: The US will now find imports from the UK more expensive, The demand curve for pound will shift down (to the left), The supply curve for pound will shift down (to the right)

The sharp deterioration of US trade balance on goods since the 1970s was due in large part to which of the following?

All: The sharp rise in the price of imported petroleum products during the 1970s, The high international value of the dollar in the 1980s, The more rapid growth of the US than Europe and Japan during the 1990s and 2000s

According to the law of one price, in order for commodity arbitrage to equalize the price of homogeneous traded commodities, it is necessary that which of the following do not exist?

All: Transportation costs, Tariffs, Nontariff barriers

Which of the following would occur if the interest rate in the US increases relative to that in the UK?

All: US dollar will appreciate against British pound, The demand curve for pound will shift down (to the left), The supply curve for pound will shift down (to the right)

Which of the following will happen when dollar depreciates in real terms against Chinese yuan?

All: US exporters gain competitiveness in the Chinese market, Chinese investors find it cheaper to invest in the US, US import-competing sectors gain competitiveness against imports from China

Upon which of these principles was GATT founded?

All: Unconditional acceptance of the most-favored-nation principle, Elimination of nontariff trade restrictions (with a few exceptions, Consultation among nations in solving trade disputes within the GATT framework

International capital flows lead to ________.

All: decreased total return to labor in the capital abundant nation, increased world output, increased income in both nations

Dynamic benefits from industrial production include

All: more trained labor force, More innovations, Higher and more stable export prices

In 2017, US ran the largest trade deficit against ______.

China

Which of the following countries was NOT cited as one of the most unfair traders under the Omnibus Trade and Competitiveness Act of 1988?

China

Which of the following is NOT recorded in the U.S. current account?

Subsidiaries of US multinationals produce and sell US products in China

If the exchange rate between US dollar and Japanese yen changes from $1 = ¥100 to $1 = ¥80, the dollar is said to have __________ against yen and the yen has __________ against dollar.

depreciated, appreciated

From which of the following does a nation's supply of foreign exchange arise?

inflow of foreign investment, exports of goods and services to other nations, investment returns received from abroad

Which of the following countries spent the most on agricultural subsidies in 2017?

EU European Union

According to Table 11.6, in which region had low and middle income countries enjoyed the highest rate of economic growth over the period 1990-2017?

East Asia and Pacific

Today, only about _____ of foreign exchange trading is used to finance international trade.

10%

In 2017, US ran the largest trade surplus against ______.

Brazil

The World Trade Organization (WTO) was established by the _____ of multilateral trade negotiations.

Uruguay Round

If the price index is 120 in the US and 90 in the UK, what should be the equilibrium exchange rate between dollar and pound according to the absolute PPP theory?

$1.33

Which of the following has benefited from the strategic trade and industry policy

All: Japanese steel industry in the 1950s, Airbus since the 1970s, Chinese high-speed trains since 2000s

Which of the following is a basic type of international commodity agreements?

All: Buffer stocks, Export controls, Purchase contracts

When a developing country faces a foreign debt crisis, as part of the debt renegotiation, it is often required by the IMF to

All: Cut inflation, Curb wage increases, Cut imports

If the price for a Big Mac in the US is $2 and the exchange rate between the dollar and the pound is $1.6=₤1, what should be the price for a Big Mac in the UK according to the law of one price?

1.25 GBP

Any purchase of ________ of the voting stock in a firm is considered as a direct investment by the US government.

10% or more

When did the US net international investment position become negative for the first time?

1986

Today, multinational corporations account for ____ of the world output.

25%

2. (6 points) Monetary Approach to Exchange Rate DeterminationThe follow table provides the money supply and real output in US and UK in 2010 and 2020. Assume that V, the velocity of circulation of money is 5 in the US and 4 in UK. Assuming a flexible exchange rate system, answer the following questions according to the monetary approach. 𝑀𝑠 in US 𝑀∗𝑠 in UK Y in US Y* in UK2010 6000 1200 15 32020 9000 1800 18 4A. (2 points) Calculate the price levels in US and UK in 2010 and 2020.B. (2 points) Calculate the exchange rate between dollar and pound in 2010 and 2020.C. (1 point) Did dollar appreciate or depreciate against pound over the period 2010-2020? Calculate the rate of appreciation or depreciation.D. (1 point) Is your result in part C consistent with the statement that the currency of a high-inflation nation should experience depreciation against that of a low-inflation nation? Explain briefly.Hint: Be aware that Y (the real output) changes over time. You must use this information in order to get the correct price levels in each country (this is part a). Once you have the correct price levels, you should be able to get the exchange rate in each year (this is part b), which are then used to calculate the rate of appreciation/depreciation in part c.

