ECON 11 LE4

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Questions and Answers

What was the no-trade equilibrium price for clothing in America?

$10

$8 (correct)

What is the total labor required for America when producing 1F and 1C post-trade?

4 hrs

2 hrs

3 hrs

2 ½ hrs (correct)

What effect does the introduction of tariffs have on the domestic production of a good?

It decreases domestic production.

1.5

It has no effect on domestic production.

It raises domestic production of the covered good. (correct)

How much is the percentage increase in real wage for Europe after the trade?

5% Signup and view all the answers

How many units of clothing does America need to import when the price is lowered to $4?

200 Signup and view all the answers

Which choice shows the maximum production of food for Europe without clothing?

Choice A Signup and view all the answers

What was the increase in domestic production after a $2 tariff was added?

50 units Signup and view all the answers

What is one method through which governments can increase the price of competing imports?

Exchange Rate Management Signup and view all the answers

What is the total labor required for Europe when producing 1C and 1F post-trade?

6 ⅔ hrs Signup and view all the answers

If both countries chose option C post-trade, what clothing production does America achieve?

21 units Signup and view all the answers

What is one of the inefficiencies associated with increasing local production?

Excess cost of production Signup and view all the answers

Which statement accurately describes the allocation of funds from subsidies?

Government finances them without impacting consumer surplus. Signup and view all the answers

How is an undervalued exchange rate typically perceived by consumers?

It results in lower consumption across goods. Signup and view all the answers

What is the primary reason America specializes in food production after trade?

It has a comparative advantage in food production. Signup and view all the answers

What fundamental components does the Balance of Payments (BOP) include?

Current Account and Financial Account Signup and view all the answers

How does the price of goods change after trade between America and Europe?

Prices settle at the average of the two original prices. Signup and view all the answers

Which scenario would result in a debit in the Financial Account?

A country purchases foreign equity. Signup and view all the answers

What is one implication of trade as described in the content?

Trade allows countries to consume goods not produced domestically. Signup and view all the answers

What can be inferred about Europe's production specialization after trade?

Europe shifts its production focus entirely to clothing. Signup and view all the answers

Which of the following statements is true regarding the production and consumption in the post-trade situation?

Europe's consumption of clothing is higher than its production. Signup and view all the answers

Study Notes

International Trade and Development

Trade disciplines firms with market power, increasing productivity with technology embodied in intermediate goods.
Trade expands consumption variety and quality, offering cheaper costs compared to self-sufficiency.
Comparative advantage arises when opportunity costs of production are lower in one country compared to another, encouraging specialization and trade.
Ricardian analysis demonstrates specialization based on lower production costs, not absolute advantage.
For example: if producing food is relatively cheaper in America than in Europe, America should specialize in producing food and export it, importing clothing.

Comparative Advantage Analysis

Example: America and Europe produce food and clothing, both are more efficient in producing both but different in which is more efficient in producing each item.
America is more efficient in producing food and clothing
Opportunity costs of producing food in America is lower than in Europe, vice versa
This dictates which product should be traded and which imported, specializing based on Comparative Advantage and lower opportunity costs. This means if one country is comparatively better at making one good than the other it should focus on it.

Modern Analysis of Comparative Advantage

Example productivity schedule displays different production combinations, with optimal choice for countries.
In pre-trade, each country produces and consumes goods domestically based on their production capability. Prices are dictated solely within the countries' markets.
Post-trade, the price for commodities adjusts to be between those of each country's domestic prices, creating a new global price point.
Trade increases combined production given specialization, improving each country's combined prosperity.

Trade Strategies: Import Substitution

Aims for sustained development by shifting from primary to manufacturing production.
Requires increased domestic production/ reduced reliance on imports to achieve development.
Governments introduce policies such as:
- Tariffs(taxes on imports)
- Quotas(numerical limits on imports)
- Subsidies (financial help for domestic producers)

Diagrammatic Analysis of Tariffs

Raising domestic prices with tariffs reduces imports and increases domestic production and employment.
Higher domestic prices result in reduced consumption (negative impact on consumers).
Part of the revenue generated from the tariff can be used towards government services for public welfare. There is a tradeoff.

Exchange Rate Management

Undervalued exchange rate makes imports expensive, stimulating exports, and generating reserves.
Foreign exchange reserves are resources used for managing national financial matters and are not used for consumption or investment.
This strategy has negative impact on consumers due to higher prices on imported goods.

Balance of International Payments (BOP)

A systematic record of a country's economic transactions with other countries in a given time period.
Includes current account (trade in goods and services, income, current transfers) and capital/financial account (asset transactions).
Both sides of the balance will always sum to zero

Determination of Foreign Exchange Rates

The foreign exchange rate is the price of one currency in terms of another currency.
It is determined by supply and demand for each currency.
Factors influencing the rate can include: interest rate differentials, trade imbalances, and government policies.

Supply and Demand Analysis of Trade

Supply and demand curves interact to determine exchange rates.
Shifting of the curves occurs in response to various events like recession or government policy changes
A higher price for a currency results in decreased cost for imports while making its exports more expensive.

International Monetary Systems (IMS) Post-WWII

The Bretton Woods system established a fixed exchange rate regime, with pegs against the US dollar.
The system was adjustable when a country's currency deviated too much from the peg.
This system was replaced by multiple exchange rates when the US dollar lost its credibility in the 1970s due to the Vietnam War.

The International Financial System

Institutions that facilitate cross-border transactions and manage foreign exchange rates.
Includes fixed, flexible, and managed exchange rate regimes.
The Bretton-Woods system fixed exchange rates.

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Description

This quiz explores the principles of international trade and its impact on development, focusing on the concepts of comparative advantage and specialization. Topics include the role of intermediate goods, market power, and efficiency in production between countries such as America and Europe. Test your knowledge of trade theories and their real-world applications.