Module 10 – International Sector Flashcards Preview

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Flashcards in Module 10 – International Sector Deck (69):
1

Define Quota?

  • Similar to tariff but no tax advantage to government
  • Significant competition among importers for quota
    • Requires some method of allocating
    • Government could sell quota rights:  Value is the above-normal profit
    • Division of rent is subject of negotiation:  If manufacturer determines sole distributor then he has monopoly power

2

What are the opportunity costs of 1 loaf in terms of salmon in islands x and y?

A. Island x: 2 Island y: 3
B. Island x: 2.2 Island y: 1.4
C. Island x: 2.2 Island y: .14
D. Island x: 3 Island y:2

The correct answer is D. The opportunity cost of 1 loaf is the number of salmon to be surrendered to acquire the loaf. Since there are no economies of scale the trade offs are constant. In island x the opportunity cost of 140 loaves is 420 salmon; the opportunity cost of 1 loaf is 3 salmon (420/140). The corresponding cost of 1 loaf is 2 salmon in island y.

3

Main argument for restricting international trade is protection of domestic industries.  Explain?

- Logically weak but politically persuasive
- Benefits outweighed by cost to average households

3

Define Flexible exchange rates

In a free market the exchange rate will adjust to the level where the quantities demanded and supplied are equal

4

A country has been exporting considerably more than it has been importing for several years and yet its currency has been depreciating steadily against most capitalist countries’ currencies. Which of the following could account for the constant depreciation?

A. Other countries’ currencies were depreciating faster
B. The trade deficit was in services not goods
C. The country had a continuous net outflow of capital exceeding the trade surplus
D. The trade deficit was in goods not services

The correct answer is C. A country’s exchange rate is determined by its balance of payments, a surplus leading to an appreciation a deficit to a depreciation. The balance of payments is the sum of the trade balance and net capital flows. If the currency depreciated in spite of a trade surplus it means that the net capital outflow exceeds the trade surplus.

5

To reap benefits from international trade a country must have

I. an absolute advantage in the production of at least one good

II. citizens whose tastes and preferences differ from those in other countries.

Which of the following is correct?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is D.

The theory of comparative advantage demonstrates that a country without any absolute advantage in the production of any good can still trade profitably with a nation with an absolute advantage in the production of all goods. By specialising in the production of goods in which each has a comparative advantage total output can increase in both countries and both countries can benefit even if tastes and preferences are identical. Since relative prices, i.e. how much of one good exchanges for the other, will be different, motivation to trade will exist. Thus both I and II are wrong.

5

The factors which would help our exports would be

I. higher inflation in our trading partners than at home
II. depreciation of our currency against our trading position

Which of the following is correct?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is C. If the prices of our goods were rising at a slower rate than those of foreigners our goods would become relatively more attractive. Thus I is true. If our currency were depreciating, foreigners would acquire more of our currency for theirs than previously again making our exports more attractive. Thus II is true also.

5

Higher living standards throughout the world would be made possible by

I. an increase in the skills of the labour force in each country.
II. an increase in the stock of capital goods in each country.
III. an increase in protective tariffs in each country. Which of the following is correct?

A. I only.
B. I and II only.
C. I and III only.
D. I, II and III.

The correct answer is B. A higher world standard of living means a higher per capita gross world product. This could occur in a variety of ways – for example, the same world output and a lower population or a lower world output with a disproportion- ately lower population. Assuming a particular world population, however, a higher output would be required to increase living standards. Higher output comes about with an increase in the quantity and/or quality of the factors of production or by a more efficient allocation of these factors. Although an increase in a protective tariff could benefit one country, a universal increase in protective tariffs would lead to a less efficient allocation of world resources and, consequently, a decrease in world output. Both an increase in worker skills and an increase in capital goods would increase output.

