Lecture 23: International Macroeconomics
115 Questions
1 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the definition of a closed economy?

A closed economy is one that does not interact with other nations.

International trade has declined in volume since 1950.

False

What are the three main factors that have contributed to a significant increase in international trade volume?

  • Exports, imports, and net exports
  • Transportation, telecommunication, and technology (correct)
  • Trade policies, tariffs, and quotas
  • Investments, savings, and consumption

    • What is the formula for calculating net exports?

    <p>Net exports are calculated as exports - imports.</p> Signup and view all the answers

    A positive value for net exports indicates a _______, while a negative value indicates a _______.

    <p>Trade surplus, trade deficit</p> Signup and view all the answers

    What is the definition of net capital outflow?

    <p>Net capital outflow is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.</p> Signup and view all the answers

    What are the three possible outcomes when a foreigner buys US products?

    <p>Buy US goods, buy US assets, exchange the currency</p> Signup and view all the answers

    What is the relationship between net exports and net capital outflow?

    <p>Net exports and net capital outflow are equal: NX = NCO.</p> Signup and view all the answers

    Which equation accurately represents national savings in an open economy?

    <p>S = Y – C – G = I + NX = I + NCO</p> Signup and view all the answers

    A trade deficit always indicates a negative economic outcome.

    <p>False</p> Signup and view all the answers

    A trade deficit can result from which of the following events?

    <p>Increased domestic investment</p> Signup and view all the answers

    What is the definition of a nominal exchange rate?

    <p>A nominal exchange rate is the rate at which one can exchange the currency of one country for the currency of another.</p> Signup and view all the answers

    A currency appreciates when it ______ in value, while it depreciates when it ______ in value.

    <p>Increases, decreases</p> Signup and view all the answers

    What is the primary factor determining exchange rates in the short run?

    <p>Supply and demand forces determine exchange rates in the short run.</p> Signup and view all the answers

    What primary factor drives currency demand in international markets?

    <p>Interest rates</p> Signup and view all the answers

    A higher real interest rate in a country typically leads to a depreciation in its currency.

    <p>False</p> Signup and view all the answers

    What is the defining characteristic of a pegged currency?

    <p>A pegged currency is kept at a fixed exchange rate, as opposed to a floating exchange rate.</p> Signup and view all the answers

    What are the primary motivations for governments pegging their currencies?

    <p>To promote trade, control import/export prices, and stabilize the currency</p> Signup and view all the answers

    Pegging a currency involves passively setting the exchange rate without any market intervention.

    <p>False</p> Signup and view all the answers

    Describe how China managed to keep its currency undervalued before 2005.

    <p>China kept its currency undervalued by manipulating its supply, essentially printing more RMB to purchase USD, thus maintaining the fixed exchange rate.</p> Signup and view all the answers

    What is the main difficulty in keeping a currency overvalued, compared to undervaluing it?

    <p>It requires buying significant amounts of the target currency to stimulate demand</p> Signup and view all the answers

    A country switching entirely to another currency completely eliminates the need for its own monetary policy.

    <p>True</p> Signup and view all the answers

    What is the defining principle of purchasing power parity (PPP) in international economics?

    <p>Purchasing power parity states that the prices of the same good should be equal in different countries. This assumes that prices of similar goods should converge over time.</p> Signup and view all the answers

    What is the Big Mac Index?

    <p>The Big Mac Index is tongue-in-cheek method used to assess the purchasing power parity (PPP) of currencies using the price of a McDonald's Big Mac in different countries.</p> Signup and view all the answers

    What is the main advantage of countries sharing a common currency?

    <p>It simplifies cross-border transactions and transactions.</p> Signup and view all the answers

    Countries that share a currency have complete control over their own monetary policy.

    <p>False</p> Signup and view all the answers

    What are the two main types of trade policies?

    <p>Tariffs and quotas</p> Signup and view all the answers

    What is the primary consequence of tariffs, relative to free trade?

    <p>Tariffs lead to a reduction in total surplus, creating a deadweight loss for the economy.</p> Signup and view all the answers

    Quotas and tariffs have similar effects on currency markets and the overall economy.

    <p>True</p> Signup and view all the answers

    What is the main reason that tariffs are considered a source of government revenue?

    <p>Tariffs generate revenue for the government by imposing a tax on imported goods.</p> Signup and view all the answers

    The burden of a tariff is entirely borne by the consumer.

