Questions and Answers of International Economics 5th

Explain why neighboring countries tend to trade extensively with each other.
Suppose that an economy produces three goods—raisins (R), soybeans (S), and textiles (T). What would its PPF look like under conditions of constant opportunity costs? What would it look like with
Using the following data, calculate the country’s nominal and real GDP levels: Case Ps (5) SP+ ($) T a 5 40 2 15 b 10 40 4 15 C 4 50 d 4 50 00 00 8 14 8 16
Using your calculations from Exercise 2, compare changes in nominal and real GDP between cases a and B. Explain your result.DATA FROM EXERCISES 22. Using the following data, calculate the country’s
Suppose the economy is characterized by constant opportunity costs so that PS/PT equals 2. Derive the economy’s national supply schedule. How does it differ from the one derived in Figure A2.1?
Suppose that in world markets the relative price of S is lower than country A’s autarky price. Would A be a net exporter or importer of S? What would be the case for good T in the country A in this
Derive country A’s national supply and demand curves for good T. Be careful how you label the axes!
If a country is at a point on its PPF where the slope of the PPF is flatter than the slope of the CIC touching that same point, then the standard of living would rise if outputs of the two goods
Suppose that country A produces two goods under conditions of constant opportunity costs. Given its resources, the maximum S that it can make is 700 units and the opportunity cost of making T is 2.
Suppose that a country produces two goods, X and Y, with two factors of production, K and L. The production of good X always requires more per unit than the production of good Y does. What does this
Suppose that a small, tropical country produces mangoes for domestic consumption and possibly for export. The national demand and supply curves for mangoes in this country are given by the
For each of the following cases below determine the following:(a) the pre-trade relative prices; (b) the direction of comparative advantage; and (c) the limits to the relative wage rate. Hours of
Show that if a country has a comparative advantage in good S, it has a comparative disadvantage in good T.
Suppose that there are 40,000 hours of labor available in country A. Ten hours of labor are required to produce 1 unit of S, while eight hours are required to produce 1 unit of T. Find the shape and
Use the information in Exercise 5 plus the following additional data to graph A’s trade triangle: world relative price = 3; A’s imports = 3,000; A’s exports = ?data from exercises 5Suppose that
Evaluate the following statements:a. Developed countries have nothing to gain by trading with developing countries.b. Developed countries get all the gains from trade when they trade with developing
Show that less than complete specialization in production leads to a lower level of welfare than complete specialization.
Suppose that the technologies available to A and B are given by the following table:Are there any incentives for trade in this example? Explain. 5 T A B 6 12 2 4
Consider two countries, A and B, with the technologies given by case 4 in Exercise 1.data from exercise 11. For each of the following cases below determine the following:(a) the pre trade relative
The classical model predicts that countries will completely specialize in the production of their comparative advantage good. Explain why the opportunity to engage in international trade would lead
Use a general equilibrium depiction of trade equilibrium in the HO model (e.g., either graph Figure 4.4) to prove that complete specialization in the production of exports will, in general, lower the
Some have argued that the factor price equalization theorem implies that U.S. wages must fall to the level of those found in the least developed countries of the world. Comment on the validity of
Consider the following data on the factor endowments of two countries, A and B:a. Which country is relatively capital abundant?b. Which country is relatively labor abundant?c. Suppose that good S is
Compare and contrast the classical and HO theories of the commodity composition of trade. Discuss differences in assumptions, posttrade production points, and the effects of trade on the distribution
Australia is land abundant, and India is labor abundant. Wheat is land intensive relative to textiles. Graphically demonstrate the pre trade and post trade equilibria between these two countries.
One of the important changes in the world economy over the past three decades has been the rapid increase in capital investment in the countries of the Pacific Basin (notably Japan and Korea). What
Explain carefully why the assumption of identical technology worldwide eliminates the classical basis for international trade.
Use the Rybczynski theorem to prove that the more dissimilar countries become in their factor endowments, the more likely it is for complete specialization to occur once trade begins.
Suppose that country A is capital abundant. It can produce two goods, X and Y. Good Y is labor intensive relative to good X. Derive A’s PPF and determine the pretrade relative price of Y in terms
The assumption (in the HO model) that the technology sets available to both the countries are identical implies that if factor prices are identical in the two countries, then exactly the same
Why were Leontief’s findings considered paradoxical? Explain.
Suppose that the following information represents the complete trade data for each country. Use these data and Equation 5.1 to calculate values of IIT for each country. Exports ($) Imports ($)
Discuss various reasons why we might expect countries to engage in intraindustry trade.