5

Suppose that the pound sterling on foreign exchange markets was being traded for 2.5 Swiss francs, and further suppose that the following day the exchange rate was one pound sterling for 2.8 Swiss francs. Which of the following would be the immediate effect of the change in the exchange rate between pounds sterling and the Swiss franc?

A. Swiss goods would become more expensive for British consumers.

B. Swiss goods would become less expensive for British consumers.

C. Swiss goods would become neither more nor less expensive for British consumers.

D. British goods would become less expensive for Swiss consumers.

The correct answer is B. A Swiss franc still buys the same basket of goods in Switzerland. One pound sterling, however, now exchanges for 2.8 Swiss francs instead of 2.5 Swiss francs, that is, one pound sterling can now buy more Swiss goods than before. Swiss goods have become less expensive for British consumers, just as British goods have become more expensive for Swiss consumers.

6

What are the three major accounts of balance of payments?

  1. Current account / trade account: Imports and exports of goods and services
  2. Capital account: International borrowing and lending transactions
  3. Official settlements account: Change in holdings of foreign currency

7

Both islands start to trade and an equilibrium ‘price’ is reached for salmon in terms of loaves. Of the prices given which of the following is the only possible equilibrium price of a salmon?

A. 3 loaves
B. 0.5 loaves
C. 0.4 loaves
D. 0.33 loaves

The correct answer is C. Prior to trade 1 salmon exchanged for ⅓ loaf in x. Prior to trade 1 salmon exchanged for ½ loaf in y. After trade the equilibrium price must lie between the extremes of ⅓ (.33) and ½ (.5).

7

Exxplain the growth rate for imports in:

Z/Z = f (Yd/Yd, INFf/INFf, App/Dep)

The factors affecting exports will be the same as the
factors affecting imports except they act in the opposite direction and will depend upon domestic national income (YD) rather than (YF).

8

Discuss Theory of Absolute Advantage

• This states that the same commodity can be produced in one country using less labor and capital than in a second country

• Less labor and capital means an absolute advantage

• Trade between similar countries can take place as long as tastes and incomes differ in each country

• If you impede international trade, countries cannot fully exploit their absolute industrial advantage over other countries

• International trade provides greater scope for specialization and economies of scale

• Cross-country differences in endowments of minerals, or in climate-affected agriculture, often provide an obvious basis for international trade

• The theory of absolute advantage not only explains the direction of trade but also explains resource movement

• Indeed, Adam Smith viewed international trade as an important extension of domestic commerce, providing greater scope for the division of labour and economies of scale

9

‘The last thing British manufacturing companies and hotels want is an appreciating pound sterling.’ The appreciation will
I. make the export of our goods and services more difficult
II. discourage families from holidaying at home
Which of the following is correct?

A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is C. The appreciating pound sterling will mean foreigners will get fewer pounds for their own currencies, i.e. British manufacturing goods will increase in price in foreign currencies. Thus I is true. The appreciating pound will give British households more foreign currency for their pounds sterling and make vacationing abroad cheaper in terms of pounds sterling. Thus II is true also.

9

Uncertainty of future exchange rate poses risk for exporting firm, discuss?

- May minimise risk by buying foreign currencies in the futures market; additional costs

- Controversy as to whether fixed or flexible rates are better as:

  • Flexible rates enhance world trade and lead to globally efficient allocation of resources
  • Fixed exchange rates ensure better exchange rate stability

10

Define Quota

A quota is a restriction on the amount of a good that may enter a country in a specific time period

11

Both islands start to trade and an equilibrium ‘price’ is reached for loaves in terms of salmon. Of the prices given which of the following is the only possible equilibrium price of a loaf?

A. 5 salmon
B. 3 salmon
C. 2.5 salmon
D. 2 salmon

The correct answer is C. Prior to trade 1 loaf exchanged for 3 salmon in x. Prior to trade 1 loaf exchanged for 2 salmon in y. After trade the equilibrium price must lie between the extremes of 2 and 3 salmon. 2.5 salmon is the only ‘price’ given which satisfies this criterion.

