Questions and Answers of International Economics Theory

Suppose demand and supply are exactly as described in Problem 3, but there is no marginal social benefit to production. However, for political reasons, the government counts a dollar’s worth of
Distinguish between international and domestic economic issues.
Explain why seven themes recur in international economics and discuss their significance.
Distinguish between the trade and monetary aspects of international economics.
The gravity model is often used not only to explain trade between two countries but also to investigate the reasons why they don’t. Illustrate this anomaly with suitable examples and reasons.
Ireland and Belgium have very similar trading patterns. Both trade considerably more with the United States than with the European Union (EU), even though they are EU members and are closer to the EU
Suppose in an hour, India and Thailand produce two products—rice and cloth.India produces 10 kgs of rice and 5 meters of cloth, and Thailand produces 5 kgs of rice and 2 meters of cloth. Using
Suppose Mike and Johnson produce two products—hamburgers and T-shirts.Mike produces 10 hamburgers or 3 T-shirts a day, and Johnson produces 7 hamburgers or 4 T-shirts. Assuming they can devote time
In China, local governments are responsible for setting the minimum wages. In the United States, a network of federal laws, state laws, and local laws set the minimum wages. How can this be
Why do governments set the living standards of the people by setting the minimum wage?
Why would a country opt for free trade when some workers remain unemployed in the import-competing sector? Given the real wage rate in Thailand is higher than that in Bangladesh, how would
In the United States, where Internet services are cheap, the ratio of capital to labor used is higher than that of capital used in accounting services. But in other countries, where Internet services
Most U.S. immigrants are represented by Mexican blue-collar workers that are more likely to work in risky jobs than U.S.-born workers with positive effect on productivity. Limiting immigration is a
Offshore accounting services, especially to India, are becoming an increasingly attractive option for many U.S. companies. This shift has led to huge startup and communication costs, and the
Will free trade and perfect competition lead to an equalization of wage rate internationally?Explain. Why would the wage rate greatly vary between developed and developing countries, in the same
Assume Indonesia and China are trading partners. Indonesia initially exports palm oil to and imports lubricants from China. Using the standard trade model, explain how an increase in the relative
The Netherlands primarily exports agricultural products, while importing raw materials such as natural gas, metal ores, and grains. Analyze the impact of the following events on the Netherland’s
Access to adequate food is the primary concern for most countries; thus, agriculture is one of the most important industries in the world. The security and health of population has lowered the price
Singapore and Korea are somewhat similar in adopting eco-innovation policies:both are highly innovative economies, with similar patterns of comparative advantage in producing eco-friendly goods and
Which of the following countries would you expect to have intertemporal production possibilities, biased toward current consumption goods, and which would be biased toward future consumption goods?a.
For each of the following examples, explain whether it is a case of external or internal economies of scale:a. Almost all Hermes products are manufactured in France.b. Apple has its displays mainly
Evaluate the relative importance of economies of scale and comparative advantage in causing the following:a. Most of the world’s gold is produced in South Africa or Tanzania.b. Half of the
Which of the following are foreign direct investments?a. A Chinese company pays $6.49 million for a stake in the Hilton.b. A Russian businessman buys $44 billion on FOREX.c. An American company buys
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
Home’s demand curve for books is D = 50 - 10P.Its supply curve is S = 10 + 10P.Derive and graph Home’s import demand schedule. What would the price of books be in the absence of trade?
Now add Foreign, which has a demand curve D* = 60 - 10P and a supply curve S* = 20 + 10P.a. Derive and graph Foreign’s export supply curve and find the price of books that would prevail in Foreign
Home imposes a specific tariff of 1.5 on books imports.a. Determine and graph the effects of the tariff on the following: (1) the price of books in each country; (2) the quantity of books supplied
Suppose Foreign had been a much smaller country with domestic demand.D* = 8 - 2P, S* = 4 + 2P.Recalculate the free trade equilibrium and the effects of a 1.5 specific tariff by Home.Relate the
For a company that produces candy canes, sugar is 70 percent of its ingredient costs.The United States limits the imports of sugar to protect cane farmers, which has led to an increase in the price
Return to the example of Problem 2. Starting from free trade, assume that Foreign offers exporters a subsidy of 1.5 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. “Tariffs on imported goods will increase domestic price, leading to high unemployment.”b. “High tariffs and
The nation of Cologne is “large,” but unable to affect world prices. It imports chocolate at the price of $20 per box. The demand curve is:D = 700 - 10P.The supply curve is S = 200 + 5P.Determine
If tariffs are already in place as a trade policy, why might a country choose to apply nontariff barriers also as another way to control the amount of trade that they conduct with other countries?
