Questions and Answers of International Economics 5th

9. Assume that initially the IS curve is given by IS1:Y=22-1.5T-30i+2G and that the price level P is 1, and the LM curve is given by LM1:M=Y(1-i)The home central bank uses the interest rate as its
4. How would a decrease in the money supply of Paraguay (currency unit: the guaraní) affect its own output and its exchange rate with Brazil (currency unit: the real). Do you think this policy in
1. Discovering Data In this chapter we discussed the weak link between the real exchange rate and the trade balance. We looked at a time series diagram showing these two variables for the United
13. Consider a world of two countries: Highland (H) and Lowland (L). Each country has an average output of 9 and desires to smooth consumption. All income takes the form of capital income and is
8. This question continues from the previous problem, focusing on how risk premiums explain the gaps in living standards across countries.a. Investors worry about the rule of law in Turkey and also
6. Using production function and MPK diagrams, answer the following questions.For simplicity, assume there are two countries: a poor country (with low living?
4. In this question assume all dollar units are real dollars in billions; for example,$150 means $150 billion. It is year 0. Argentina thinks it can find $150 of domestic investment projects with a
3. How can countries use the balance of payments to better diversify against risk?
2. How can countries use the balance of payments to make more efficient investments?
1. How can countries use the balance of payments to make consumption smoother?
8. Consider the economy of Opulenza. In Opulenza, domestic investment of $400 million earned $15 million in capital gains during 2009. Opulenzans purchased$160 million in new foreign assets during
4. Show how each of the following would affect the U.S. balance of payments.Include a description of the debit and credit items, and in each case identify which specific account is affected (e.g.,
3. Note the following accounting identity for gross national income (GNI):
6. In the late 1990s, several East Asian countries used limited flexibility or currency pegs in managing their exchange rates relative to the U.S. dollar. This question considers how different
5. This question considers how the FX market will respond to changes in monetary policy in South Korea. For these questions, define the exchange rate as South Korean won per Japanese yen, Ewon/¥.
4. Use the money market and FX diagrams to answer the following questions. This question considers the relationship between the euro (€) and the U.S. dollar ($).The exchange rate is in U.S. dollars
1. Discovering Data In this question we will be testing an assumption of our model of exchange rate determination. In particular, you will be showing that the PPP assumption often fails in the short
9. Both advanced economics and developing countries have experienced a decrease in inflation since the 1980s (see Table 14-3 in the text). This question considers how the choice of policy regime has
8. This question uses the general monetary model, where Lis no longer assumed constant, and money demand is inversely related to the nominal interest rate.Consider the same scenario described at the
5. Table 14-1 in the text shows the percentage undervaluation or overvaluation in the Big Mac, based on exchange rates in January 2016. The table that follows shows the local currency price as well
4. Use the table that follows to answer this question. Treat the country listed as the home country, and treat the United States as the foreign country. Suppose the cost of the market basket in the
5. Describe the different ways in which the government may intervene in the forex market. Why does the government have the ability to intervene in this way, while private actors do not?
4. Go back to the FRED website: http://research.stlouisfed.org/fred2/. Locate the monthly exchange rate data for the following:a. Canada (dollar), 1980–2012b. China (yuan), 1999–2004, 2005–09,
3. Consider the United States and the countries it trades with the most (measured in trade volume): Canada, Mexico, China, and Japan. For simplicity, assume these four are the only countries with
2. Refer to the exchange rates given in the following table:Based on the table provided, answer the following questions:a. Compute the U.S. dollar–yen exchange rate E$/C$ and the U.S.
1. Discovering Data Not all pegs are created equal! In this question you will explore trends in exchange rates. Go to the St. Louis Federal Reserve’s Economic Data (FRED) website at
5. Visit one of the many websites that list all of the current exchange rates between different currencies around the world. Try a financial newspaper’s site such as ft.com (follow the links to
4. The charts below show the growth of real GDP per capita in three pairs of geographically adjacent countries: North and South Korea, Argentina and Chile, Zimbabwe and Botswana (using data from the
2. The data in Figure 12-1 end in 2015. Visit https://research.stlouisfed.org/fred2/series/DEXCHUS and https://research.stlouisfed.org/fred2/series/DEXUSEU (or another site with daily exchange rate
3. How do government policy choices affect macroeconomic outcomes?6
2. Why do countries borrow from and lend to each other and with what effects?56
1. Why do exchange rates matter and what explains their behavior?5
9. Refer to following variations of the payoff matrix for the environmental game shown in Figure 11-7. In this problem, a number is assigned to represent the welfare level of each outcome for Home
8. Refer to Figure 11-4 when answering this question.a. Redraw Figure 11-4, panel (a), assuming that the production externality is positive so that the SMC curve lies below the supply curve. Label
7. Using Table 11-3, explain why environmentalists have “lost the battle but won the war” in their dealings with the WTO. Refer to specific WTO cases in your answer.