11

Move to flexible exchange rates in the1970s was designed to ___

stabilise exchange rates and avoid large devaluation/revaluation

12

Explain the effect of Tariffs on Supply Curve?

  • Shifts the supply curve upward
    • Increases price and decreases quantity
  • If we assume balanced trade:
    • Have no effect on the balance of trade but only on the volume of trade
  • Everyone pays more for both imported and domestically
    • Resources are not employed efficiently
    • World production is reduced
  • In short run:
    • Workers in protected industry don’t need job search or retraining

12

Explain X as a measure for exports.

X = f(YF, Pd/PF, ER) and

X/X = f (Yf/Yf, INFd/INFf, App/Dep)   

- foreign demand (Yf), a function of foreign national incomes
- domestic (Pd) versus foreign (Pf) prices, the lower the domestic prices the higher the exports
- an exchange rate (ER), if domestic currency depreciates, foreigners can purchase more imports for the same amount of money

INF = inflation and App = currency appreciation, Dep = currency depreciation

The growth rate of exports will depend upon the growth rate of foreign income, relative inflation rates and the degree of appreciation or depreciation of the currency against
a basket of foreign currencies.

 

13

If a trade war broke out among the major trading nations in the world and the volume and value of exports halved there would be

I. lower average living standards
II. higher living standards for some persons

Which of the following is correct?

A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is C. International trade by permitting a more efficient allocation of resources globally leads to higher world income and higher average living standards. A significant decrease in world trade would lead to lower average living standards. Thus I is true. The decrease in trade however would lead to an increase in demand for domestic goods in some sectors and as a result could lead to an increase in the returns to some factor inputs. Thus II is true.

14

What is the difference between Tariff and Quota? Who gets the above-normal profit:

- Tariff: Government
- Quota : allocation determines the distribution of economic rent

16

If the US dollar appreciates against the French franc

I. this will cause the French demand curve for dollars to shift to the right
II. a French franc will command more US goods than before the appreciation
Which of the following is correct?

A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is D. Suppose $1.00 were exchanging initially for 6 French francs and after the appreciation were exchanging for 7 French francs, i.e. if the dollar appreciates it commands more of the foreign currency. This will cause the French francs to move along their demand curve for dollars, i.e. the price has changed, but will not cause a shift. Thus I is wrong. The dollar will now command more French goods, the franc fewer American goods. Thus II is wrong.

17

Two countries A and B trade with each other.
A produces and exports good x to B.
B produces and exports good y to A.
Economies of scale exist in the production of good x only. It follows that

I. A benefits from the economies of scale
II. B benefits from the economies of scale

Which of the following is correct?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is C. The existence of economies of scale in the production of x exacerbates the argument for specialisation and exchange since the greater the level of production the fewer the resources required to produce an additional unit of x and thus the better off both countries will be.

18

Suppose that diplomatic initiatives by the United States led to the opening of extensive trade with Russia. Which of the following best describes the effects this would have on the United States?


A. Incomes in export industries would rise, but not by as much as income in import-competing industries would fall.

B. Incomes in import-competing industries might fall, but not by as much as income in export industries would rise.

C. Per capita income would rise as long as income in both export- and import-competing industries would rise.

D. Incomes in both export- and import-competing industries could either rise or
fall.

The correct answer is B. The effect of opening up trade with Russia would be to increase per capita income in both countries because it would expand the opportu- nities for consumers in each country to consume combinations of goods that are more in accord with their preferences, and it would also permit each country to specialise in the production of those goods for which it has a comparative ad- vantage. Although there would definitely be an increase in US national income, not all workers and employers would share evenly in this increase. It is likely, at least in the short run, that those in import-competing industries would face a decline in income. This decline would not be as great, however, as the increase in incomes in export industries.