Which of the following are potentially valid arguments for tariffs or export subsidies, and which are not? Explain your answers.a. “Dairy producers earning in Wales are at their lowest peak despite
A small country can import a good at a world price of 5 per unit. The domestic supply curve of the good is S = 10 + 10P.The demand curve is D = 600 - 5P.In addition, each unit of production yields a
“China gives its aluminum industry an unfair advantage through underpriced loans and other illegal government subsidies. These kinds of policies have disadvantaged American manufacturers and
Norway banned the imports of agricultural biotech products and developed extremely restrictive policies for crops derived from agricultural biotech, which are not related to the protection of health,
Why do you think the problems with the infant industry argument are criticized by many economists? Explain why the example of Asian countries creates controversies in this matter.
Country A currently imports solar panels at $30,000 each. The government is using only 10 percent of the program as domestic content, exporting clean energy to neighboring countries. Country B
From Figure 11-3, we observe that South Korea, China, and India experienced major changes in their economic policies during the 1960s. What would account for the differences in their development
It’s widely believed that space exploration will become commonplace in the near future and that there will be huge strides in satellite use. Does this mean that the United States should have
Many European policy analysts criticize the European Union and its member states for heavily subsidizing basic research. Instead, they say that applied research should be encouraged to generate
Some retailers in developing countries sell products from developed countries with high wages, but assure customers that these goods are produced under high standards of quality. Is demanding that
Explain how each of the following transactions generates two entries—a credit and a debit—in the Japanese balance of payments accounts, and describe how each entry would be classified:a. A
A Mexican travels to Brazil to buy a gemstone which costs 3,000 Real (Brazilian currency). The Brazilian company that sells the gemstone then deposits the 3,000 Real in its account in a Panama bank.
The nation of Pecunia had a current account deficit of $1 billion and a nonreserve financial account surplus of $500 million in 2021.a. What was the balance of payments of Pecunia in that year? What
In 2015, in the balance of payment of Switzerland, the labor income in the primary income balance shows a deficit of 21 billion CHF (Swiss Franc), which represents almost 30 percent of the net
Go to the BEA website at http://www.bea.gov/iTable/iTable.cfm?reqid=62&step=1&isuri=1#reqid=62&step=6&isuri=1&6210=5&6200=143 and download annual data starting in 1976 on the U.S. end-of-year
In Delhi, a haircut costs 135 rupees (INR). The same haircut costs 15 Singapore dollars (SGD) in Singapore. At an exchange rate of 50 INR per SGD, what is the price of an Indian haircut in terms of a
Petroleum is sold in a world market and tends to be priced in U.S. dollars. The Phosphate Group of Morocco must import petroleum to produce fertilizer and other chemicals. How are its profits
Calculate the euro rates of return on the following assets:a. A painting whose price rises from €200,000 to €250,000 in a year.b. A diamond whose price rises from €20 000 to €21 000 between
Suppose the Mexican peso (MXN) interest rate and the Indian rupee (INR) interest rate are the same, 5 percent per year. What is the relation between the current equilibrium MXN/INR exchange rate and
A report appeared in the Financial Times on 18 January, 2016, noted that the South Korean Finance Minister had voiced confidence in China’s economic outlook, and had declared that “he endorsed
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
The central bank of a country announces it would play a less active role in limiting fluctuations in its currency interest rates. Do you think that the exchange rate of its currency will become more
Take the two currencies—South African Rand (ZAR) and Indonesia Naira(NGN). Suppose the one-year forward exchange rate is 23 NGN per ZAR and the spot exchange rate is 20 NGN per ZAR. What is the
In the beginning of 2015, the interest rate of some currencies are the following:a. What are in theory the best carry trade cases?b. If you take in account the exchange rate variation risk, what
Between 1980 and 2005, Ghana experienced some periods of high inflation and periods of less high inflation. Some key macroeconomic data on the evolution of economic and financial variables are listed
How might a zero interest rate complicate the task of monetary policy?