6. Refer to the survey in Table 11-2 regarding consumers’ attitudes toward working conditions.a. Fill in the survey questions for yourself and at least five friends.b. Average your results, and
5. Redraw the graph of trade diversion (Figure 11-3) with the S9Mex curve intersecting the MUS curve between points A and D.
4. Assume that Thailand and India are potential trading partners of China. Thailand is a member of ASEAN but India is not. Suppose the import price of textiles from India (PIndia) is 50 per unit
3. Figure 11-2 shows the tariff game between Home and Foreign, both large countries.a. Redraw the payoff matrix for a game between a large and small country.b. What is/are the Nash
2.a. How is a customs union different from a free-trade area? Provide examples of each.b. Why do some economists prefer multilateral trade agreements over regional trade agreements?
1. Discovering Data In Application: The Trans-Pacific Partnership, we summarized some of the provisions of TPP and the views of consumer and environmental groups. The text of the TPP agreement is
3. Does international trade help or harm the environment?
2. Do all countries gain when a regional free-trade area is formed?
1. Why is the World Trade Organization needed?
12. Who gains and who loses when governments in Europe and the United States provide subsidies to Airbus and Boeing?13. Provide reasons for countries to use export subsidies. Does your answer depend
11. To improve national welfare, a large country would do better to implement an export subsidy rather than an import tariff. Is this true or false? Explain why.
10. Refer to Problem 9. Based on your answer there, would foreign countries have a reason to object to the use of a sales tax on cigarettes by the United States? Based on your knowledge of the
9. Here we examine the effects of domestic sales taxes on the market for exports, as an example of the “targeting principle.” For example, in the domestic market, there are heavy taxes on the
8. Refer to Problem 7. Now suppose the European government wants Airbus to be the sole producer in the lucrative small-aircraft market. Then answer the following:a. What is the minimum amount of
7. Boeing and Airbus are the world’s only major producers of large wide-bodied aircrafts. But the increasing cost of fuel and the changing demand in the airline industry increases the need for
6. Explain why the WTO is more concerned with the use of direct export subsidies than production subsidies in achieving the same level of domestic support.
5. Refer to Problem 3. Suppose Home is a small exporter of wheat. At the world price of $100 per ton, Home growers export 20 tons. But rather than an export subsidy, suppose the Home government
4. Refer to Problem 3. Rather than a small exporter of wheat, suppose that Home is a large country. Continue to assume that the free-trade world price is $100 per ton and that the Home government
3. Suppose Home is a small exporter of wheat. At the world price of $100 per ton, Home growers export 20 tons. Now suppose the Home government decides to support its domestic producer with an export
2. Describe the impact of each of the following goals from the Hong Kong WTO meeting on (i) domestic prices and welfare of the country taking the action and (ii)world prices and welfare for the
1. Discovering Data In Figure 10-8 we showed the value of Chinese exports of rare earth minerals, along with their average price and quantity sold, in three categories of exports. The source for the
3. Why do countries subsidize their high-tech exports?69
2. Can countries control the export of their rare natural resources?85
1. Why do wealthy countries subsidize their farmers?63
8. Suppose the Home firm is considering whether to enter the Foreign market.Assume that the Home firm has the following costs and demand:
7. Consider the case of a Foreign monopoly with no Home production, shown in Figure 9-7. Starting from free trade at point A, consider a $5 tariff applied by the Home government.a. If the demand
6. Suppose that the demand curve for a good is represented by the straight line P = 20 – 2Q Fill in the missing information in the following chart:
3. Rank the following in descending order of Home welfare and justify your answers.If two items are equivalent, indicate this accordingly
2. Figure 9-1 shows the Home no-trade equilibrium under perfect competition (with the price PC) and under monopoly (with the price P M). In this problem, we compare the welfare of Home consumers in
1. Discovering Data Figures A, B, and C (see the next page) are taken from Chad Bown: “The Pattern of Antidumping and Other Types of Contingent Protection”(World Bank, PREM Notes No. 144, October
3. Is there an argument for using infant industry protection, and has it worked in practice?55
2. Why would foreign firms dump their products by exporting them at a price below their costs?36
1. Can governments use trade policy to give home firms a strategic advantage in their markets?kl4
15. Suppose that a producer in China is constrained by the MFA to sell a certain number of shirts, regardless of the type of shirt. For a T-shirt selling for $2.00 under free trade, the MFA quota
14. Consider the following hypothetical information pertaining to a country’s imports, consumption, and production of T-shirts following the removal of the MFA quota:
13. Consider a small country applying a tariff t as in Figure 8-5. Instead of a tariff on all units imported, however, we will suppose that the tariff applies only to imports in excess of some quota
12. Refer to the graphs in Problem 11. Suppose that instead of a tariff, Home applies an import quota limiting the amount Foreign can sell to 2 units.