20

This year I shall be travelling from the UK to Israel, where I will give 6 lectures to the Israeli MBA students. I shall fly there and back on British Airways, shall stay in hotels in Tel Aviv and Jerusalem where I shall have a week’s vacation.

The value of Israeli exports in these activities is
I. the lecturing fee
II. the airline ticket bill
III. the Tel Aviv and Jerusalem hotel bills

Which of the following is correct?
A. II only
B. II and III only
C. III only
D. I, II and III

The correct answer is C. As a UK citizen I am supplying services to Israel, i.e. the lectures are a UK export as are the BA flights. Thus I and II are wrong. The hotels in Israel however are selling services to me, i.e. they are Israeli exports and UK imports. Thus III is true.

22

The question of who bears the burden of a tariff depends upon the price elasticities of demand and supply of the good in question. The more price elastic the demand for the good, given the supply curve

I. the more the tariff will be borne by the consumer
II. the greater will be the decrease in consumer surplus

Which of the following is correct?

A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is D. The more price inelastic is the demand of a good the less responsive is quantity demanded to a price increase and vice versa. Thus the more price inelastic the demand is the greater will be the burden of a tariff on the consumer and the greater the loss in consumer surplus and vice versa. Thus I and II are wrong.

22

A balance of payments deficit means too much supply of a country’s currency and so govt must ___

purchase it to avoid the exchange rate dropping

23

Scotland exports whisky and wool to France and imports wine and cheese from France. ‘In times of high unemployment in Scotland, however, Scotland would be better off producing its own wine and cheese even although France has an absolute advantage in the production of both.’

Which of the following is correct? The speaker is

A. correct; indeed if the unemployment rate of labour and capital were high enough in Scotland, France’s absolute advantage would disappear
B. incorrect because Scotland does not have sufficient resources to produce wine and cheese
C. correct because the unemployment rate in Scotland could fall to zero
D. incorrect because the British pounds earned by the French from the sale of wine and cheese are used to buy Scottish whisky and wool; were that to cease the gains from Scottish wine and cheese production would be more than offset from the losses in whisky and wool production.

The correct answer is D. A is wrong because the absolute advantage will not disappear because of the unemployment rate. Wages may fall but not the physical amount of resources required to produce wine and cheese. B is wrong; Scotland could produce wine (hot houses, sun lamps, etc., etc.,) and does produce cheese. C is wrong and D is true because of the reasoning given in D.

23

What does the theory of absolute advantage specify as the condition for gains from trade?

A. One country has more capital than another country
B. One country has more labour than another country
C. A commodity can be produced in one country using less labour and capital than in another country
D. Difference must exist in climate and resource endowments

The correct answer is C. This is a definitional question. The fact that a country may have more capital or more labour or greater resource endowments than a second country is not a sufficient condition to determine comparative advantage. Thus A, B and D are wrong.

24

Definition of Pauper Labour? 

Argument that trading with a poor country with low wages and productivity will reduce real wages in wealthier country

25

What are the opportunity costs of 1 salmon in terms of loaves in islands x and y?

A. Island x: .33 Island y: 2.0
B. Island x: .33 Island y: .5
C. Island x: 1.33 Island y: 1.5
D. Island x: 1.33 Island y: 2.0

The correct answer is B. The opportunity cost of 1 salmon is the number of loaves to be surrendered to acquire the salmon. Since there are no economies of scale the trade offs are constant. In island x the opportunity cost of 420 is 140 loaves; the opportunity cost of 1 salmon is .33 loaf (140/420). The opportunity cost of 1 salmon is .50 loaf (100/200).

25

Balance of trade, also known as ___

Current account

26

If, because of continued UK balance of payments surpluses, the pound sterling appreciated, the effect on UK residents would be that

I. a holiday in Europe would cost less.
II. imported goods would become cheaper.

Which of the following is correct?