A. According to the monetary approach, 𝑃= 𝑀𝑠𝑘𝑌 in each nation, where k=1/5=0.2 in US and k=1/4=0.25 in UK. SoP = 6000/(0.2*15) = 2000 in US in 2010P = 9000/(0.2*18) =2500 in US in 2020P* = 1200/(0.25*3) = 1600 in UK in 2010P* = 1800/(0.25*4) = 1800 in UK in 2020B. The exchange rate between dollar and pound ($/₤) is given by 𝑅= 𝑃𝑃∗. SoR($/₤) = 2000/1600 = 1.25 in 2010R($/₤) = 2500/1800= 1.39 in 2020C. Dollar depreciated against pound over the period 2010-2010. The rate of depreciation is (1.39-1.25)/1.25=0.112 or 11.2% Note that if you do not round up the number for R($/₤) in 2020, you will get 11.1% for the rate of depreciation of dollar. 7D. Consistent. The inflation rate over the period 2010-2020 is 25% in the US and 12.5% in the UK. So in this exercise US is the high inflation country and UK is the low inflation country, and dollar is expected to depreciate against pound

1. (10 points) Purchasing-Power ParityThe following table gives the prices indices in US and EMU in 2010 and 2020. Answer the following questions. 2010 2020Price index in US 125 180 Price index in EMU 120 144 A. (2 points) Calculate the PPP exchange rate between dollar and euro in 2020? Express the exchange rate as the dollar price per euro.B. (4 points) Is euro expected to appreciate or depreciate against dollar over the period 2010-2020 according to the relative purchasing-power parity? What is the expected rate of appreciation or depreciation? Note that the rate of appreciation/depreciation is the PERCENTAGE change of the exchange rate.C. (4 points) Suppose the nominal exchange rate NR($/€) is 1 in 2010 and 1.4 in 2020. Did euro appreciate or depreciate against dollar in nominal terms? What is the rate of appreciation or depreciation in nominal terms? Calculate the real exchange rate RR($/€) in 2010 and 2020. Did euro appreciate or depreciate against dollar in real terms? What is the rate of appreciation or depreciation in real terms?

A. The PPP exchange rate in 2020 is given byR($/€) = P(US)/P(EMU) = 180/144 = 1.25That is, according to the absolute PPP theory, in equilibrium one euro can be exchanged for 1.25 dollar in 2020.B. According to the relative PPP theory, dollar is expected to depreciate against euro because inflation rate is higher in US (44%) than in the euro area (20%), in particular, 𝑅1𝑅0=𝑃1𝑃0𝑃∗1𝑃∗0=180 125144 120= 1.441.2 = 1.2Recall that the exchange rate is expressed as the dollar price per euro, euro is therefore expected to appreciate against dollar by 20%.C. Euro appreciated against dollar in nominal terms by (1.4-1)/1 = 40% over the period 2010-2020. The real exchange rate is given by RR($/€) = NR($/€)*P(EMU)/P(US)HenceRR($/€) = 1*120/125 = 0.96 in 2010RR($/€) = 1.4*144/180 = 1.12 in 2020 5That is, euro appreciated against dollar in real terms by (1.12-0.96)/0.96 = 16.7% over the period 2010-2020.

