Questions and Answers of International Economics 5th

What is the mixture of monetary and fiscal policies that can cure each of the following imbalances?a. Rising inflation and overall payments deficit (e.g., point H in Figure 23.12).b. Rising inflation
The United States has had a trade deficit every year since 1980. Why does the United States have this trade deficit? Why did it become very large in the mid-1980s and again starting in the late
Floating exchange rates allow a country to achieve external balance while maintaining control over its money supply and monetary policy.But floating exchange rates are also highly variable, more
“Overshooting is the basis for the enhanced effectiveness of monetary policy under floating exchange rates.” Do you agree or disagree? Why?
“A drop in the foreign demand for our exports has a larger effect on our domestic product and income under floating exchange rates than it would under fixed exchange rates.”Do you agree or
A country has a rising inflation rate and a tendency for its overall payments to go into deficit. Will the resulting exchange-rate change move the country closer to or further from internal balance?
In the late 1980s, the United States had a large government budget deficit and a large current account deficit. The dollar was floating. One approach suggested to reduce both of these deficits was a
A country initially has achieved both external balance and internal balance.International financial capital is highly but not perfectly mobile, so the country’s FE curve is upward sloping and
A country initially has achieved both external balance and internal balance. The country prohibits international financial capital inflows and outflows, so its financial account (excluding official
Each of the following indicates a series of foreign exchange interventions by the monetary authority of a country. For each, do you think that the authority effectively made a profit or not?a. The
The exchange rates between the world’s major currencies are floating. Each major country in the world is using its monetary policy to attempt to improve the country’s international price
Case Study What Role for Gold?Gold was at the center of the international monetary system during the gold standard.Individuals had the right to obtain or sell gold (in exchange for national currency)
“Countries whose currencies are linked to each other through fixed exchange rates usually should pursue very different monetary and fiscal policies.” Do you agree or disagree? Why?
“If most countries adhered to a system of fixed exchange rates, global inflation would be lower.” Do you agree or disagree? Why?
A country is worried that business cycles in other countries tend to disrupt its own economy. It would like some “insulation” from foreign business cycles. Why would this country favor having a
“If a country’s government decides to have a flexible exchange rate, then it should have a clean float.” Do you agree or disagree? Why?
A country now has a floating exchange rate. Its government would like to fix the exchange-rate value of its currency to another currency. You have been hired as an advisor to the country’s
The variability of floating exchange rates since 1973 has been higher than most economists expected.a. Why are some economists not concerned about this?b. Why are other economists quite worried about
A new government has been elected in a country that now has a high inflation rate and a floating exchange rate. The new government is committed to reducing the country’s inflation rate.a. If the
What is a currency board? Is having a fixed exchange rate with a currency board that defends the fixed rate better for a country than having a fixed exchange rate and a standard central bank that
What is dollarization? Is dollarization better for a country than having a fixed exchange rate and a standard central bank that defends the fixed rate?
According to the Maastricht Treaty, what are the five convergence criteria for an EU country to be allowed to join the European Monetary Union? What logic do you see for having each as a requirement?
The time is 2015. After the end of the worst of the euro crisis in 2012, the European Monetary Union and the euro have worked reasonably well. Britain has remained outside. You are attempting to
Consider the same scenario in the previous question. Your British friend is trying to convince you that Britain should stay out of the monetary union. What are her two strongest arguments?
To understand stories about how trade works, it is useful to know some of the key facts about trade. A good start is a broad overview of the products traded and trade’s growing importance.How large
What is consumer surplus? Using real-world data, what information would you need to measure consumer surplus for a product?
How can a country’s supply and demand curves for a product be used to determine the country’s demand-for-imports curve? What does the demand-for-imports curve mean?
A tropical country can produce winter coats, but there is no domestic demand for these coats. Explain how this country can gain from free trade in winter coats.