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

The correct answer is C. In the absence of any offsetting changes, appreciation of the pound sterling means that more of any other currency will be exchanged for one pound sterling, i.e. one pound will now buy more euro and, consequently, a holiday in Europe would be less expensive for a holidaymaker from the UK. The pound, by exchanging for more euro, will be able to command more imports, i.e. imported goods will become cheaper.

27

Explain the effect of payment surplus and deficit.

Balance of payments – excess supply of country’s currency that results from international transactions that the government must purchase to preserve exchange rate

  • Balance of payments surplus will cause currency to appreciate
  • Balance of payments deficit will cause currency to depreciate

27

the growth rate of imports and exports depends upon lots of factors – including ___

the value of our currency

28

Trade can be beneficial as long as the ___

...relative marginal utilities of goods are different

30

Compared to another nation if a nation has

I. an absolute advantage in the production of all manufacturing goods it must have a comparative advantage in the production of at least one good
II. a comparative advantage in the production of more than one manufacturing goods it must have a higher living standard than the other nation
Which of the following is correct?

A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is D. If one nation took half as many resources to produce each good as the other nation it would have an absolute advantage in the production of all goods but no comparative advantage; i.e. opportunity costs of any two goods would be the same. Thus I is wrong. There is no relationship between comparative advantage and living standards. Thus II is wrong.

31

Currently islands x and y devote one half of the salmon/loaves resources to the production of each
                     

                      Salmon output     Loaves output
Island x          210                      70
Island y          100                      50
Total               310                     120


If trade were to occur and island x produced only salmon and island y only loaves combined total output would be 420 salmon and 100 loaves which is 110 more salmon [420 − (210 + 100)] and 20 fewer loaves [100 − (70 + 50)] than in the table above.

What is the maximum number of salmon possible taking both islands together if over 120 loaves are produced?

A. 301
B. 308
C. 317
D. 357

The correct answer is D. For every additional loaf produced in x, 3 salmon must be given up. For every additional loaf produced in y, 2 salmon must be given up. Therefore it pays to have y produce only 100 loaves and x to give up 63 salmon to secure 21 loaves. Loaves total will be 121 (100 + 21) and salmon output (420 − 63) for x and 0 for y, i.e. 357.

33

The lines ARB above the linear ignores ___ 

..the effects of specialization

35

A tariff imposed on an imported good for which the market is in equilibrium

I. makes everyone in the importing country worse off
II. increases the equilibrium price of the good
III. decreases the equilibrium quantity exchanged of the good

Which of the following is correct?

A. I and III only
B. II only
C. II and III only
D. I, II and III

The correct answer is C. The impact of a tariff is to shift the supply curve upwards by the amount of the tariff. Given normally sloped demand and supply curves this will cause the equilibrium price to rise and equilibrium quantity exchanged to decrease. Thus II and III are correct. The imposition of the tariff, however, could protect a domestic industry to the benefit of domestic employees. Thus while all consumers of the good will be worse off because of the higher price not every person will be worse off. Thus I is wrong.

35

If Europe had fixed exchange rates with all other trading nations, and if its imports exceeded its exports by €4 billion, and if capital investment abroad by its residents exceeded foreign capital investment in Europe by €5 billion, there would be a net inflow of foreign exchange into Europe in the absence of any other foreign transaction. Which of the following is correct?

The analysis above is

A. correct because the inflow from foreign capital investment would exceed the outflow from the trade deficit.

B. incorrect because whenever imports of goods and services exceed exports of goods and services the balance of payments must be in deficit.

C. correct because the net foreign capital investment would increase Europe’s assets abroad by €5 billion, which would exceed the trade deficit.

D. incorrect because the deficit in the balance of trade plus the net outflow in the capital account would cause an outflow of foreign currency holdings.

The correct answer is D. Under fixed exchange rates, a trade deficit – unless offset by net capital inflows – will lead to an outflow of foreign currency holdings. In this example, both the deficit on the trade account and the net outflow of capital will have to be matched by an outflow of foreign currency holdings.