11. Suppose Home is a small country. Use the graphs below to answer the questions.
10. No U.S. tire producers joined in the request for the tariff on tires in 2009. Rather, the petition for a tariff on tires imported from China was brought by the United Steelworkers of America, the
5. Consider a large country applying a tariff t to imports of a good like that represented in Figure 8-9. How does the size of the terms-of-trade gain compare with the size of the deadweight loss
4. Consider a large country applying a tariff t to imports of a good like that represented in Figure 8-9.a. How does the export supply curve in panel (b) compare with that in the small-country case?
3. Consider a small country applying a tariff t to imports of a good like that represented in Figure 8-5.a. Suppose that the country decides to reduce its tariff to t′. Redraw the graphs for the
2. The following questions refer to Side Bar: Key Provisions of the GATT.a. If the United States applies a tariff to a particular product (e.g., steel) imported from one country, what is the
1. Discovering Data At the opening of this chapter, we referred to the events of May 1995, when the United States considered putting tariffs on imports of luxury cars from Japan. Specifically, on May
3. If the quantity of imports is restricted by a quota, how is that different from using a tariff?
2. Why does the World Trade Organization try to reduce the use of tariffs?
1. Why do governments sometimes apply a tariff on imported goods?
11. Chinese hourly manufacturing wages have increased by 12% per year on average since 2001, which is much higher than wage growth in developed or other developing countries. How will this wage
10. It is widely noted that even though China is the favored destination for manufacturing offshoring, it is far behind India in the business of offshored services. What differences between these two
9. Why might it be relatively easier for a developing country like India to export service activities through offshoring than to participate in the global economy by producing manufacturing
8. In Figure 7-14, we saw that a fall in the relative price of components leads to an increase in the amount of components imported but that the amount of R&D exported from Home does not necessarily
7. The quote from the 2004 Economic Report of the President at the beginning of the chapter generated a lot of controversy that year. The chairman of the Council of Economic Advisers, N. Gregory
6. Read the following excerpt, and using what you have learned in this chapter, discuss how offshoring creates opportunities for the countries involved.
5. Consider the model of a firm that produces final goods using R&D and components as inputs, with cost data as follows:Components: Total costs of production = PC · QC = 200 Earnings of high-skilled
4. Consider the model of a firm that produces final goods using R&D and components as inputs, with cost data as follows:Components: Total costs of production = PC · QC = 200 Earnings of high-skilled
2. Consider an offshoring model in which Home’s skilled labor has a higher relative wage than Foreign’s skilled labor and in which the costs of capital and trade are uniform across production
1. Discovering Data What type of occupation would you like to pursue after graduation? To see what is available, go to the Bureau of Labor Statistics website at: http://www.bls.gov/ooh/.a. Find four
3. Do countries gain overall when their firms offshore to other countries?
2. Who can gain when firms shift their production abroad?
1. Why do some firms shift parts of their production to other countries?
8. In the section “Gains and Adjustment Costs for the United States Under NAFTA,”we calculated the lost wages of workers displaced because of NAFTA. Prior experience in the manufacturing sector
6. Our derivation of the gravity equation from the monopolistic competition model used the following logic:i. Each country produces many products.ii. Each country demands all of the products that
5. Starting from the long-run trade equilibrium in the monopolistic competition model, as illustrated in Figure 6-7, consider what happens when industry demand D increases. For instance, suppose that
4. Starting from the long-run equilibrium without trade in the monopolistic competition model, as illustrated in Figure 6-5, consider what happens when the Home country begins trading with two other
3. Why is trade within a country greater than trade between countries?

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