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Questions and Answers of Economics

Consider a situation similar to that in figure, in which two countries that can produce a good are subject to forward-falling supply curves. In this case, however, suppose that the two countries have
It is fairly common for an industrial cluster to break up and for production to move to locations with lower wages when the technology of the industry is no longer rapidly improving—when it is no
Recently, a growing labor shortage has been causing Chinese wages to rise. If this trend continues, what would you expect to see happen to external economy industries currently dominated by China?
In our discussion of labor market pooling, we stressed the advantages of having two firms in the same location: If one firm is expanding while the other is contracting, it’s to the advantage of
Which of the following goods or services would be most likely to be subject to (1) external economies of scale and (2) dynamic increasing returns? Explain your answers.a. Software tech-support
In perfect competition, firms set price equal to marginal cost. Why can’t firms do this when there are internal economies of scale?
Suppose the two countries we considered in the numerical example on pages 166–169 were to integrate their automobile market with a third country, which has an annual market for 3.75 million
Suppose that fixed costs for a firm in the automobile industry (start-up costs of factories, capital equipment, and so on) are $5 billion and that variable costs are equal to $17,000 per finished
Go back to the model with firm performance differences in a single integrated market Now assume that a new technology becomes available. Any firm can adopt the new technology, but its use requires an
In the chapter, we described a situation where dumping occurs between two symmetric countries. Briefly describe how things would change if the two countries had different sizes. a. How would the
Which of the following are direct foreign investments?a. A Saudi businessman buys $10 million of IBM stock.b. The same businessman buys a New York apartment building.c. A French company merges with
For each of the following, specify whether the foreign direct investment is horizontal or vertical; in addition, describe whether that investment represents an FDI inflow or outflow from the
If there are internal economies of scale, why would it ever make sense for a firm to produce the same good in more than one production facility?
Most firms in the apparel and footwear industries choose to outsource production to countries where labor is abundant (primarily, Southeast Asia and the Caribbean)—but those firms do not integrate
Consider the example of industries in the previous problem. What would those choices imply for the extent of intra-firm trade across industries? That is, in what industries would a greater proportion
Home’s demand curve for wheat isD = 100 – 20PIts supply curve isS = 20 + 20PDerive and graph Home’s import demand schedule. What would the price of wheat be in the absence of trade?
Now add Foreign, which has a demand curveD* = 80 - 20PAnd a supply curveS* = 40 + 20P.a. Derive and graph Foreign’s export supply curve and find the price of wheat that would prevail in Foreign in
Home imposes a specific tariff of 0.5 on wheat imports.a. Determine and graph the effects of the tariff on the following: (1) the price of wheat in each country; (2) the quantity of wheat supplied
Suppose that Foreign had been a much larger country, with domestic demandD* = 800 - 200P, S* = 400 + 200P.Recalculate the free trade equilibrium and the effects of a 0.5 specific tariff by Home.
What would be the effective rate of protection on bicycles in China if China places a 50 percent tariff on bicycles, which have a world price of $200, and no tariff on bike components, which together
The United States simultaneously limits imports of ethanol for fuel purposes and provides incentives for the use of ethanol in gasoline, which raise the price of ethanol by about 15 percent relative
Return to the example of problem 2. Starting from free trade, assume that Foreign offers exporters a subsidy of 0.5 per unit. Calculate the effects on the price in each country and on welfare, both
Use your knowledge about trade policy to evaluate each of the following statements:a. “An excellent way to reduce unemployment is to enact tariffs on imported goods.”b. “Tariffs have a more
The nation of Acirema is “small” and unable to affect world prices. It imports peanut at the price of $10 per bag. The demand curve isD = 400 – 10PThe supply curve isS = 50 + 5P.Determine the
If tariffs, quotas, and subsidies each cause net welfare losses, why are they so common, especially in agriculture, among the industrialized countries such as the United States and the members of the
Suppose that workers involved in manufacturing are paid less than all other workers in the economy. What would be the effect on the real income distribution within the economy if there were a
For a small country like the Philippines, a move to free trade would have huge advantages. It would let consumers and producers make their choices based on the real costs of goods, not artificial
Which of the following are potentially valid arguments for tariffs or export subsidies, and which are not? Explain your answers.a. “The more oil the United States imports, the higher the price of
A small country can import a good at a world price of 10 per unit. The domestic supply curve of the good isS = 20 + 10PThe demand curve isD = 400 – 5PIn addition, each unit of production yields a
Suppose that demand and supply are exactly as described in problem 3 but that there is no marginal social benefit to production. However, for political reasons the government counts a dollar’s
Suppose that upon Poland’s entering the European Union, it is discovered that the cost of automobile production in Poland is €20,000 while it is €30,000 in Germany. Suppose that the EU, which
There is no point in the United States complaining about trade policies in Japan and Europe. Each country has a right to do whatever is in its own best interest. Instead of complaining about foreign
Give an intuitive explanation for the optimal tariff argument.