36

The main argument for restricting trade is ___

...the protection of domestic industries

37

What factrors will effect demand for a country’s exports?

  1. foreign demand (Yf), a function of foreign national incomes
  2. domestic (Pd) versus foreign (Pf) prices, the lower the domestic prices the higher the exports
  3. an exchange rate (ER), if domestic currency depreciates, foreigners can purchase more imports for the same amount of money

39

What is Countervailing duties ?

These are tariffs imposed on imported goods that receive subsidies from home governments

- Design to cancel effect of subsidy

40

Give examples of activites in the three major accounts:

  1. Current/ trade account:  Thus if your country purchases foreign ski boots, gives donations to Save the Children Fund, or sells machinery or wheat to foreign nations, all these items would appear in the current account
  2. Capital account:  Thus if the Japanese purchase a US government bond or the US builds a factory in Japan, these transac-
    tions would appear in the Japanese and American capital accounts.
  3. Official settlements account:  Shows the change in a country’s holdings of foreign currency

41

The demand for our currency in the capital account is dependent on the ___ and ___ .

relative domestic; 

foreign interest rates e.g. high domestic interest rates may attract foreign investment but a reduction in the value of our currency may wipe out the gain

43

Define Dumping?

Practice of selling at lower price in foreign market than home market

  • Fear is that they will drive domestic competition out of business and then raise prices
  • Illegal under international law and Anti-dumping fiscal duties may be imposed if proven

44

Define Tariff?

A tariff is a tax imposed by the importing country when a good or service is enters the country

45

If all restrictions to international trade were removed, there would be

I. higher average living standards.
II. lower living standards for some persons.

Which of the following is correct?

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

The correct answer is C. The increase in world trade, by permitting more efficient resource allocation, would lead to higher world income and a higher average living standards. It would even be possible, as a result, to make everyone better off if appropriate income-redistribution schemes were adopted. But even though the average would rise, some people could experience a decline in income and a lowering of living standards.

46

Companies can avoid the uncertainty of exchange rates by ___

...buying foreign currencies in the futures market

48

In a two country world and assuming that for both countries imports=exports then the tariff imposing country will find that the other country will  ___ and that ___

 import less of its products;everyone suffers as a result

50

Define Balance of Payments

A country’s balance of payments records its international trade, borrowing and lending

51

Trade Restrictions arguments may have long-term legitimacy but also have short-term costs.  Give reasons.

Most compelling reason is:

- On average everyone benefits from free trade, but
- Some people are significantly worse off

52

Most fluctuations in exchange rates are caused by ___?

capital a/c surpluses/deficits

53

Adding a tariff means shifting the supply curve ___ and so increasing ___

upwards; the equilibrium price

55

Theory of comparative advantage shows that gains are still possible.  Explain.

- Relatively poor country without any absolute industrial advantage can still trade to mutual benefit with a wealthy country
- Independent of distribution of output: (who actually consumes)

Conclusion: a country should specialize in products and services in which it has a comparative advantage. It should trade with another country for products in which the other country has a comparative advantage. In this way both countries become better off and gain from trade. 

56

Define Fixed exchange rates

The governments involved agree to buy / sell sufficient quantities of their currencies to keep exchange rate at an agreed value

57

Define Infant Industry?

Until markets are established and scale benefits released, new industries are non competitive

Easier to establish tariffs & quotas than to abolish them

58

It is possible for a country to run a persistent and sizeable trade deficit over several years only if

I. its currency is constantly appreciating.

II. it is a consistent international borrower.

Which of the following is correct?

A. I only.

B. II only.

C. Both I and II.

D. Neither I nor II.

The correct answer is B. If a country had a persistent trade deficit and no net capital inflow, for the balance of payments accounts to balance would require a net outflow of foreign currency holdings. When such holdings of foreign currency were ex- hausted, the currency would have to depreciate. However, a net trade deficit could be sustained if it were matched by net capital inflows or a combination of net capital inflows and outflows of foreign currency holdings. An appreciation of a currency in the presence of a trade deficit would only be possible over time if net capital inflows exceed the trade deficit.