    <p>False</p> Signup and view all the answers

    A study performed in 2018 found that Trump's tariffs had what impact on US consumers?

    <p>Reduced consumer surplus and increased prices</p> Signup and view all the answers

    What is the projected impact of a 20% tariff on household expenses in the US?

    <p>The Tax Foundation projected that a 20% tariff would bring in $233B in revenue but incur an additional $259B in household expenses.</p> Signup and view all the answers

    A country has a comparative advantage in producing a good if it can produce it with a lower opportunity cost.

    <p>True</p> Signup and view all the answers

    Explain the concept of autarky, as discussed in the context of international trade.

    <p>Autarky refers to the situation where a country does not engage in any international trade and operates as a closed economy.</p> Signup and view all the answers

    In the context of trade, what happens to consumer surplus when a country starts exporting a good?

    <p>Consumer surplus decreases.</p> Signup and view all the answers

    The gain from trade always outweighs the costs for all individuals and industries within a country.

    <p>False</p> Signup and view all the answers

    What is the key principle of trade that is applied in the example of Isoland?

    <p>The key principle of trade is the concept of comparative advantage.</p> Signup and view all the answers

    International trade allows countries to specialize in producing goods where they have a competitive advantage, benefiting global economic efficiency.

    <p>True</p> Signup and view all the answers

    What happens to total surplus when a tariff is imposed on imported goods?

    <p>Total surplus decreases.</p> Signup and view all the answers

    Tariffs protect domestic industries from foreign competition.

    <p>True</p> Signup and view all the answers

    What type of economy did the US model assume before considering open economics?

    <p>Closed Economy</p> Signup and view all the answers

    What are the key factors that have contributed to the monumental increase in international trade volume since 1950?

    <p>Technological improvements in transportation, telecommunications, and technology</p> Signup and view all the answers

    What are the main components of the "trade balance"?

    <p>Exports</p> Signup and view all the answers

    A trade surplus occurs when a country's exports surpass its imports.

    <p>True</p> Signup and view all the answers

    A trade deficit occurs when a country's imports exceed its exports.

    <p>True</p> Signup and view all the answers

    What is the net capital outflow (NCO)?

    <p>Purchase of foreign assets by domestic residents - purchase of domestic assets by foreigners</p> Signup and view all the answers

    A positive NCO indicates that a country is investing more in foreign countries than foreign countries are investing in them.

    <p>True</p> Signup and view all the answers

    A negative NCO implies that foreign countries are investing more in the given country than it is investing in foreign nations.

    <p>True</p> Signup and view all the answers

    What is the relationship between NCO and NX, and what is its significance in open economics?

    <p>NCO and NX are equal.</p> Signup and view all the answers

    What economic indicator describes the "trade openness index"?

    <p>Trade as a share of GDP.</p> Signup and view all the answers

    How are international trade and savings and investments related in the context of an open economy?

    <p>National savings equal the sum of domestic investment and net capital outflow.</p> Signup and view all the answers

    A trade deficit is invariably a detrimental factor for a country's economic well-being.

    <p>False</p> Signup and view all the answers

    What are the main factors that can trigger a trade deficit?

    <p>A decline in national savings</p> Signup and view all the answers

    How can a country's currency appreciate or depreciate in terms of another country's currency?

    <p>By shifting the value of the currency in terms of another currency.</p> Signup and view all the answers

    A country's currency appreciates when its value increases in comparison to another country's currency.

    <p>True</p> Signup and view all the answers

    A country's currency depreciates when its value declines in comparison to another country's currency.

    <p>True</p> Signup and view all the answers

    How does the exchange rate impact the comparative advantage of a nation in terms of trading goods and services?

    <p>The exchange rate strongly influences a country's comparative advantage.</p> Signup and view all the answers

    Supply and demand forces are the primary determinants of exchange rates, particularly in the short run.

    <p>True</p> Signup and view all the answers

    What is the effect of an increase in demand for Japanese products or assets on the exchange rate between USD and Japanese yen?

    <p>It increases the value of Japanese yen and decreases the value of the USD.</p> Signup and view all the answers

    A rise in US real interest rates encourages a reduction in demand for USD, making it less attractive to foreign investors.

    <p>False</p> Signup and view all the answers

    What is the significance of a "strong dollar" for the US economy?