If governments make trade policies based on national economic welfare, is the problem of trade warfare still represented by a Prisoner€™s dilemma game as in Table? What is the equilibrium
Recently, the United States has taken action to restrict imports of certain Chinese goods, such as toys containing lead and seafood that doesn’t meet health standards, in order to protect U.S.
Which countries appear to have benefited the most from international trade during the last few decades? What policies do these countries seem to have in common? Does their experience lend support for
Japan’s experience makes the infant industry case for protection better than any theory. In the early 1950s Japan was a poor nation that survived by exporting textiles and toys. The Japanese
A country currently imports automobiles at $8,000 each. Its government believes that, given time, domestic producers could manufacture autos for only $6,000 but that there would be an initial
India and Mexico both followed import-substitution policies after World War II. However, India went much further, producing almost everything for itself, while Mexico continued to rely on imports of
What were some of the reasons for the decline in the import-substituting industrialization strategy in favor of a strategy that promotes open trade?
What are the disadvantages of engaging in strategic trade policy even in cases in which it can be shown to yield an increase in a country’s welfare?
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
What are the key assumptions that allow strategic trade policy to work in the Brander- Spencer example of Airbus and Boeing?
Suppose that the European Commission asked you to develop a brief on behalf of subsidizing European software development—bearing in mind that the software industry is currently dominated by U.S.
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?
France, in addition to its occasional stabs at strategic trade policy, pursues an active nationalist cultural policy that promotes French art, music, fashion, cuisine, and so on. This may be
The fundamental problem with any attempt to limit climate change is that the countries whose growth poses the greatest threat to the planet are also the countries that can least afford to pay the
Many countries have value-added taxes-taxes that are paid by producers, but are intended to fall on consumers. (They’re basically just an indirect way of imposing sales taxes.) Such value-added
We stated in this chapter that GNP accounts avoid double counting by including only the value of final goods and services sold on the market. Should the measure of imports used in the GNP accounts
Equation tells us that to reduce a current account deficit a country must increase its private saving, reduce domestic investment, or cut its government budget deficit. Nowadays, some people
Explain how each of the following transactions generates two entries—a credit and a debit—in the American balance of payments accounts, and describe how each entry would be classified:a. An
A New Yorker travels to New Jersey to buy a $100 telephone answering machine. The New Jersey Company that sells the machine then deposits the $100 check in its account at a New York bank. How would
The nation of Pecunia had a current account deficit of $1 billion and a nonreserve financial account surplus of $500 million in 2008.a. What was the balance of payments of Pecunia in that year? What
Can you think of reasons why a government might be concerned about a large current account deficit or surplus? Why might a government be concerned about its official settlements balance (that is, its
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?
Is it possible for a country to have a current account deficit at the same time it has a surplus in its balance of payments? Explain your answer, using hypothetical figures for the current and non
Suppose that the U.S. net foreign debt is 25 percent of U.S. GDP and that foreign assets and liabilities alike pay an interest rate of 5 percent per year. What would be the drain on U.S. GDP (as a
If you go to the BEA website (www.bea.gov) and look at the Survey of Current Business for July 2010, the table on “U.S. International Transactions,” you will find that in 2009, U.S. income
Return to the example in this chapter’s final Case Study of how a 10 percent dollar depreciation affects U.S. net foreign wealth (page 316). Show the size of the effect on foreigners’ net foreign
We mentioned in the chapter that capital gains and losses on a country’s net foreign assets are not included in the national income measure of the current account. How would economic statisticians
Using the data in the €œMemoranda€ to Table calculate the U.S. 2009 net international investment position with direct investments valued at marketprices.
In Munich a bratwurst costs 5 euro’s; a hot dog costs $4 at Boston’s Fenway Park. At an exchange rate of $1.05/per euro, what is the price of a bratwurst in terms of a hot dog? All else equal,
Petroleum is sold in a world market and tends to be priced in U.S. dollars. The Nippon Steel Chemical Group of Japan must import petroleum to use in manufacturing plastics and other products. How are
Calculate the dollar rates of return on the following assets:a. A painting whose price rises from$200,000to$250,000in a year.b. A bottle of a rare Burgundy, Domaine de la Romanée-Conti 1978, whose
What would be the real rates of return on the assets in the preceding question if the price changes described were accompanied by a simultaneous 10 percent increase in all dollar prices?