60

The theory of absolute advantage states that a country should import a good that it could produce for itself because
I. foreign goods are higher quality
II. a foreign country can produce it using fewer resources

Which of the following is correct?

A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is B. In a two good two country case if each country specialises in producing that good which requires less capital and less labour than the other country and then indulges in trade, both countries will be better off than if each were to produce both goods and not trade. Thus II is correct. The theory does not state foreign goods are of higher quality; homogeneity can exist.

61

For two people to benefit from exchanging goods it is necessary for them to have

I. different tastes and preferences
II. similar income levels

Which of the following is correct?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is D. Two people can have similar tastes and preferences and still gain from an exchange. A exchanges a good for which A has low marginal utility, i.e. has lots of it for one for which A has high marginal utility, i.e. has none/little of it. All A has to do is find B who also enjoys both goods in question but has little/none of the first good but lots of the second. Thus I is wrong. Endowments of the tradable goods may have nothing to do with income levels. Thus II is

62

Assume competitive pricing (without tax or distortions) accurately reflects production opportunity costs in each country. Explain?

- The product exchange (e.g. wheat:burlap) ratio may differ between two countries
- Therefore each product is relatively cheaper in one country
- By specialising in producing this product the country can obtain more of the other too

63

‘The possible gains from trade are greatly exaggerated. If a country’s exports and imports are equal, it means that it is exchanging with the rest of the world goods of equal market value. A country can only gain if it imports more than it exports and, for the world as a whole, imports and exports must be equal.’ Which of the following makes this statement incorrect?

A. It is possible that traders would be willing to give up more than they have to for what they get.

B. An economy can gain from trade only if export earnings exceed payments for imports.

C. Equality of imports and exports does not necessarily imply exchange of goods of equal market value.

D. Imports add to and exports subtract from the amount of useable output available to an economy.

The correct answer is A. The fact that the exchange value of exports and imports is equal does not mean that those who are trading are not better off. Indeed, if both sides did not benefit from trading, trade would not take place. Each side typically would be willing to give up more than it has to for what it gets. The amount that each country has to give up for what it gets is determined by market forces. The main idea in this question is perhaps most easily expressed by a demand–supply curve figure showing consumer and supplier surpluses.

65

Discuss Theory of Comparative Advantage

  • This assumes no freedom of movement of capital and labor, hence countries have different standards of living
  • The Theory of Comparative Advantage states that a poor country  (e.g. India) can still trade beneficially with a rich one (e.g US) without having any absolute advantage

66

If P = the number of meters of burlap required to buy one hectare of wheat and 1< P

As long as P is in this range, the average worker is ___

...better off

67

A balance of payments surplus is excess demand for a country’s currency causing ___

a rise in its relative exchange rate

68

Assuming no other production costs, transportation costs, or trading restrictions, which of the following is correct?

A. Country X will export wheat and import cloth.
B. Country X will export both wheat and cloth.
C. Country X will neither export nor import wheat or cloth.
D. The pattern of trade cannot be determined from the above information.

The correct answer is A. Compared with country Y, country X can produce a unit of wheat and also a unit of cloth with few resources; thus country X has an absolute advantage in the production of both commodities. Country X, however, requires three times more man-days to produce cloth compared with wheat, while country Y requires only twice the number of man-days to produce cloth compared with wheat. Therefore, since country X has a comparative advantage in wheat production and country Y has a comparative advantage in cloth production, country X will export wheat and import cloth.

69

Both theories of absolute and comparative advantage assume?

Resources are mobile within a country so that returns on labour and capital are equalised nationally

But research shows that they are not mobile internationally. Therefore they may have divergent technical proficiency and standards of living