The United States exports a substantial amount of scrap iron and steel to Turkey, China, Canada, and other countries. Why do some U.S. users of scrap iron and steel support a prohibition on these
Explain what is wrong with the following statement: “Trade is self-eliminating.Opening up trade opportunities drives prices and costs into equality between countries.But once prices and costs are
In 2012, the United States imported about 3.1 billion barrels of oil. Perhaps it would be better for the United States if it could end the billions of dollars of payments to foreigners by not
Consider Figure 2.3, which shows free trade in motorbikes. Assume that consumers in the United States shift their tastes in favor of motorbikes. What is the effect on the U.S. domestic demand and/or
Consider a two-country world. Each country has an upward-sloping national supply curve for raisins and a downward-sloping national demand curve for raisins. With no trade in raisins, the no-trade
Consider a world in which everyone agrees that changes in consumers’ well-being are more important than changes in producers’ well-being in analyzing the effects of free trade in furniture. (This
The equation for the demand curve for writing paper in Belgium is Q D = 350 - ( P /2) [or P =700 - 2 Q D ]The equation for the supply curve for writing paper in Belgium is Q S = 220+ 5 P [or P = 40 +
Mercantilism was the philosophy that guided European thinking about international trade in the several centuries before Adam Smith published his Wealth of Nation s in 1776. Mercantilists viewed
“Mercantilism recommends that a country should limit its exports, so that more of the otherwise-exportable products are instead available for local consumption.”Do you agree or disagree with this
Consider the numerical example that we used to demonstrate the thinking of Adam Smith (page 34). Assume that there is now no international trade. You are the first person to notice the differences
You are given the information shown in the table about production relationships in Pugelovia and the rest of the world.You make several Ricardian assumptions: These are the only two commodities,
The real wage is the purchasing power of one hour of labor. That is, for each product it is the number of units of the product that a worker can buy with his earnings from one hour of work. In a
Consider the international trade shown in Figure 3.1. Suppose that the equilibrium international cloth price is 1.2 W/C, instead of 1 W/C. At the equilibrium international price of 1.2 W/C, does the
“Mercantilism recommends that a country should limit its exports, so that more of the otherwise-exportable products are instead available for local consumption.”Do you agree or disagree with this
“According to the Heckscher–Ohlin theory, two countries that have the same production technologies for the various products that they produce are unlikely to trade much with each other.” Do you
“For a world in which international trade would be based only on the differences featured in the Heckscher–Ohlin theory, the shift from no trade to free trade is like a zerosum game.” Do you
The country of Pugelovia has an endowment (total supply) of 20 units of labor and 3 units of land, whereas the rest of the world has 80 units of labor and 7 units of land. Is Pugelovia
In your answer to this question, use a diagram like Figure 4.3, making it large enough so that you can see the curves and quantities clearly. The no-trade point is as shown in Figure 4.3, a price
The country of Puglia produces and consumes two products, pasta (P) and togas (T), with increasing marginal opportunity costs of producing more of either product. With no international trade the
Consider Figure 4.4A. According to the logic of the Heckscher–Ohlin theory, why is the shape of the U.S. production-possibility curve different from the shape of the production-possibility curve
Extending what you know about production-possibility curves, try to draw the ppc for a nation consisting of four individuals who work separately. The four individuals have these different
The world consists of two countries. One country (call it Hiland) has a strong legal system for contract enforcement, and the other country (call it Loland) has a legal system in which enforcement of
What we now know about the mixtures of productive factors that make up the exports and imports of leading nations has been learned largely because Wassily Leontief was puzzled in the 1950s.Leontief,
A s a result of the North American Free Trade Agreement (NAFTA), the United States and Canada shifted toward free trade with Mexico. According to the Stolper–Samuelson theorem, how is this shift
“Opening up free trade does hurt people in import-competing industries in the short run. But in the long run, when people and resources can move between industries, everybody ends up gaining from
The empirical results that Leontief found in his tests are viewed as a paradox. Why?
In shipbuilding there are two types of ships. Producing basic bulk-carrying ships is labor intensive. Production of complex ships, including the largest container ships and very deepwater
Indian exports of computer software development services have grown rapidly since the early 2000s. In the early 2000s the cost to employ programmers in India was about half the cost of programmers
In the long run in a perfectly competitive industry, price equals marginal cost and firms earn no economic profits. The following two equations describe this longrun situation for prices and costs,
From the following information calculate the total input shares of labor and capital in each dollar of cloth output:Cloth is the only product that this country exports. The total input share of labor
Consider the following data on some of Japan’s exports and imports in 2012, measured in billions of U.S. dollars:For which of these products do Japan’s exports and imports appear to be consistent
“According to the Heckscher–Ohlin theory, countries should engage in a lot of intraindustry trade.” Do you agree or disagree? Why?
