BEC 8 - International Economics

Question 1

What are the four broad national attributes (factors) identified by Michael Porter as promoting or impeding the creation of competitive advantage by a country?

Answer 1

Porter’s four factors are:

1. Factor endowments - the factors of production;
2. Demand conditions - nature of domestic demand;
3. Relating and supporting industries - the international competitiveness of related industries;
4. Firm strategy, structure and rivalry - how companies are created, organized, managed and compete.

Question 2

Define “comparative advantage”.

Answer 2

Comparative advantage is the ability of a country, business, individual or other entity to produce a particular good or service at a lower opportunity cost than the opportunity cost of producing the good or service by another entity.

Question 3

Define “absolute advantage”.

Answer 3

Absolute advantage is the ability of a country, business, individual or other entity to produce a particular good or service more efficiently (with fewer resources) than another entity.

Question 4

Identify three major reasons for international economic activity.

Answer 4

1. To develop new markets for the sale of goods and services;
2. To obtain commodities not otherwise available domestically;
3. To obtain goods and services at lower costs than available domestically.

Question 5

T/F: Restrictions on imports generally are based on economic misconceptions.

Answer 5

True

Such forms of protectionism are generally inappropriate because they are based on economic misconceptions or because there are more appropriate fiscal and monetary policy responses.

Question 6

What is a country’s balance of payments account?

Answer 6

A summary accounting of all of a country’s transactions with other countries.

Question 7

Distinguish the difference between import quotas and import tariffs.

Answer 7

1. Import quotas are restrictions on the quantity of goods that can be imported into a country;
2. Import tariffs are taxes imposed on imported goods as a means of reducing the quantity of goods imported into a country.

Question 8

Identify and describe the balance of payment accounts.

Answer 8

1. Current Account: Net $ amounts earned from export of goods and services, amounts spent on import of goods and services, and government grants to foreign entities;
2. Capital Account: Net $ amount of inflows from investments and loans by foreign entities, amount of outflows from investments and loans U.S. entities made abroad, and the resulting net balance;
3. Financial Account : Net $ amount of U.S.-owned assets abroad and foreign-owned assets in the U.S.

Question 9

Define a “balance of payments deficit”.

Answer 9

A country has a balance of payments deficit when its imports and investment outflows exceed its exports and investment inflows.

Question 10

What are some of the socio-political issues associated with international trade?

Answer 10

1. Domestic unemployment linked to use of foreign labor
2. Loss of manufacturing capabilities;
3. Reduction of industries essential to national defense;
4. Lack of domestic protection for start-up industries.

Question 11

T/F: The lower the cost of a foreign currency in terms of a domestic currency, the cheaper the foreign goods and services of that currency in the domestic market.

Answer 11

True
A given good denominated in a foreign currency will cost less of the domestic currency the lower the cost of the foreign currency is in terms of the domestic currency. So, if you want to acquire a single foreign good it will cost less when the exchange rate is $1.10 per Euro than when the exchange rate is $1.25 per Euro—the foreign good is cheaper at the $1.10 exchange rate.

Question 12

T/F: The lower the cost of a foreign currency in terms of a domestic currency, the higher the cost of domestic goods and services to foreign buyers, resulting in lower exports.

Answer 12

True
This statement reverses the perspective so that now we are considering the exchange rate from the point of view of foreign buyers. Intuitively, the stronger dollar cannot be better for both the sides of the transactions. In our prior example, the stronger dollar means that the foreign buyers can get only $1.10 per Euro, not $1.25 per Euro. So, the dollar-based goods cost that foreign buyer more when the exchange rate is $1.10 per Euro than when it is $1.25 per Euro. For a good that is priced at $10.00 U.S., at the $1.25 exchange rate it would take 8 Euros (8 x $1.25 = $10.00), but at the $1.10 exchange rate it would take 9+ Euros to buy the $10.00 good (9 x $1.10 = $9.90 + a fraction of another Euro).

Question 13

Define the term of “dumping”.

Answer 13

Dumping is a form of international price discrimination by which the price charged for a product exported and sold in (imported into) a foreign country is less than the price of the identical product in the market of the exporting country.

Question 14

Define “direct (currency) exchange rate”.

Answer 14

Currency exchange rate expressed as the domestic price of one unit of a foreign currency (e.g., U.S. dollar cost of one Euro).
1 Euro = $1.10

Question 15

Define “indirect (currency) exchange rate”.

Answer 15

Currency exchange rate expressed as the foreign currency price of one unit of the domestic currency (e.g., Euro cost of one U.S. dollar).
$1.00 = .909 Euro ($1/$1.10)

Question 16

Define “currency exchange rate”.

Answer 16

The price of one unit of a country’s currency expressed in units of another country’s currency; the rate at which two currencies will be exchanged.

Question 17

When a currency appreciates (becomes stronger), it will cause:

Answer 17

a. Foreign goods to become cheaper, providing consumers access to a wider array of goods at lower prices.
b. Domestic producers to maintain lower prices, thus encouraging efficiency and putting downward pressure on inflation (price increases).
c. Domestic producers to have more difficulty in competing in both domestic markets and foreign markets.

Question 18

When a currency depreciates (becomes weaker), it will cause:

Answer 18

a. Domestic goods to become cheaper relative to foreign goods, thus increasing export demand.
b. Increased export demand to increase domestic employment.
c. Imported goods to be more expensive, which will drive up the cost of imported inputs (i.e., raw materials, components, etc.).