Explain carefully how Leontief went about testing the HO model. Why is this an incomplete test of the model?
Discuss the merits of the alternative reconciliations of Leontief ’s finding. Why do you think so much effort was expended in trying to reconcile Leontief ’s findings with the HO model?
How else might the HO model be tested? What would you expect to find if you were to test this proposition with real-world data? Would this result necessarily refute the model?
How do different relative endowments and intensities of skilled labor across countries help explain the Leontief paradox? Also, how does the product cycle model help explain the same paradox?
Would the Linder hypothesis provide a convincing explanation for the pattern of international trade in wheat? In coal? Explain why or why not.
Prove the following proposition: Free trade is better than no trade.
Prove the following: Some trade (trade with tariffs) is better than no trade.
Suppose that a country imposes a pure revenue tariff. Diagram the welfare effects of this tariff. How do these effects differ from the usual deadweight costs analyzed in the chapter?
The less elastic (i.e., the steeper) the domestic supply curve, the lower the production deadweight cost of any tariff. True or false? Demonstrate and explain.
The more elastic (i.e., the flatter) the domestic demand curve, the lower the consumption deadweight cost of any tariff. True or false? Demonstrate and explain.
The optimal tariff for a small country is zero. Prove this statement geometrically and then explain your results.
Prove that the more elastic demand and supply conditions are in a country that is large in world markets, the greater the ability of that country to impose an optimal tariff.
Prove that the more inelastic demand and supply conditions are in a foreign country, the greater the ability of a country that is large in world markets to impose an optimal tariff. Use this result
Suppose a country imposed a specific export tariff of $ton each unit of its exports of a certain product. Describe this situation graphically, and calculate the welfare cost of this policy.
Suppose that the domestic demand and supply for shoes in a small open economy are given by.where P denotes price and Q denotes quantity.a. What are the autarky price of shoes and the quantity
Suppose that prospective importing firms hire lobbyists to help them secure from government authorities the right to import quota-restricted items into a country. How much would importers as a group
Suppose that a country requires special inspections on all imported food but exempts domestic production from similar inspection. What effect would this have on imports, domestic production, prices,
Show graphically that a monopolist will charge a higher price and produce at a lower level of output with a quota protection than with a tariff protection that yields the same level of imports.
The United States has used quotas to protect its domestic sugar industry. What has been the likely impact of these quotas on the world price of sugar (relative to the price that would exist under
Is the optimum tariff argument a valid argument for protection?
Consider the example of airplane building and strategic trade policy described in the text. Suppose that the United States matched Europe’s export subsidy with a subsidy of 10 to Boeing. How would
The United States automakers have announced programs to build and market electric cars. Should the United States impose temporary protection on this product to guarantee U.S. commercial success? Why
Suppose that the domestic demand and supply for hats in a small open economy are given by.where Q denotes quantity and P denotes price.a. If the world price is 10, what is the free trade level of
According to the analysis in this chapter, VERs are a more costly form of protection than tariffs or other types of quotas. Why do countries choose to protect certain industries using this form of
Suppose that Macland protects its motorcycle industry with a quota that raises domestic prices by $$150$ per unit. If Macland’s government were to then impose a tariff of $$120$ per motorcycle,
Under what circumstances can commercial policy be an effective tool to solve world environmental problems? Under what circumstances will commercial policy be not very effective? In general, which set
Examine Figure 8.1 carefully. In what periods were U.S.tariffs high?When were they low? How do you explain these patterns? 0 1792 1798 1804 10 20 30 30 18103 1816 1822 1828 1834 1840 1846 40 50 50 70
Compare and contrast how the U.S. government handles antidumping and countervailing duty cases.
What is Section 301 of U.S. trade law? Describe how it works. Do you think it is likely to be very effective? Comment.
In 1988, Senator Ernest Hollings of South Carolina was quoted as saying that “going the 201 route is for suckers.” By this, he appeared to mean that American firms seeking protection from foreign
A former ITC commissioner, Alfred Eckes, has written, “In battling dumping, trade administrators not only help sustain political support for an open global trading system, but they also bring
The late Milton Friedman often wrote that instead of imposing countervailing duties on subsidized foreign goods, the United States should write a note of thanks to foreign taxpayers. Do you agree?
How likely is dumping to be predatory? Discuss.
Comment on the observation that the sign of a successful customs union is that world trade expands after it is formed.
Discuss the pros and cons of multilateral trade liberalization under the principle of unconditional MFN status versus the formation of regional trade arrangements.
Why was the formation of NAFTA so controversial in the The United States but much less so in Canada?