    <p>A stronger dollar makes US exports more expensive, but imports from other countries become cheaper.</p> Signup and view all the answers

    What is the difference between a floating exchange rate and a fixed exchange rate?

    <p>A floating exchange rate is determined by market forces, while a fixed exchange rate remains constant.</p> Signup and view all the answers

    Why do governments choose to peg their currency to a fixed exchange rate?

    <p>To streamline trade by stabilizing the exchange rate and eliminating currency fluctuations</p> Signup and view all the answers

    China's rapid economic growth in the 1990s and 2000s was heavily reliant on its export-driven model.

    <p>True</p> Signup and view all the answers

    How did China maintain its currency undervalued relative to the US dollar during the period from 1997 to 2005?

    <p>By manipulating the supply of its currency and pegging it at 8 RMB to 1 USD.</p> Signup and view all the answers

    What does "defending the peg" refer to when discussing currency pegging?

    <p>The act of intervening in the currency market to maintain the fixed exchange rate.</p> Signup and view all the answers

    The US dollar is widely accepted as the world’s most stable currency, making it a popular target for currency pegging.

    <p>True</p> Signup and view all the answers

    Maintaining an overvalued currency is typically easier than keeping a currency undervalued, because a country can simply print their currency to increase supply.

    <p>False</p> Signup and view all the answers

    What is the primary issue that arises for countries that switch to another currency, like the US Dollar?

    <p>The loss of control over their own monetary policy.</p> Signup and view all the answers

    Hyperinflation is a key factor that can encourage countries to switch to another currency.

    <p>True</p> Signup and view all the answers

    What concept governs the long-run exchange rate determination?

    <p>Purchasing Power Parity (PPP)</p> Signup and view all the answers

    The "Big Mac Index" is a lighthearted approach for measuring Purchasing Power Parity (PPP) in exchange rates across countries.

    <p>True</p> Signup and view all the answers

    The Euro is the only common currency shared by European countries.

    <p>False</p> Signup and view all the answers

    What are the main advantages of a shared currency system like the Eurozone?

    <p>A shared currency system benefits from easier trade, reduced nationalistic feelings, and a sense of shared history.</p> Signup and view all the answers

    What is the main disadvantage of a shared currency system, like the Eurozone?

    <p>A shared currency system loses the flexibility of using individual monetary policies to address country-specific economic issues.</p> Signup and view all the answers

    Tariffs and quotas typically have distinct effects on exchange rates and economies.

    <p>False</p> Signup and view all the answers

    Tariffs can serve as a source of government revenue.

    <p>True</p> Signup and view all the answers

    The burden of a tariff is always entirely borne by the importer.

    <p>False</p> Signup and view all the answers

    Tariffs are a universally beneficial policy, promoting economic growth and prosperity for all nations.

    <p>False</p> Signup and view all the answers

    What is a closed economy?

    <p>A closed economy is an economy that does not interact with other nations.</p> Signup and view all the answers

    What are the main factors that have led to the significant increase in international trade volume since 1950?

    <p>Improvements in transportation, telecommunication, and technology.</p> Signup and view all the answers

    The term 'trade openness index' refers to the share of a country's GDP represented by exports and imports combined.

    <p>True</p> Signup and view all the answers

    Which of the following is NOT a key topic covered in the study of open economies?

    <p>Monetary policy of individual countries</p> Signup and view all the answers

    What is comparative advantage?

    <p>A country has a comparative advantage if it can produce a good with a lower opportunity cost than another country.</p> Signup and view all the answers

    In the example provided in this lecture, which country has the comparative advantage in producing avocados?

    <p>Mexico has the comparative advantage.</p> Signup and view all the answers

    What is the primary benefit of specialization and trade as per the lecture?

    <p>Both participating countries can achieve a point outside of their consumption possibilities frontier under autarky, implying a gain from trade.</p> Signup and view all the answers

    What is the definition of net exports?

    <p>Net exports are the difference between a country's exports and imports.</p> Signup and view all the answers

    The balance of trade is always equivalent to the balance of capital flow.

    <p>True</p> Signup and view all the answers

    How do economists use the terms 'savings' and 'investment' in an open economy?

    <p>In an open economy, savings are equal to investment plus net capital outflow.</p> Signup and view all the answers

    How is a trade deficit related to net capital outflow?

    <p>A trade deficit is equivalent to a negative net capital outflow.</p> Signup and view all the answers

    Which of the following can cause a trade deficit?

