Macroeconomic Essentials (Economics 1B) Unit 9

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Questions and Answers

What are the three primary reasons countries participate in the global economy?

To trade, to apply political pressure, and to invest (correct)

To encourage foreign companies, to impose trade sanctions, and to promote tourism

To specialize, to export, and to import

To produce goods, to provide services, and to create jobs

What is the principle that supports the idea of countries trading with each other?

That countries should specialize in producing what they do best (correct)

That countries should only export goods

That countries should only trade with their neighboring countries

That each country should be self-sufficient

What is an example of a South African company that has invested in a foreign country?

De Beers

Sasol

Anglo-Gold

South African Breweries (correct)

What occurs when one country produces more of a product than another using the same amount of resources?

Absolute advantage Signup and view all the answers

In which country can very good grapes be raised and very good wine can be made, but at a higher expense than importing from foreign countries?

Scotland Signup and view all the answers

Who wrote about the concept of absolute advantage?

Smith Signup and view all the answers

Which of the following is a benefit of foreign companies investing in a country?

They bring money, technology, and skills that are not available locally Signup and view all the answers

What is an example of a product that can be produced by a South African worker?

DVD players Signup and view all the answers

What is the essence of comparative advantage?

Nations should produce goods that they are most efficient at producing. Signup and view all the answers

What is the assumption about transport costs in the England and Portugal example?

There are zero transport costs. Signup and view all the answers

What happens to clothing production in England when two workers are reassigned from wine production?

Clothing production increases by 6 units. Signup and view all the answers

What is the implication of the England and Portugal example in terms of absolute advantage?

A country can have an absolute advantage in all goods and yet gain from trade with a less efficient partner. Signup and view all the answers

Why were trade sanctions imposed on South Africa during the 1980s?

To impose economic pressure and affect South Africa's political decisions. Signup and view all the answers

Why do industrialized countries invest overseas?

To increase profits for local companies by accessing cheaper labour and raw materials. Signup and view all the answers

What is the purpose of import tariffs?

To protect domestic firms against competition from imports or to raise government revenue. Signup and view all the answers

What is the result of the trade between England and Portugal in the example?

England gains 3 units of wine and Portugal is left exactly as well off as before. Signup and view all the answers

What is the benefit of trade, according to the theory of comparative advantage?

Trade involves mutual gain. Signup and view all the answers

What is the key difference between the productivity of English and Portuguese workers in the example?

Portuguese workers are more productive in both industries. Signup and view all the answers

What does an increase in the value of a country's currency imply about the value of another currency?

The other currency depreciates Signup and view all the answers

Which of the following accurately describes a floating exchange rate?

It fluctuates based on market supply and demand Signup and view all the answers

How does a country's currency appreciation affect its goods in foreign markets?

Makes them more expensive in foreign markets Signup and view all the answers

What is primarily responsible for creating demand for a nation's currency?

Purchases of that nation's goods or assets Signup and view all the answers

What role do authorized currency dealers play in a foreign exchange market?

They facilitate the exchange of currencies in the market Signup and view all the answers

What happens when a government buys its own currency on the foreign exchange market?

It increases demand for its currency Signup and view all the answers

What defines a fixed exchange rate?

It is established and maintained by the government Signup and view all the answers

What is the impact of international economic interdependence on policy-making?

It makes policy-making more complex for all stakeholders Signup and view all the answers

Study Notes

Why Countries Trade

Countries participate in the global economy for three primary reasons: to trade, apply political pressure, and invest.
Specialization is key to international trade, as countries can obtain goods and services they cannot produce or do not possess.
Many South African companies have invested in countries overseas, and foreign companies are encouraged to invest locally, bringing money, technology, and skills not available locally.

Absolute Advantage

Absolute advantage occurs when one country produces more of a product than another using the same amount of resources.
Example: South Africa has an absolute advantage in producing DVD players over Botswana, while Botswana has an absolute advantage in producing wool.

Comparative Advantage

Comparative advantage is the idea that nations should concentrate on producing what they are best at, even if they do not have an absolute advantage.
By exporting each other’s services/skills, nations can benefit from trade and end up with more goods/services.
The theory of comparative advantage states that each country will specialize in and export those goods for which it has a comparative advantage.

Comparative Advantage Example

England and Portugal produce two commodities, wine and clothing, with different productivity levels.
Portugal has an absolute advantage in both industries but still benefits from trade with England.
England can gain 3 units of wine by exporting clothing to Portugal, demonstrating that a country can have an absolute advantage in all goods and yet gain from trade.

Application of Political Pressure

Countries use trade as a way of affecting or controlling another country’s political decisions.
Example: trade sanctions imposed on South Africa during the 1980s and 1990s to apply political pressure against apartheid.

Investment in the Global Economy

Industrialized countries invest overseas to increase profits for local companies and gain access to cheaper labor or raw materials.

The Impact of Trade Tariffs

Import tariffs are duties or taxes imposed on products imported into a country.
Tariffs are used to protect domestic firms against competition from imports or to raise government revenue.

Foreign Exchange Rates

Foreign trade involves payment in foreign currencies, and exchange rates represent the price of one currency in terms of another.
Changes in exchange rates affect the relative prices of goods and services across countries and the flow of goods and services.
Appreciation of a currency makes goods relatively more expensive in foreign markets, while depreciation makes foreign goods relatively cheaper domestically.

Foreign Exchange Market

The foreign exchange market is the international market where one currency can be exchanged for other currencies.
The main reason people demand a given nation's currency is to purchase that nation's goods, services, or financial assets.
The main reason people supply the currency of a given country is to purchase another country's goods, services, or financial assets.

Types of Exchange Rates

A floating exchange rate is determined in free markets by the law of supply and demand.
A fixed exchange rate is set and maintained by the government in conjunction with its Central Bank.

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Description

This quiz covers the reasons why countries participate in the global economy, including trade, applying political pressure, and investment.