“External scale economies are an influence on the pattern of international trade because they affect the number of varieties of a product that are produced in a country.” Do you agree or
A monopolistically competitive industry exists in both Pugelovia and the rest of the world, but there has been no trade in this type of product. Trade in this type of product is now opened.a. Explain
The global market for household dishwashers is monopolistically competitive. It is initially in a free-trade equilibrium, with 40 models offered, and a price of $600 for a typical dishwasher. In your
Here are data on Japanese exports and imports, for 2012, for the same seven products shown for U.S. trade in Figure 6.2:a. For each product for Japan, calculate the IIT share.b. The weighted average
There are a small number of firms that make electric railroad locomotives. In 2012 world exports of electric railroad locomotives (SITC revision 3 number 79111) totaled about $$1$ billion. Germany
Production of a good is characterized by external scale economies. Currently there is no trade in the product, and the product is produced in two countries. If trade is opened in this product, all
Which type of growth will most likely lead to a decline in the nation’s welfare? What is meant by immiserizing growth? Which type of growth will most likely lead to an increase in the nation’s
Compare and contrast quotas and tariffs.
Give examples of the relationship between income levels and environmental and labor problems.
Define labor standards.
State four potential problems with using trade sanctions to enforce labor standards.
Compare and contrast transboundary and nontransboundary environmental problems.
A company from a high-labor-standards country, like Sweden, wants to open a plant in a low-labor-standards country, like Pakistan, and it is required by law to adhere to the same labor standards as
Use the following information to answer the questions below. Assume that the capital account is equal to 1,000.a. Is there a surplus or a deficit in the trade balance?b. What is the current account
Define the current, capital, and financial accounts of a country’s balance of payments.
Explain the importance of the three main components of the current account.
Describe three types of international capital flows.
Use a simple algebraic model to relate the current account to savings, investment, and the general government budget balance.
According to this chapter, “monthly merchandise trade balance statistics through press releases and news articles makes it the most familiar concept in international economics.” Briefly explain.
Show the relationship between a country’s balance of payments and its international investment position.
List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.
Draw a graph of the supply and demand for the American dollar in the Australian market. Diagram the effect of each of the following on the exchange rate; state in words whether the effect is long,
Diagram the effects on the home currency of a change in supply or demand for foreign currency.
If the USD/EUR exchange rate is 1.16, and the USD/CAD exchange rate is 0.81, what is the EUR/CAD exchange rate?
Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.
If the USD/AUD exchange rate is 0.75, and inflation has been 6 percent in the United States and 3 percent in Australia (since the base year), what is the real exchange rate? Has the USD appreciated
State the three rules of the gold standard.
Compare and contrast hard pegs, crawling pegs, and flexible exchange rate systems.
If European investors buy more American assets and convert euros to dollars, is the dollar undervalued or overvalued? Explain.
Explain in words and with an equation the relationship between price changes and the real exchange rate.
State the necessary conditions for two or more countries to form a successful single currency area.
In 1981, six Eastern Caribbean countries (Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia and St. Vincent, and the Grenadines) and two United Kingdom Overseas Territories
According to the World Bank data, in 2020, Indonesia’s interest rate was 10.05 percent, while in India, it was 4.38 percent.a. Would you expect the Indonesian rupiah to appreciate or depreciate
Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP.
Using aggregate demand and aggregate supply, graph the effects on the price level and GDP of each of the following:a. A rise in income taxesb. A decrease in government spendingc. A rise in export
Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.
Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.
Explain how expenditure switching and expenditure reducing policies can be used to reduce a current account deficit.
Draw a J-curve and use it to show how exchange rate depreciation does not lead to an immediate reduction in the current account deficit.
According to Eurostat, in 2020, the European Union had a current account surplus of €349 million, corresponding to 2.6 percent of GDP. What are the main policies that the European Union might take

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