. (16 points) Import QuotaSuppose that nation A is a small nation with demand and supply of commodity X given by Qd = 120 - 20P and Qs = 20P, respectively. Assume that the free trade price of commodity X is $1, and nation A imposes an import quota of 20X. Draw a figure similar to Figure 9.1 in Salvatore and compute the following:A. (2 points) nation A's price, production, consumption and imports of commodity X under free trade B. (4 points) nation A's price, production, consumption and imports of commodity X under the import quota C. (2 points) consumption, production and trade effects of the import quotaD. (4 points) dollar value of the consumer surplus and producer surplus before and after the imposition of the import quotaE. (2 points) dollar value of the deadweight loss of the import quota, assuming that import licenses are distributed to selected domestic importers free of chargeF. (2 points) the maximum price government can charge for the import licenses, and the subsequent dollar value of the deadweight loss of the import quotaCompare your answers to this question to your answers to PS #1 in Chapter 8. Do the import tariff and import quota achieve the same objective in terms of trade restriction. Which policy is less costly?

A. Under free trade, price of commodity X in nation A isP = $1Nation A's production is Qs = 20P = 20*1 = 20X (AC in the graph)Nation A's consumption isQd = 120 - 20P = 120- 20*1 = 100X (AB in the graph)The level of imports are given by the "excess demand"Imports = Qd - Qs = 100X - 20X = 80X (CB in the graph)B. With an import quota of 20X, the equilibrium is achieved whenExcess demand = QuotaThat is,Qd - Qs = 20Therefore, the price of commodity X in nation A must satisfy(120 - 20P) - 20P = 20 => P = $2.5Nation A's production is Qs = 20P = 20*2.5 = 50X (GJ in the graph)Nation A's consumption isQd = 120 - 20P = 120- 20*2.5 = 70X (GH in the graph)The level of imports is fixed by the quotaImports = 20X (JH in the graph)C. Consumption effect = 70X - 100X = -30X (NB in the graph)Production effect = 50X - 20X = 30X (CM in the graph)Trade effect = 20X - 80X = -60X (CM+NB in the graph)That is, with an import quota of 20X, nation A's consumption decreases by 30X, production increases by 30X, and imports decrease by 60X.D. Without the quota, i.e., under free trade,Consumer surplus = ARB = $250Producer surplus = OAC = $10With the quota,Consumer surplus = GRH = $122.5Producer surplus = OGJ = $62.5E. When import licenses are distributed to selected domestic importers free of charge, government collects no revenue. Therefore, Deadweight loss = decrease in consumer surplus (AGHB in the graph) - increase in producer surplus (AGJC in the graph) That is,Deadweight loss = $127.5 - $52.5 = $75 (CJHB in the graph)F. The maximum price government can charge for the import licenses equals the difference between domestic price and world price of commodity X. That is,Maximum price for the import licenses = $2.5 - $1 = $1.5In this case, 8Government revenue from import license distribution = 20*$1.5 = $30Deadweight loss = decrease in consumer surplus (AGHB in the graph) - increase in producer surplus (AGJC in the graph) - government revenue from important license distribution (MJHN in the graph)That is,Deadweight loss = $127.5 - $52.5 - $30 = $45 (CJM+BHN in the graph)Compared to PS#1 in Chapter 8, we can see that a 150% import tariff and an import quota of 20X achieve the same objective in terms of trade restriction (i.e., imports go down from 80X to 20X). However, import tariff is less costly because it incurs a smaller deadweight loss unless import licenses are distributed in a competitive market.

Foreign investments in the US have the potential benefits of ______.

All: Financing US budget deficits, Creating jobs in the US, Promoting more rapid economic growth in the US

Which of the following factors contribute to the inelastic and unstable demand of developing nations' primary exports?

All: Households in developed nations spend only a small proportion of their income on agricultural commodities,There are few substitutes for minerals, Business cycle fluctuations in developed nations.

Foreign investments in the US have the potential harmful effects of _______.