The West African CFA franc is the currency used by eight independent states in West Africa—Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal, and Togo, which form a monetary
The Eurozone was created in 1999 with countries including Austria, Belgium, France, Germany, and Ireland. New participant countries have joined since—Slovenia(2007), Cyprus (2008), Malta (2008),
The following chart shows the numbers on the average nominal rate (NER) and real exchange rate (REER) of the Japanese Yen against several foreign currencies(such average index numbers are called real
Suppose the expected real interest rate in Hong Kong is 5 percent per year while that in Singapore is 2 percent per year. What do you expect to happen to the real HK$/SNG exchange rate over the next
In 2006, an ECB report stated that despite an overall increase in euro area long term bond yields, the euro area yield curve flattened during the year. This is mirrored in the decline of the “term
Between 2002 and 2004, when the 1-year interest rate in the euro zone was 120 basis points higher than the U.S. rate, on an average, economists expected a depreciation of the euro based on the
Suppose residents of the Euro area consume relatively more of Eurozone countries’export goods than residents of foreign countries. In other words, Eurozone countries export goods have a higher
In 2015, the Canadian government intended to adopt a balance budget act requiring the government to maintain a balanced budget at all times. Hence, if the government wishes to change government
What does the Marshall-Lerner condition look like if the country whose real exchange rate changes does not start out with a current account of zero? (The Marshall-Lerner condition is derived in
In November 2015, the Government of India formulated a policy for according preference to the government procurement of electronic goods that are manufactured domestically.According to the news
To control the money supply and prevent inflation, the People’s Bank of China(PBC), which is confronted with a permanent current account and capital account surpluses, uses mostly two tools to
Recall our discussion of the Swiss franc’s currency floor in the Case Study on“Can Markets Attack a Strong Currency? The Case of Switzerland.” Also, recall the discussion of the liquidity trap
The chapter suggested that the developing world recovered more robustly from the financial crisis of 2007–2009 than the industrial world. Using the World Outlook Economic databases (can be accessed
Suppose that some central banks sell large amounts of their reserves in U.S. dollars on the foreign exchange market to buy an equivalent amount of Euro. Is this action equivalent to a sterilized sale
After the global financial crisis, the central banks that fall within the framework of the Bank of International Settlement (BIS) set up the “Basel III” agreement in 2010. This new agreement
In their article (and the book) “This Time is Different,” Carmen M. Reinhart and Kenneth S. Rogoff asserted the view that both countries and creditors do learn from their mistakes, and due to
The reforms introduced in the banking system after the financial crisis of 2007–2009 have sometimes been criticized by federation of bankers, who warned that requiring banks to hold more capital
Several multilateral or regional development banks have been created since World War II. The last born is the Asian Infrastructure Investment Bank (AIIB) created effectively in January 2016. It
Figure 5.1 shows that since 1990, business cycles in the U.S. economy have had long recovery and relatively short recession phases. Why do you think this has happened? Do you think this pattern is
What is the basic purpose of the Federal Reserve system? How is it organized functionally and geographically?
What is meant by a direct and an inverse relationship between economic variables? Illustrate, using the accompanying graphs, how you think each of the following relationships would appear, and
Define the three major goals and the three major problems of the macroeconomy. What is the significance of the Employment Act of 1946 with regard to these goals and problems?
What is the difference between income-determined spending and nonincomedetermined appending? What are the different types of nonincome-determined spending?Why are all nonincome-determined
Could the national debt be eliminated over the next 10 years? How? What are the opportunity costs of paying off the debt and not paying it off?
Assume that you are a congressperson whose district may be awarded a multimilliondollar rapid transit project. The economy, however, is in the throes of one of the more severe inflationary periods of
How much is a $20 bill worth? How is its value measured, and what causes its value to change?
List and briefly describe the functions of a Federal Reserve bank.
The First National Bank of Anytown had $50,000,000 in its reserve account at the Fed one morning. Later that morning, $2,500,000 in checks that had been deposited at the Bank of Anytown were
Define each of the following terms and explain how each has affected the financial institutions system in recent years.a. Branch bankingb. Interstate bankingc. Mutual fundsd. Financial holding
Explain the changes brought to banking and the significance of the following pieces of legislation: the Monetary Control Act of 1980, the Gramm-Leach-Bliley Act, and Dodd-Frank.
Go to www.FederalReserve.gov and locate the name and a brief biography of each current member of the Board of Governors of the Federal Reserve system. What type of experience does each bring to the
What is your position on a law that would place the Federal Reserve under the direct control of the president of the United States and that would allow each new president to completely replace the
The Gramm-Leach-Bliley Act radically changed banking rules and the banking field that had been in place for over sixty years. In your opinion, did this abrupt change contribute to the financial
Some people believe that taxpayers should not have footed the bill for the savings and loan crisis and bailout of large financial institutions in 2008, and that the government should not insure
Locate information on two or three different mutual funds and explain how they differ from one another in terms of what is included in each fund, risk, and income growth potential.
If you had the power to reset the rules for financial institutions, would you change them?What would you change?
Assuming that the supply of money in the economy is $3.2 trillion and velocity is 5, answer questions a through d.a. What is the dollar value of output produced in the economy?b. What would happen to
What is the difference among a bank's actual reserves, required reserves, and excess reserves? How is each determined?
If a bank has $30,000,000 in demand deposits, a 15 percent reserve requirement, and$5,200,000 in actual reserves, what are its required and excess reserves, and how much in new loans could it make?
What is the money multiplier, and how is it related to the reserve requirement? If the Federal Reserve increases excess reserves in the system by $180 million with a reserve requirement of 12
Assume that the reserve requirement is 12.5 percent and that $500,000 is added to Hometown Bank’s excess reserves as a result of the change in Federal Reserve policy.a. How much in new loans can

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