Why was the formation of NAFTA so controversial in the United States, while the formation of the Canada–U.S. FTA was little noticed by most Americans?
Which conditions are likely to lead to a trade-diverting customs union? To a trade-creating customs union?
What are the two commonly practiced types of preferential trade arrangements? Are such arrangements always beneficial to world welfare?
Consider the following data detailing the situation for Mac Land before and after it forms an FTA with Mex Land: Pre FTA Imports from Europe 110 million units Imports from Mex land 0 units. Post FTA
Compare and contrast the types of trade policy actions taken by governments that pursue import-substitution policies versus those that pursue outward-looking strategies.
Many Latin American countries have followed import-substitution policies. Many of these same countries have also experienced long periods of high inflation. Explain some of the possible linkages
Describe how import-substitution policies can encourage the escalation of tariffs by stages of processing.
Suppose that in country A the income elasticity of demand for good S is less than 1, and the income elasticity of demand for T is greater than 1. Suppose also that A exports good S and imports good
Compare the costs of an MNC operating in a foreign country with the costs of domestic firms operating in that country. Explain how an MNC can compete under these circumstances.
Suppose that A is a small open economy that takes world prices as given. What would be the effect on wages and rents in A if it were to experience an outflow of foreign capital? Use a diagram to
What is immizerizing growth? Do you think it is likely to occur in the real world? Explain.
Identify whether each of the following is a debit or a credit in the country of Freedonia’s BOP and indicate where the item would be classified.a. Freedonian firms export $$250$ million worth of
Consider each of the following events. For each, identify relevant, determine whether it is a debit or credit entry; and calculate the statistical discrepancy entry for the U.S. BOP table.a. Ford
Suppose that foreigners decided that financial investments in the United States were not a good idea. What would they do? What effect would these actions have on the value of the dollar and U.S.
Japan has run large current account surpluses for much of the past two decades, yet no one ever asks if these surpluses are sustainable. Why are surpluses treated differently than deficits?
Use the information in the following table on Switzerland’s international transactions to answer the following questions (amounts are millions of U.S. dollars):a. What is Switzerland’s balance of
Suppose that one euro costs 80¢ on January 1. Suppose that on March 1, one euro costs 75¢. What has happened to the value of the dollar (in terms of euros) over this period?
Using the information in Exercise 1, imagine that you are a purchasing agent for a domestic firm and you are thinking about buying goods from a European firm.DATA FROM EXERCISE 11. Suppose that one
Using Table 12.1, calculate the price of 1 Australian dollar in terms of Japanese yen on Friday October 7, 2011. Currency Name In U.S. Dollars In Foreign Currency Americas Argentina peso 0.2353
According to Table 12.1, were one-month interest rates higher in the United States or Canada on Friday October 7, 2011? How do you know? Currency Name In U.S. Dollars In Foreign Currency Americas
Suppose that the spot price of a euro is $$1.00,$ the one-year forward rate on euros is $$1.05,$ and the interest rate on 1-year euro-area deposits is 10 percent. What would the interest rate
Draw a figure such as Figure 12.1 to illustrate equilibrium for a particular currency in the foreign-exchange market. Now, show what would happen to the exchange rate (under flexible rates) and the
Consider the information presented here (all values are in US$):a. Let E denote the spot exchange rate and F denotes the one-month forward rate. Derive the formula that shows how F is determined in
You can analyze changes in foreign exchange rates by using supply and demand diagrams. Construct an example for the $$/£$ exchange rate wherein the dollar appreciates relative to the pound.
Over the past two centuries, there have been two extended periods of worldwide fixed exchange rates, the international gold standard and the Bretton Woods system. Compare and contrast these two
Suppose that we are in the early days of the Bretton Woods system, and France has declared a par value for the French franc at FF6 per dollar. The allowable fluctuation band is 1 percent on either
Suppose Switzerland is on the gold standard and it maintains a strict ratio of gold in its vaults to money (Swiss francs) in circulation. Suppose that it runs a balance of payments deficit.What will
List three factors relevant for a country’s choice of an exchange rate system. Using the United States as an example, explain how these factors may have affected U.S. policy regarding floating
The one-year interest rate on Swiss francs is 5 percent, and the dollar interest rate is 8 percent.a. If the current $$/SF$ spot rate is $$0.60$ and uncovered interest rate parity holds in the
Assume the three-month interest differential for Swiss francs minus British pounds is equal to -0.05 percent. The sixmonth interest differential is equal to -0.03 percent. Is the British pound
Suppose the term structure of interest rates is rising for the United States and falling for Japan. If this is all you know, what can you say about the expected change in the yen/dollar exchange rate?

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