Classes 1, 3, 4

Question 1

(1) Two-Speed Recovery in Europe

Answer 1

-Europe has an economy that is characterized by a central core of countries (strong Germany)-There are nations on the periphery of europe (greece, italy, spain, portugal, ireland), these nations have been suffering low growth and the prospects for enhanced growth are severely limited/constrained.-Germany has the clout to change the economic and financial environment in europe-Shows how different countries in the same area can operate at different economic levels

Question 2

(1) Global two-speed recovery

Answer 2

-The economic growth in the world is emanating not from the old line players (western europe, north america, japan), but it is emanating from emerging nations such as brazil, china and mexico-The emerging nations are leading the growth, the industrial nations can’t find a way to bring on this growth

Question 3

(1) Balance of Payments Accounts (3)

Answer 3

1. The Current Account2. The Capital and Financial Accounts3. The Reserve Account

Question 4

(1) Current Account

Answer 4

-records (on a quarterly or annual basis) flows of exports, imports, investment income and international financial transfers-“Credits” money that flows into Canada (ex to buy Canadian goods/services or to travel in Canada)-“Debits” money that flows out of Canada (ex when Canadians import goods/services, when Canadinas travel abroad, when Canada pays interest or dividends to foreigners)

Question 5

(1) Capital and Financial Accounts

Answer 5

-record (on a quarterly or annual basis) the flows of capital that move into or out of Canada within the period-the difference between the value of foreign purchases of Canadian assets and Canadian purchases of foreign assets-“Credits” when there is an inflow of capital to Canada (ex. an American buys a bond issues by a Canadian government)-“Debits” when there is an outflow of Canadian capital (ex a Canadian buys a bond issued by a foreign government)

Question 6

(1) Reserve Account

Answer 6

-Records changes in the amount of “official” foreign exchange reserves held by the Bank of Canada-these changes tend to be very small relative to the total foreign exchange for commercial and international investment purposes

Question 7

(1) Balance of Payments Identity

Answer 7

Balance of Payments MUST balance!BCA + BKC + BRA = 0BCA = Balance on Current AccountBKC = Balance on Capital and Financial AccountBRA = Balance on Reserves AccountSince BRA is so small, we must make sure that BCA = BKA

Question 8

(1) Current Account in Canada

Answer 8

-In General: The value of our exports exceeds the value of our imports-Total value of our merchandise trade exports (forest products, minerals, energy, etc) exceeds the value of our imported merchandise (electronics, clothing, foodstuff)-Canadian Outflows of Investment Income Receipts and Investment Income Payments far exceeds the inflow of receipts from abroad –> Canadian industry is very capital intensive, and so we import capital to use.

Question 9

(1) Exchange rate’s impact on the trade balance

Answer 9

-When the Can $ appreciates then Canadian-produced goods become more expensive in the export market –> so exports decrease-When the Can $ appreciates, the stronger Canadian dollar makes imports cheaper-As exports fall and imports rise the trade balance deteriorates

Question 10

(1) Trade Balance

Answer 10

Exports minus Imports

Question 11

(1) J-Curve effct

Answer 11

-J-Curve is a reaction pattern of the trade balance to currency depreciation.-it depicts an initial deterioration and eventual improvement of the trade balance following currency depreciation-since it takes time for the trade balance to adjust to a depreciation in currency, curve is observed-after depreciation: some importers continue to import at high prices before finding alternative domestic sources, and exporters require time before they start exploiting the new opportunities in markets abroad

Question 12

(1) Capital Account vs Financial Account

Answer 12

Capital Account - records a nation’s capital transfers and transactions in non-produced, non-financial assets (such as patents and copyrights)-Financial Account records a nation’s international transactions in financial assets (such as bonds, loans or equities)-There is generally much more activity in the Financial Account as opposed to the Capital Account and it is the more important of the two accounts

Question 13

(1) Two Categories of Financial Assets recorded in the Capital & Financial Account

