Questions and Answers
Based on Table 4.1, relative to the United States, Canada is
After trade opens, the short run impact on the income of the variable factor will be
Comparative advantage cannot account for a significant portion of world trade.
False
Intraindustry trade is characterized by what two features?
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If the United States and Mexico trade Budweiser for Modelo beer, what type of trade does this represent?
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If the residents of a country receive income from their foreign investments, it is counted as a
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Total debt is more important in figuring out the ability of a country to service its debt than are debt to GDP and debt to export ratios.
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The index of openness for a nation that had $600 million in exports, $400 million in imports, and GDP of $2,000 million would be
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An important factor that increased international capital flows in the second half of the nineteenth century was
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A major impact of the transatlantic telegraph was
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Transaction costs include the costs of
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Economists overwhelmingly support more open markets because trade
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Capital flows between countries are smaller than in past decades in absolute terms.
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Since the end of World War II, world trade has grown much faster than world output.
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Multilateral international organizations help resolve disputes but they may also reduce national sovereignty.
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Mercantilists perceived trade as a zero sum game.
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Define the term 'IMF conditionality'.
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If the dollar is subject to a floating exchange rate system and R increases, then the dollar __________.
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To protect against foreign exchange risk, firms can use __________.
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If Canada raises its interest rates, what happens?
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What does the Bretton Woods exchange rate system represent?
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What is required for a single currency area?
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A weak U.S. dollar leads to a higher volume of U.S. imports.
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What is the largest center for currency trading?
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What are markets signaling if the forward rate is greater than the spot rate for the home currency?
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When did major currencies begin floating against each other, ending the Bretton Woods system?
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Who are the most important participants in foreign exchange markets?
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Study Notes
International Economics Study Questions
Chapter 1: Introduction - The Global Economy
- Dimensions of globalization: the increase in international trade, investment, and migration
- International economics studies the economic interactions between different countries
- The principle distinction in international economics: trade (exchange of goods and services) and money (exchange of financial assets)
Chapter 2: International Economic Institutions Since World War II
- Definition of an institution: a set of rules and procedures that govern the behavior of countries
- Key international economic institutions:
- IMF (International Monetary Fund): provides loans to countries in need, promotes international monetary cooperation
- World Bank: provides loans to developing countries for development projects
- WTO (World Trade Organization): promotes free trade and resolves trade disputes
- Role of international economic institutions: provide a framework for international economic cooperation, resolve disputes, and promote economic development
Chapter 3: Comparative Advantage and Gains from Trade
- Comparative advantage: the idea that countries should specialize in producing goods for which they have a lower opportunity cost
- Gains from trade: increased efficiency, higher productivity, and greater variety of goods and services
- Opportunity cost: the value of the next best alternative that is given up when a choice is made
- Example of comparative advantage: the United States and Mexico, where the United States has a comparative advantage in computer production and Mexico has a comparative advantage in shoe production
Chapter 4: Comparative Advantage and Factor Endowments
- Heckscher-Ohlin Model: a model that explains trade patterns based on differences in factor endowments (labor, capital, natural resources)
- Stolper-Samuelson Theorem: predicts the income distribution effects of trade based on factor endowments
- Factor endowments: the amount of labor, capital, and natural resources available in a country
- Example of factor endowments: the United States is capital abundant and Mexico is labor abundant
Chapter 5: Beyond Comparative Advantage
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Intraindustry trade: trade in similar goods, such as cars or electronics, between countries with similar factor endowments
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Economies of scale: the reduction in production costs that comes from increasing the scale of production
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Internal economies of scale: the reduction in production costs that comes from increasing the scale of production within a firm
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External economies of scale: the reduction in production costs that comes from the geographical concentration of firms in an industry
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Examples of intraindustry trade: trade in automobiles between the United States and Japan, trade in electronics between South Korea and Taiwan### Trade and Balance of Payments
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The United States and Canada trading hydro-powered electricity for Hollywood films represents an example of trade in goods and services.
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The United States and Mexico trading Budweiser for Modelo beer represents an example of trade in goods.
Current Account and Capital Account
- Income received from foreign investments is counted as a credit in the current account.
- Purchase of a plane ticket on a foreign airline is an example of an import and is counted as a debit in the current account.
- Shipment of food aid to a poor country is an example of an export and is counted as a credit in the current account.
- Purchase of a foreign bond is an example of a capital outflow and is counted as a debit in the capital account.
National Income Equation
- The national income equation is Y = C + I + G + (X - M), where Y is national income, C is consumption, I is investment, G is government spending, X is exports, and M is imports.
- The current account balance is equal to Y - C - I - G, or equivalently, X - M.
- An improvement in the current account balance can be achieved by increasing savings, reducing investment, or running a budget surplus.
Exchange Rates and Exchange Rate Systems
- A floating exchange rate system is a system in which the exchange rate is determined by market forces.
- An increase in the exchange rate (R) represents a depreciation of the dollar.
- Firms can use the forward market for foreign exchange to protect against foreign exchange risk.
Exchange Rate Systems
- The Bretton Woods system was an example of a modified gold standard.
- A single currency area requires mobile labor and synchronized business cycles.
- An increase in the demand for a currency will cause its value to appreciate.
- A weak currency leads to a higher volume of imports.
Foreign Exchange Markets
- The largest center for currency trading is the London market.
- The growth in the daily volume of foreign currency transactions is higher than the growth rate of the global economy.
- The US dollar is the most commonly traded currency.
- If the forward rate is greater than the spot rate, markets are signaling that they expect the future spot rate to be higher.
- If inflation is higher in the home market, the real value of the home currency is expected to decrease over time.
- Major currencies began floating against each other in 1973, ending the Bretton Woods system.
- The most important participants in foreign exchange markets are commercial banks.
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Description
This quiz covers the basics of international economics, including globalization, the international economy, and the principles of international economics.
