Chapter 16 Trade and Foreign Exchange Rate Determination

Question 1

Why do countries trade?

Answer 1

Countries trade because sometimes it is cheaper to buy goods from other countries than it is to produce them domestically

Question 2

What are terms of trade?

Answer 2

Express the price of one country’s goods in terms of how much of a second country’s goods must be given up

Question 3

What is the real exchange rate

Answer 3

the relative price of a country’s goods in terms of a second country’s goods

Question 4

What are the arguments against free trade?

Answer 4

Fear that international competition will destroy jobs
National security (war?)
Infant industries need protection (insulation from foreign competition)
Other countries subsidize their industries (unfair)
Lose ability to threaten with trade restrictions (irrational with true free trade)

Question 5

What is the nominal exchange rate?

Answer 5

the price of 1 country’s currency in terms of a 2nd country’s currency

Question 6

What is the real exchange rate equation

Answer 6

Real exchange rate = E x P/P[F]

Question 7

What is devaluation

Answer 7

Country’s central bank intentionally lowers the value of the currency

Question 8

Who are the demanders of U.S. dollars?

Answer 8

foreigners who want to buy our goods
foreigners who want to invest in the U.S.
Americans working in other countries

Question 9

Who are suppliers of dollars?

Answer 9

Americans who want to buy foreign products
Americans who want to invest in foreign countries
Foreigners who work in the U.S. (“foreign-owned factors of production located in the U.S.”)