ECON 3365.2: INTERNATIONAL ECONOMIC ISSUES FINAL EXAM Due on April 14, 2020 Part I: Answer any FOUR (4) of the following questions (Note: Part I is worth 70% of the Final Exam; 28 out of 40 marks; each question is worth 7 marks) 1. Consider the following information for two countries (Canada and US) which could produce Steel and Bread using only labour as input. Each country has 2000 units of labour. The table indicates maximum level of output that the two countries, could produce in a given period of time using the 2000 units of labour. Canada US Steel (Units) 50, 000 50, 000 Bread (Units) 100,000 80,000 a) Calculate the labour productivity for Canada and US in the production of the two goods. b) If the two countries engage in international trade, indicate the country which exports Steel and the country which exports Bread. Show your calculations of labour productivity and opportunity cost; and explain the basis for your answer. 2 a) Explain the effects of imposing a tariff on a good that is both produced domestically and imported in the case of a large country. Describe the results, using the concepts of producer surplus, consumer surplus and deadweight loss. Specifically address the effects on consumers, producers, government revenue and overall national well-being, b) Under what conditions can the country improve its welfare? 3 a) Explain how an international financial crisis differs from a banking crisis and a debt crisis. b) What are the two main causes (vulnerabilities) of a financial crisis? Explain how each of them causes a financial crisis? 4. a) What are the three approaches (ways) for a country to handle different standards abroad? Is anyone of the approaches better than the others? Explain why and justify your answer. b) Do standards have to be the same for countries to be integrated? Explain. 5. Consider Canada's foreign exchange market for the US dollar. Explain how each of the following events can lead to an appreciation or depreciation of the Canadian dollar. a). More rapid growth in Canada than in the US c). Goods are more expensive in Canada than in the US b). Expectations of a future depreciation in the US dollar. 6. a) What are the main arguments used by nations to justify protection for particular industries? Which are economic, and which are noneconomic? b) Evaluate the validity of infant industry argument for protection. 7. Assume that aggregate supply meets aggregate demand in the upward sloping portion of the AS curve. For each of the following, explain the change in aggregate supply and/or aggregate demand, and state the effect on prices and output. a) The demand for exports increases. b) Taxes increase. c) Costs of production increase. 8. Explain the following. a) Purchasing power parity b) Effective rate of protection c) Real exchange rate d) Trade to GDP ratio Part II: Answer all of the following questions. Choose the best answer. (Note: Part II is worth 30% of the final exam; 12 out of 40 marks) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The United States' comparative advantage over Japan in the production of rock-n-roll music implies that (for a similar quality of music) the A) opportunity cost of production is less in Japan. B) absolute cost of production is less in the United States. C) opportunity cost of production is less in the United States. D) absolute cost of production is less in Japan. 2) With trade, the slope of the Consumption Possibilities Curve (CPC) is equal to A) the opportunity cost of the good on the vertical axis. B) the world price of the good on the horizontal axis. C) the opportunity cost of the good on the horizontal axis. D) the world price of the good on the vertical axis. 3) Using the HO model, assume that the United States is capital abundant and Mexico is labor abundant. If soybeans are capital intensive and avocados are labor intensive, A) Mexico will produce more soybeans once trade is introduced. B) avocado prices in the United States will fall once trade begins. C) the United States will produce more avocados once trade is introduced. D) soybean prices in Mexico will rise once trade begins. 4) After trade opens, the short run impact on the income of the specific factor that is relatively scarce will be A) a decrease in its income. B) no change in its income. C) an increase in its income. D) indeterminate, income effects are not possible to know. 5) Intraindustry trade is characterized by what two features of the industry and market? A) Economies of scale and differentiated products B) Diseconomies of scale and homogeneous products C) Quota auctions and low effective rates of protection D) Non-tariff barriers and large-scale foreign investment 6) Most foreign investment is today is directed towards high-income countries because A) there are no economies of scale in low-income countries. B) high-income countries are politically stable. C) there are tax breaks and subsidies available. D) markets are larger, so transportation costs are minimized by producing near the market. 7) In which way are tariffs different from quotas? A) They increase the domestic quantity supplied of the product. B) They raise the price of the imported products to consumers. C) They reduce the volume of imported products. D) They raise government revenue. 8) High-income industrial nations such as the United States and Japan tend to have their highest tariffs in A) capital-intensive, diversified manufacturing. B) automobiles. C) agriculture, clothing, and textiles D) newer, high-technology manufacturing industries. 