    <p>A decrease in national savings.</p> Signup and view all the answers

    A trade deficit is always a bad thing for a country's economy.

    <p>False</p> Signup and view all the answers

    What is the 'nominal exchange rate'?

    <p>The nominal exchange rate is the rate at which one can trade the currency of one country for the currency of another.</p> Signup and view all the answers

    What is the difference between a currency appreciation and depreciation?

    <p>A currency appreciates when it becomes more valuable relative to another currency, while it depreciates when it becomes less valuable.</p> Signup and view all the answers

    Which of the following scenarios would lead to an appreciation of the US dollar?

    <p>Increased US interest rates.</p> Signup and view all the answers

    What is a pegged currency?

    <p>A pegged currency is a currency that is kept at a fixed exchange rate relative to another currency.</p> Signup and view all the answers

    Why might a country choose to peg its currency?

    <p>A country might peg its currency to promote currency stability, facilitate trade, or control relative import and export prices.</p> Signup and view all the answers

    How does a country defend a currency peg?

    <p>Countries defend a currency peg by manipulating the supply of their currency to maintain the desired exchange rate.</p> Signup and view all the answers

    What was China's strategy for maintaining its currency peg?

    <p>China kept its currency undervalued by maintaining a fixed exchange rate of 8 RMB: 1 USD and buying US dollars in the foreign exchange market to maintain that rate.</p> Signup and view all the answers

    What is the main risk associated with adopting a currency peg, particularly when seeking to overvalue a currency?

    <p>Overvaluing a currency through a peg requires large reserves of the target currency to maintain the peg, which can be expensive and difficult to sustain.</p> Signup and view all the answers

    What is the alternative to a currency peg that countries can use?

    <p>Countries can switch entirely to another currency, typically the US dollar, to achieve stability or address issues like hyperinflation.</p> Signup and view all the answers

    What is Purchasing Power Parity (PPP)?

    <p>PPP is an economic theory that suggests, in the long run, exchange rates will adjust to equalize the prices of identical goods and services across different countries.</p> Signup and view all the answers

    What are the advantages of sharing a currency, as exemplified by the Euro?

    <p>Sharing a currency can facilitate trade among countries, reduce nationalistic feelings, and strengthen a shared history.</p> Signup and view all the answers

    What is the primary disadvantage of sharing a currency?

    <p>Sharing a currency means that participating countries lose control over their individual monetary policies.</p> Signup and view all the answers

    What are the two main types of trade policies discussed in this lecture?

    <p>Tariffs and quotas</p> Signup and view all the answers

    What was President Trump's stance on tariffs?

    <p>President Trump was enthusiastic about tariffs, sometimes calling them 'beautiful.'</p> Signup and view all the answers

    Tariffs reduce total surplus, creating a deadweight loss.

    <p>True</p> Signup and view all the answers

    What is the impact of tariffs/quotas on currency?

    <p>Tariffs and quotas can cause the currency of the imposing country to appreciate relative to the currency of the country whose goods are affected.</p> Signup and view all the answers

    Where does the burden of a tariff ultimately fall?

    <p>Shared between foreign producers and domestic consumers.</p> Signup and view all the answers

    What was the main finding of the study on tariffs implemented in 2018?

    <p>While the tariffs brought in revenue and potentially increased domestic production, US consumers ultimately paid a higher price for goods than the revenue generated and production gains combined.</p> Signup and view all the answers

    What is the prediction of the Tax Foundation regarding the impact of a 20% tariff in 2025?

    <p>The Tax Foundation predicts that a 20% tariff in 2025 would generate $233 billion in revenue but increase household expenses by $259 billion.</p> Signup and view all the answers

    In the numerical example comparing trade between the US and Mexico using avocados and non-avocados, what is the key condition that governs whether both countries will benefit from trading?

    <p>Both countries will benefit from trading as long as the trade price falls somewhere between the opportunity costs of both countries for each good.</p> Signup and view all the answers

    What is the main takeaway about the impact of trade on total surplus in a country?

    <p>Trade generally increases total surplus compared to an autarky scenario.</p> Signup and view all the answers

    A tariff always causes a decline in total surplus.

