Question 2

2. Accounting for trade in goods and services Suppose the following transactions occur during the current year: 1. Yakov orders 50 bottles of wine from a French distributor at a price of $30 per bottle. 2. A U.S. company sells 300 spark plugs to a Korean company at $5.00 per spark pluag. 3. Charles, a U.5. citizen, pays $670 for a skateboard he orders from Wally's (a U.S. company). Complete the following tahle by indicating how the combined effects of these transactions will be reflected in the U.5. national accounts for the current year. Hint: Be sure to enter a "0\" if none of the transactions listed are included in a given category and to enter a minus sign when the balance is negative. Amount (Dollars) Consumption Investment Government Purchases Imports Exports Net Exports UL Gross Domestic Product (GDP) 3. Factors that influence international trade In the 1950s, imports and exports of goods and services constituted roughly 49 to 5% of U.S. GDP. In recent years, exports have accounted for approximately 11% of GDP, while imports have tripled to approximately 15% of GDP. Which of the following help to explain the increase in international trade and finance since the 195057 Check all that apply. [ | Better high-speed rail lines O International trade agreements that lower tanffs and import quotas U The widespread use of the Internet to conduct business (] An increasing number of import quotas Continue without saving 4. Analyzing the effects of a trade deficit Suppose the U.S5. government has just hired you to analyze the following scenario. Assume the U.S. agricultural industry grows concerned about the amount of fresh fruit imports to the United States, a practice that harms domestic producers. Industry experts claim that implementing a quota on imports would reduce the size of the trade deficit. Complete the following exercise in order to help you analyze this claim. The following graph shows the demand and supply of U.S. dollars in a model of the foreign-currency exchange market. Shift the demand curve, the supply curve, or both to show what would happen if the government decided to implement the quota. @ n Supply Demand O Supply emand REAL EXCHANGE RATE (Units of foreign currency per dollar) QUANTITY OF DOLLARS Given this change, the dollar v Fill in the following table with the effect of a quota on the following items: Supply of Loanable Funds Real Interest Rate Domestic Investment Net Exports Change due to a quota v v v v 5. Capital flight The graphs below depict the loanable funds market and the relationship between real interest rates and the level of net capital outflow (NCO) calculated in terms of the Mexican peso. The Market for Loanable Funds in Mexico Mexican Net Capital Outflow 7 Supply REAL INTEREST RATE (Percent) REAL INTEREST RATE (Percent) NCO Demand 1 O -1 2 3 4 5 6 0 1 2 3 4 5 6 7 -4 3 -2 -1 1 LOANABLE FUNDS (Billions of pesos) NET CAPITAL OUTFLOW (Billions of pesos)Complete the first row of the table to reflect the state of the markets in Mexico. Real Interest Rate Net Capital Outflow (NCO) (Percent) (Billions of pesos) [ ] ] Initial state After capital flight Suppose now that a sudden bout of political turmeoil in Mexico causes world financial markets to become uneasy. Because investors now see Mexico as unstable, they decide to pull a portion of their assets out of Mexico and put them into more stable economies. This unexpected shock to the demand for assets in Mexico is known as capital flight. Shift the NCO curve to illustrate the effect of capital flight. Then, on the graph representing the market for loanable funds, shift the supply curve, the demand curve, or both curves to reflect the change caused by the shift in NCO. Note: You will not be graded on your final placement of the curves on the graph, but you will nead to shift them correctly in order to answer the questions that follow. Determine the equilibrium interest rate after capital flight occurs, and enter it into the second row of the table. Then determine the level of NCO that occurs along the new NCO curve at the new eguilibrium interest rate. Finally, show the effect of the change in NCO on the market for foreign exchange by shifting either the supply curve, the demand curve, or both. Finally, show the effect of the change in NCO on the market for foreign exchange by shifting either the supply curve, the demand curve, or both. (?) The Market for Foreign-Currency Exchange Supply O Demand Supply REAL EXCHANGE RATE (Dollars per peso) Demand QUANTITY OF PESOS Summarize the results of capital flight by completing the following table. Real Interest Rate Real Exchange Rate Net Capital Outflow Effects of capital flight