9) One reason why producers have an incentive to organize in favor of protection is because A) producer gains are relatively concentrated. B) producer gains outweigh consumer losses. C) producer gains are spread across so many firms that no one gets a large share of the benefits. D) there is no real cost to the economy. 10) The biggest flaw in the logic of the labor argument is the failure to consider A) the differences in national productivity levels. B) the impact on employment levels. C) the impact of tariffs on inflation. D) the needs of developing countries. 11) Mutual recognition of standards refers to A) common product safety, environment, labor, and fair competition standards agreed upon by trading partners. B) separate standards held by different trading partners which other partners refuse to recognize. C) the acceptance of a trading partner's standards as valid and sufficient by another trading partner. D) the elimination of tariffs and quotas by trading partners. 12) Race to the bottom refers to which of the following? A) Countries will compete with each other to offer incentives to firms. B) Firms will underpay workers in low income countries. C) Countries have an incentive to conform to the standards of the lowest income country. D) Firms have an incentive to relocate to countries with lower standards. 13) When countries try to ban child labor, A) family poverty decreases. B) most children start to attend school. C) child labor often moves to the informal economy. D) GDP increases. 14) Countries that compete by offering foreign firms a reduced set of environmental compliance requirements are known as A) pollutants. B) pollution exporters. C) transboundary members. D) pollution havens. 15) If the residents of a country receive income from their foreign investments, it is counted as a A) debit in the capital account. B) credit in the current account. C) credit in the capital account. D) debit in the current account. 16) If there is a trade deficit, which of the following is true? A) There will be a current account deficit. B) The current account balance could be positive, negative, or zero. C) There will be a current account surplus. D) There will be a financial account surplus. 17) Debt service A) always makes a country worse off for having borrowed. B) is rarely an issue for high-income countries. C) is a problem when the amount of debt is small relative to the size of the economy. D) tends to benefit low- and middle-income countries at the expense of high-income countries. 18) In order to protect against foreign exchange risk, firms can use A) interest rate arbitrage. B) the J-curve. C) the spot market for foreign exchange. D) the forward market for foreign exchange. 19) Which of the following institutions is the most important participant in foreign currency markets? A) A retail customer B) A commercial bank C) A central bank D) A foreign exchange broker 20) An American firm that buys foreign exchange because its managers expect the dollar to depreciate is A) decreasing the demand for foreign exchange. B) hedging. C) speculating. D) increasing the supply of foreign exchange. 21) A decrease in the U.S. demand for the Mexican peso A) causes Mexican goods to be cheaper in the US. B) causes the Mexican peso to appreciate. C) causes the U.S. dollar to depreciate. D) causes an increase in the U.S. dollar price of a Mexican peso. 22) A single currency area requires A) mobile labor and synchronized business cycles. B) mobile labor and unsynchronized business cycles. C) immobile labor and mobile capital. D) immobile labor and synchronized business cycles. 23) If aggregate supply meets aggregate demand in the vertical part of the AS curve, which of the following is a true statement about expansionary policies? A) Both monetary and fiscal policies will only cause prices to increase. B) Fiscal and monetary policy will be equally effective in increasing output. C) Fiscal policy will be more effective in increasing output. D) Monetary policy will be more effective in increasing output. 24) Expenditure-switching policies designed to improve a current account deficit A) turn domestic spending towards foreign goods. B) increase the overall level of demand in the economy. C) turn domestic spending towards domestic goods. D) reduce the overall level of demand in the economy. 25) In theory, the free movement of capital raises world welfare because A) it reduces inflation in some countries. B) it allows countries to invest more than they could with domestic savings alone. C) it reduces the chance of financial crises. D) it increases world income equality. INTERNATIONAL ECONOMIC ISSUES April 14, 2020 FINAL EXAM NAME: _______________________________ ID#:____________________________ ANSWER SHEET (Part II) 1. -------- 11. 2. -------- -------- 21. -------- 31. -------- 41. -------- 12. -------- 22. -------- 32. -------- 42. -------- 3. -------- 13. -------- 23. -------- 33. -------- 43. -------- 4. -------- 14. -------- 24. -------- 34. -------- 44. -------- 5. -------- 15. -------- 25. -------- 35. -------- 45. -------- 6. -------- 16. -------- 26. -------- 36. -------- 46. -------- 7. -------- 17. -------- 27. -------- 37. -------- 47. -------- 8. -------- 18. -------- 28. -------- 38. -------- 48. -------- 9. -------- 19. -------- 29. -------- 39. -------- 49. -------- 10. -------- 20. -------- 30. -------- 40. -------- 50