All: Imposing a burden on the future generations, Triggering a financial crisis, Worsening US current account balance in the future

(16 points) Export SubsidySuppose that nation A is a small nation with demand and supply of commodity X given by Qd = 120 - 20P and Qs = 20P, respectively. Assume that the free trade price of commodity X is $4, and nation A provides a $1 subsidy on each unit of commodity X exported. Draw a figure similar to Figure 9.3 in Salvatore and compute the following:A. (2 points) nation A's price, production, consumption and exports of commodity X under free tradeB. (4 points) nation A's price, production, consumption and exports of commodity X with the export subsidy C. (2 points) consumption, production, trade and revenue effects of the export subsidyD. (4 points) dollar value of the consumer surplus and producer surplus without and with the export subsidy E. (4 points) dollar value of the deadweight loss of the export subsidy

A. Under free trade, the price of commodity X in nation A isP = $4Nation A's production is Qs = 20P = 20*4 = 80X (AC in the graph)Nation A's consumption isQd = 120 - 20P = 120- 20*4 = 40X (AB in the graph)The level of exports is given by the "excess supply"Exports = Qs - Qd = 80X - 40X = 40X (BC in the graph) 10B. With a $1 export subsidy, the price of commodity X in nation A becomesP = $4 + $1 = $5Nation A's production is Qs = 20P = 20*5 = 100X (GJ in the graph)Nation A's consumption isQd = 120 - 20P = 120- 20*5 = 20X (GH in the graph)The level of exports isExports = Qs - Qd = 100X - 20X = 80X (HJ in the graph)C. Consumption effect = 20X - 40X = -20X (NB in the graph)Production effect = 100X - 80X = 20X (CM in the graph)Trade effect = 80X - 40X = 40X (CM+NB in the graph)Revenue effect = 80*$1 = $80 (NHJM in the graph)That is, with a $1 export subsidy, nation A's consumption decreases by 20X, production increases by 20X, exports increases by 40X, and government spends $80 on the export subsidy.D. Without the export subsidy, i.e., under free trade,Consumer surplus = ARB = $40Producer surplus = OAC = $160With the export subsidy,Consumer surplus = GRH = $10Producer surplus = OGJ = $250E. Deadweight loss = decrease in consumer surplus (AGHB in the graph)- increase in producer surplus (AGJC in the graph)+ government expenditure on export subsidy (NHJM in the graph) That is,Deadweight loss = $30 - $90 + $80 = $20 (NHB+CJM in the graph)

The following table gives the terms of trade of the G-7 countries. A. Compute the terms of trade shock for each country over the period 1990-2009. Note that TOT shock is measured as the percentage change in the terms of trade.B. (2 points) Identify the country with the largest improvement in the terms of trade and the country with the largest deterioration over the period 1990-2009.

A.TOT shockUS (98.8-101.1)/{(98.8+101.1)/2} = -2.30% Canada (114.8-97.2)/{(114.8+97.2)/2} = 16.60% Japan (74.2-83.9)/{(74.2+83.9)/2} = -12.27% Germany (105.8-109.3)/{(105.8+109.3)/2} = -3.25% France (103.9-100.1)/{(103.9+100.1)/2} = 3.73% UK (104.5-101.1)/{(104.5+101.1)/2} = 3.31% Italy (103.3-94)/{(103.3+94)/2} = 9.43% B. Canada experienced the largest improvement in TOT during this period as Canada had the largest positive TOT shock. Japan experienced the largest deterioration in TOT as Japan had the largest negative TOT shock.

Figure 15.2 shows the relationship between changes in relative national price levels and changes in exchange rates for 18 industrial nations from 1973 to 2017. For which country is the relative PPP theory clearly violated?

Australia

The Smoot-Hawley Tariff Act of 1930 has often been associated with:

Decreasing volume of trade for the US

_________ often takes the form of starting a subsidiary or taking control of another firm.

Direct Investment

Suppose the price level in the US is 110 in 2010 and 132 in 2020, and the price level in the Mexico is 150 in 2010 and 240 in 2020. According to the relative PPP theory, what would happen to the exchange rate between dollar and Mexican peso over the period of 2010-2020?

Dollar appreciates by 25%

Which of the following is not a characteristic of the HPAE?

Excess capital intensity and relative little labor absorption

The Doha Round of trade negotiations failed in 2008 over disagreements over _________.

Government subsidies to agricultural products

According to the ________ model, without trade or international capital flows, returns on capital are higher in the nation having the _________overall relative capital-labor ratio.

Hecksher-Ohlin Model; Lower

According to Table 12.5, which of the following economies is the SECOND largest recipient of FDI in 2017?