Suppose the dollar interest rate and the pound sterling interest rate are the same, 5 percent per year. What is the relation between the current equilibrium $/£ exchange rate and its expected
Traders in asset markets suddenly learn that the interest rate on dollars will decline in the near future. Use the diagrammatic analysis of this chapter to determine the effect on the current
We noted that we could have developed our diagrammatic analysis of foreign exchange market equilibrium from the perspective of Europe, with the euro/dollar exchange rate E€/$(= 1/E$/€)on the
The following report appeared in the New York Times on August 7, 1989 (“Dollar’s Strength a Surprise,” p. D1): But now the sentiment is that the economy is heading for a “soft landing,”
Suppose the dollar exchange rates of the euro and the yen are equally variable. The euro, however, tends to depreciate unexpectedly against the dollar when the return on the rest of your wealth is
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? If so, how would the
In October 1979, the U.S. central bank (the Federal Reserve System) announced it would play a less active role in limiting fluctuations in dollar interest rates. After this new policy was put into
Imagine that everyone in the world pays a tax of percent on interest earnings and on any capital gains due to exchange rate changes. How would such a tax alter the analysis of the interest parity
Suppose the one-year forward $/€ exchange rate is $1.26 per euro and the spot exchange rate is $1.2 per euro. What is the forward premium on euros (the forward discount on dollars)? What is the
Europe’s single currency, the euro, was introduced in January 1999, replacing the currencies of 11 European Union members, including France, Germany, Italy, and Spain. Do you think that,
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
Suppose there is a reduction in aggregate real money demand, that is, a negative shift in the aggregate real money demand function. Trace the short-run and long-run effects on the exchange rate,
How would you expect a fall in a country’s population to alter its aggregate money demand function? Would it matter if the fall in population were due to a fall in the number of households or to a
The velocity of money, V, is defined as the ratio of real GNP to real money holdings, V = Y/(M/P) in this chapter’s notation. Use equation to derive an expression for velocity and explain how
What is the short-run effect on the exchange rate of an increase in domestic real GNP, given expectations about future exchange rates?
Does our discussion of money’s usefulness as a medium of exchange and unit of account suggest reasons why some currencies become vehicle currencies for foreign exchange transactions?
If a currency reform has no effects on the economy’s real variables, why do governments typically institute currency reforms in connection with broader programs aimed at halting runaway inflation?
Imagine that the central bank of an economy with unemployment doubles its money supply. In the long run, full employment is restored and output returns to its full employment level. On the
Between 1984 and 1985, the money supply in the United States increased to $641.0billion from $570.3billion, while that of Brazil increased to 106.1 billion cruzados from 24.4 billion. Over the same
Continuing with the preceding question, note that the monetary value of output in 1985 was$4,010billion in the United States and 1,418 billion cruzados in Brazil. Refer back to question 3 and
In our discussion of short-run exchange rate overshooting, we assumed that real output was given. Assume instead that an increase in the money supply raises real output in the short run (an
Figure shows that Japan€™s short-term interest rates have had periods during which they are near or equal to zero. Is the fact that the yen interest rates shown never drop below zero a
How might a zero interest rate complicate the task of monetary policy?
As we observed in this chapter, central banks, rather than purposefully setting the level of the money supply, usually set a target level for a short-term interest rate by standing ready to lend or
Suppose Russia’s inflation rate is 100 percent over one year but the inflation rate in Switzerland is only 5 percent. According to relative PPP, what should happen over the year to the Swiss
Discuss why it is often asserted that exporters suffer when their home currencies appreciate in real terms against foreign currencies and prosper when their home currencies depreciate in real terms.
Other things equal, how would you expect the following shifts to affect a currency’s real exchange rate against foreign currencies? a. The overall level of spending doesn’t change, but domestic
Large-scale wars typically bring a suspension of international trading and financial activities. Exchange rates lose much of their relevance under these conditions, but once the war is over,
In the late 1970s, Britain seemed to have struck it rich. Having developed its North Sea oil-producing fields in earlier years, Britain suddenly found its real income higher as a result of a dramatic
Explain how permanent shifts in national real money demand functions affect real and nominal exchange rates in the long run.
In Chapter 6, we discussed the effect of transfers between countries, such as the indemnity imposed on Germany after World War I. Use the theory developed in this chapter to discuss the mechanisms
A country imposes a tariff on imports from abroad. How does this action change the long-run real exchange rate between the home and foreign currencies? How is the long-run nominal exchange rate
Imagine that two identical countries have restricted imports to identical levels, but that one has done so using tariffs while the other has done so using quotas. After these policies are in place,
Explain how the nominal dollar/euro exchange rate would be affected (all else equal) by permanent changes in the expected rate of real depreciation of the dollar against the euro.
Can you suggest an event that would cause a country’s nominal interest rate to rise and its currency to appreciate simultaneously, in a world of perfectly flexible prices?

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