    <p>True</p> Signup and view all the answers

    Study Notes

    Lecture 23: International Macroeconomics

    • The lecture concerns international macroeconomics, a field that considers how nations interact in the global economy.
    • International trade is a vital part of both domestic and global economic activity.
    • The volume of international trade has increased significantly since 1950, primarily due to improvements in transport, telecommunications, and technology, as well as trade policy changes (e.g., GATT, NAFTA, USMCA).
    • Trade has become a larger proportion of global GDP over time.
    • The lecture also touches on the recent political discourse around trade policies and their impact.
    • Trump's advocacy for more tariffs and their relevance to US manufacturers was highlighted.
    • The lecture dives into the core concept of an open economy, encompassing imports, exports, trade balances, capital flows, exchange rates, tariffs, and quotas.
    • The production possibilities frontier (PPF) is a concept introduced. Without trade, the PPF is identical to the consumption possibilities frontier.
    • Comparative advantage is described as a country's ability to produce a good at a lower opportunity cost compared to other countries.
    • Examples of this concept are illustrated with avocados and non-avocados to illustrate potential benefits of trade.
    • The lecture introduces the vocabulary related to international flows of goods. Defining exports and imports, as well as explaining net exports (NX) and trade imbalances (surplus or deficit), is part of the lecture.
    • Net capital outflow (NCO) is defined as the net purchase of foreign assets by domestic residents, less the net purchase of domestic assets by foreigners.
    • The equality of net exports and net capital outflow is presented as an accounting identity (NCO = NX).
    • The relationship between domestic savings, investment, and net capital outflow in an open economy, along with alternative interpretations, is explained.
    • The potential effect of trade deficits on national savings and investment is explored.
    • Implications of trade deficits, factors that may cause these (national saving drops, increased foreign inflow or domestic investment increases) are covered.
    • Exchange rates are covered. They are defined as the rate at which one currency is exchanged for another currency. Examples are provided.
    • The determination of exchange rates is presented as a supply and demand issue in the currency market
    • Real interest rates significantly impact currency demand. Higher real interest rates on domestic assets attract investment leading to higher demand for that currency.
    • The concept of a "strong dollar" in relation to potentially higher or lower exports/imports is explained in the context of international trade.
    • The lecture then explores the concept of currency pegging, a system where a nation's currency is maintained at a fixed rate to another currency. The practicality of maintaining such a peg, particularly China, is analyzed, offering reasons for the use and complexities.
    • The lecture also looks at ways a country deals with hyperinflation by using alternative means for valuation, and the implications of such an action given existing financial systems.
    • Purchasing Power Parity (PPP) is introduced and explained as an economic theory that attempts to derive the real exchange rate between two currencies, based on the purchasing power of the currencies in two different countries.
    • The concept of a "Big Mac Index," a tongue-in-cheek calculation for evaluating exchange rates based on the relative price of a McDonald's Big Mac in various countries, is clarified
    • The use of a shared currency, like the Euro, as an alternative to currency pegging, is discussed, along with its advantages and disadvantages.
    • The lecture explores tariffs and quotas as trade policies, emphasizing their effects on currency exchange, government revenue, and their impact on domestic consumers.
    • Key takeaways from a previous lecture concerning trade and tariffs (from Lecture 7) regarding the impact of trade and tariffs on consumer, producer, and total surplus are summarized.
    • The final pages of the lecture examine the impact of tariffs and quotas on currency exchange rates and government income. Specific insights into the impact of Trump's tariffs in 2018 are detailed.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Related Documents

    ECON 201 Lecture 23: International Macroeconomics Fall 2024 PDF

    Description

    This lecture focuses on international macroeconomics and its significance in understanding global economic interactions. It addresses the growth of international trade since 1950, the impact of trade policies, and concepts like open economies and the production possibilities frontier (PPF). Political discussions around tariffs and their implications for manufacturers are also covered.

    More Like This

    Economic Development and Policies Quiz
    14 questions

    Economic Development and Policies Quiz

    PicturesqueOrbit avatar
    PicturesqueOrbit
    Macroeconomics in International Economy
    6 questions

    Macroeconomics in International Economy

    StylishWoodland avatar
    StylishWoodland
    Economics Test: Macro Economy and Policies
    5 questions

    Economics Test: Macro Economy and Policies

    LegendaryLynx avatar
    LegendaryLynx
    International Economics Overview
    44 questions

    International Economics Overview

    EnhancedOrchid7263 avatar
    EnhancedOrchid7263
    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser