Questions and Answers of Finance Applications And Theory

■■ Relate exchange rate changes to changes in the relative prices of countries’exports.
13. The international investment position of the European Union (28 countries) is negative of €2,557.4 billion in 2015, from €3,337.8 billion in 2014. The breakdown by country is as
12. 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
11. Return to the example in this chapter’s final Case Study of how a 10 percent dollar depreciation affects U.S. net foreign wealth (pp. 369–373). Show the size of the effect on foreigners’
9. Suppose the South Africa net foreign debt is 50 percent of its GDP and foreign assets and liabilities pay an interest rate of 6 percent per year. What would be the drain on SA GDP (as a
7. Do the data on the European Central Bank, which set up the official settlements balance for the Eurozone, give an accurate picture of the extent to which foreign central banks buy and sell euros
2. Equation (13-2) 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
■■ Relate the current account to changes in a country’s net foreign wealth.
■■ Describe the balance of payments accounts and explain their relationship to the current account balance.
■■ Apply national income accounting to the interaction of saving, investment, and net exports.
■■ Use the current account balance to extend national income accounting to open economies.
■■ Discuss the concept of the current account balance.
■■ Discuss key issues in the debate over trade policy and the environment.
■■ Discuss the role of the World Trade Organization (WTO) as a forum for resolving trade disputes and the tension between the rulings of the WTO and individual national interests.
■■ Evaluate the claims of the anti-globalization movement related to trade effects on workers, labor standards, and the environment in light of the counterarguments.
■■ Summarize the more sophisticated arguments for interventionist trade policy, especially those related to externalities and economies of scale.
■■ Summarize the basic ideas behind “economic dualism” and its relationship to international trade.
■■ Discuss the special issues raised by preferential trade agreements.
■■ Explain how international negotiations and agreements have promoted world trade.
■■ Relate the theory and evidence behind “political economy” views of trade policy.
■■ Evaluate national welfare arguments against free trade.
■■ Articulate arguments for free trade that go beyond the conventional gains from trade.
11. Suppose 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
10. If tariffs are already in place as a trade policy, why might a country choose to apply also nontariff barriers as another way to control the amount of trade that they conduct with other countries?
8. 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
■■ Discuss what export subsidies and agricultural subsidies are, and explain how they affect trade in agriculture in the United States and the European Union.
■■ Evaluate the costs and benefits of tariffs, their welfare effects, and winners and losers of tariff policies.
10. Consider the example of industries in problem 9. What would those choices imply for the extent of intra-firm trade across industries? That is, in what industries would a greater proportion of
■■ Understand theories that explain the existence of multinationals and the motivation for foreign direct investment across economies.
■■ Explain why economists believe that “dumping” should not be singled out as an unfair trade practice, and why the enforcement of antidumping laws leads to protectionism.
■■ Describe how economic integration can lead to both winners and losers among firms in the same industry.
■■ Recognize the new types of welfare gains from intra-industry trade.
■■ Understand how internal economies of scale and product differentiation lead to international trade and intra-industry trade.
■■ Discuss the roles of external economies and knowledge spillovers in shaping comparative advantage and international trade patterns.
■■ Discuss the sources of external economies.
■■ Understand the differences between internal and external economies of scale.
■■ Recognize why international trade often occurs from increasing returns to scale.
11. Explain the analogy between international borrowing and lending and ordinary international trade.
2. Due to overfishing, Norway becomes unable to catch the quantity of fish that it could in previous years. This change causes both a reduction in the potential quantity of fish that can be produced
■■ Relate international borrowing and lending to the standard trade model, where goods are exchanged over time.
■■ Understand the effects of tariffs and subsidies on trade patterns and the welfare of trading nations and on the distribution of income within countries.
■■ Recognize how changes in the terms of trade and economic growth affect the welfare of nations engaged in international trade.
1. Go back to the numerical example with no factor substitution that leads to the production possibility frontier in Figure 5-1.a. What is the range for the relative price of cloth such that the
■■ See how empirical patterns of trade and factor prices support some (but not all) of the predictions of the factor-proportions theory.
■■ Understand the possible links between increased trade and rising wage inequality in the developed world.
■■ Discuss why the gains from trade will not be equally spread even in the long run and identify the likely winners and losers.
■■ Explain how differences in resources generate a specific pattern of trade.
6. Using the numerical example in problem 5, assume now that Foreign limits immigration, so that only three workers can move there from Home. Calculate how the movement of these three workers affects
5. In Home and Foreign, there are two factors each of production, land, and labor used to produce only one good. The land supply in each country and the technology of production are exactly the same.
3. The marginal product of labor curves corresponding to the production functions in problem 2 are as follows:Workers Employed MPL in Sector 1 MPL in Sector 2 5 5.4 3.96 10 2.3 2.28 15 1.76 2.22 20
2. An economy can produce leather using labor and capital and wheat using labor and land. The total supply of labor is 50 units. Given the supply of capital, the outputs of the two goods depend on
■■ Explain the arguments in favor of free trade despite the existence of losers.
■■ Discuss the reasons why trade is a politically contentious issue.
■■ Understand the meaning of gains from trade when there are losers.
■■ Explain why trade will generate both winners and losers in the short run.
■■ Understand how a mobile factor will respond to price changes by moving across sectors.
9. International immobility of resources is compensated by the international flow of goods. Justify the statement?
8. Why do governments set the living standards of the people by setting the minimum wage? (Hint: Refer to your answer to problem 7.)
4. Suppose in an hour, 10 kg of rice and 5 meter of cloth is produced in India, and 5 kg and 2 meter in Thailand. Using opportunity costs, explain which country should export cloth and which should
■■ Describe the empirical evidence that wages reflect productivity and that trade patterns reflect relative productivity.
■■ Demonstrate gains from trade and refute common fallacies about international trade.
■■ Explain how the Ricardian model, the most basic model of international trade, works and how it illustrates the principle of comparative advantage
3. Equation (2.1) says that trade between any two countries is proportional to the product of their GDPs. Does this mean that if the GDP of every country in the world doubled, world trade would
1. The gravity model is often used to not only explain trade between two countries, but also to investigate the reasons why they don’t. Illustrate this anomaly with suitable examples and reasons.
■■ Explain how the mix of goods and services that are traded internationally has changed over time.
■■ Describe how the share of international production that is traded has fluctuated over time and why there have been two ages of globalization.
■■ Discuss how distance and borders reduce trade.
■■ Describe how the value of trade between any two countries depends on the size of these countries’ economies and explain the reasons for that relationship.
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