Hong Kong

According to Table 1, which of the following statement is true for the U.S. income terms of trade (I)

I in 2000 is 90, which has improved from 1990

Which of the following will happen when dollar appreciates in real terms against Chinese yuan?

Imports from China are sold at a lower price in the US

Which of the following countries was the #1 initiator of antidumping investigations in the period of 2011-2017?

India

US direct investment in Latin America was lower in 1985 than in 1980 because of ______.

International debt problems in the Latin American countries

Which of the following countries has followed an exported oriented industrialization policy since the1950s?

Korea

Which of the following countries provided the largest agricultural subsidies as a percentage of its agricultural output in 2017?

Korea

The United States is the main supplier of foreign direct investments to what countries?

Latin America, the Philippines, and Saudi Arabia

Which of the following is NOT a characteristic of a developing country?

Low Population Growth rate

Compared to the export-oriented industrialization, the import substitution industrialization policy has often resulted in a ___.

Lower rate of economic growth in the long run

According to Table 1, which of the following statement is true for the U.S. commodity terms of trade (N)?

N in 2000 is 75, which has deteriorated from 1990.

During the postwar period

NTBs have increased and tariffs have decreased in importance and use.

With which type of dumping do domestic consumers get better off in the short run but worse off in the long run?

Predatory dumping

Which of the following is NOT an objective of the Millennium Development Goals?

Removing agricultural subsidies in developed nations

According to Table 13.3, US deficits in the following accounts are the largest in the year 2006 EXCEPT _______?

Secondary Income

_____ raised average import duty in the U.S. to the all-time high.

Smoot-Hawley Tariff Act of 1930

The US government introduced the trigger-price mechanism in 1978 in response to dumping in what industry?

Steel

The Kennedy Round of trade negotiation succeeded in significantly reducing ________.

Tariffs on industrial products

When a multinational corporation controls the raw material used in the production of its final good through a vertical integration, which of the following is most likely to happen?

The MNC will obtain an uninterrupted supply of the raw material at the lowest possible cost.

The rapid growth of US direct investment in Europe from 1980 to 2017 was due to _____.

The US desire to avoid the common external tariff imposed by the EU.

In 2017, banks in which country take the leading role in the foreign exchange market trading?

UK

According to Case Study 9-5, in which country are nontariff trade barriers most pervasive?

US

According to Case Study 9-2, ______ got worse off as a result of the voluntary export restraints on the Japanese automobile exports to the US negotiated in 1981.

US consumers

Which of the following are recorded in the U.S. financial account?

US residents purchase stocks in a Chinese company

At which international trade gathering was there a successful reduction in trade restrictions and protectionism, averting a revival of inward-looking policies in developing countries?

Uruguay Round

Which of the following statements is true about the voluntary export restraints (VERs)?

WTO members are not allowed to impose new VERs.

Which of the following is NOT a primary reason for a firm to make foreign direct investment?

a safe and secure ROI

Foreign direct investments are undertaken usually by multinational corporations engaged in all of the following activities EXCEPT _______.

basic agriculture

It has been found that firms with a strong international orientation tend to

be more profitable than purely domestic firms

According to Table 13.2, US has an export surplus in _________.

chemicals

If less than full employment is present, then foreign investments tend to ________ the level of employment in the investing country and __________ the level of employment in the host country.

decrease; increase

Countervailing duties are intended to neutralize any unfair advantage that foreign exporters might gain over domestic producers because of foreign:

export subsidies

Strategic trade and industrial policy is advanced for industrial nations to acquire a comparative advantage in the _____.

high tech sector

When a small country experiences an upward shift in the demand curve, a given import quota would result in ___ and ___.

higher domestic price, same imports

Two-way international portfolio investments are often explained by

portfolio theory and risk diversification

Which of the following is NOT a problem created in the home country by multinational corporations?

reduced return to capital

In large developed nations, which sector is most protected by nontariff trade barriers?

textile and apparel

The basic motive for international portfolio investments is

to earn higher returns abroad

IBM does not want to license foreign producers because it wants to retain complete control over its ____________ and to ensure consistence in quality and services.

trade secrets and patents

Direct foreign investments have been greatly facilitated by the rapid advancements in _______________ since the end of World War II

transportation and communication