Answer 13

1. Direct Investment- foreign direct investment is what multinational enterprises do - for example McCain setting up food processing plant in France with equity injections of $10 mil - the $10 mil is a debit in the Capital Account (BUT flow of earnings from that capital is recorded as investment income in Current Account)2. Portfolio Investment - Canadian purchases of shares of foreign companies, foreign purchases of shares in Canadian companies, Canadian purchases of foreign bonds and foreign purchases of Canadian bonds

Question 14

(1) Dutch Disease

Answer 14

The relationship between the increase in exploitation of a natural resource and the decline in the manufacturing sector. As a country’s revenues increase from natural resources, their currency will become stronger, resulting in their exports becoming more expensive for other nations, thus making the manufacturing sector less competitive.

Question 15

(3) Process vs product innovation for labour productivity growth

Answer 15

-process innovation is more important than product innovation for labour productivity growth-process innovators had an annual labour productivity growth 3.6% higher than non-process innovators-process innovation is associated with higher plant survival rates while product innovation is related to lower survival rates-product innovation dominates the early stages of the life cycle, while process innovation occurs later when market shake outs have already occured

Question 16

(3) firm size and relation to innovation

Answer 16

-firm size is more closely related to process innovation than product innovation-large firms have higher process innovation than small firms, but there is no difference in product innovation rates-failing to innovate will lead to the closure of even large plants

Question 17

(3) what happens in industries that have substantial economies of scale and trade barriers are torn down?

Answer 17

-they will actively foster those economies and the technological enhancements that drive them by concentrating production, research and corporate strategy in one location while serving foreign markets via exports

Question 18

(3) New evidence for scale economies

Answer 18

-it was previously thought that there are usually constant returns to scale-new study says that 2/3 of manufacturing industries exhibit increasing returns to scale-another 1/3 of manufacturing industries exhibit constant returns to scale. In this case they are more likely to emphasize proximity to market in order to economize on transportation costs and to establish a local presence-thus a substantial share of world trade emanates form industries that enjoy economies of scale-high end manufacturing usually has increasing returns to scale-low end manufacturing usually has constant returns to scale-natural resources have returns below those for high-end manufacturing

Question 19

(3) Industrial productivity and commodities

Answer 19

-productivity is enhanced by creating products and services that consumers find valuable and for which they pay a premium-commodities and undifferentiated products tend to be relatively unexciting in productivity terms, and productivity growth tends to come from cost cutting and ever-leaner production-small firms tend to be less productive on average than larger firms

Question 20

(3) “Trading Up” Key points

Answer 20

-FTA led to sharp increase in trade b/w Can and US-Can and US experienced exceptional growth in trade in sectors liberalized by the FTA-A number of industries experienced fast 2-way trade growth, suggesting an increased degree of intra-industry specialization-NAFTA allowed Can to sustain exports to Mexico, despite Mexico’s economic crisis, and Can and US were protected by the impact of Mex’s crisis-Can’s investment performance has been solid under the FTA. Can continued to attract a share of total NA business capital expenditures that is equal to or better than historical -Can and US have been less important destinations for foreign direct investment for each other, and a greater focus on FDI with other countries-Can’s inadequate job creation performance cannot be blamed on free trade-Can still has problem with overall productivity and earnings performance

Question 21

(4) Effect of a tarrif

Answer 21

-Tariff leads to reduced amounts of imports-Increased domestic supply into inefficient zones of production-reduction in domestic demand (because new price is higher than world price)-economic cost is the lost of consumer surplus-another loss is the reallocation of resources into the inefficient production of good

Question 22

(4) Effect of a Quota

Answer 22

-instead of issuing a tariff, issue a quota (a maximum amount of imports)-It puts you essentially the same place as a tariff

Question 23

(4) Effect of a subsidy

Answer 23

-If receiving an export subsidy, a firm can remain competitive abroad by exporting up to the foreign price (because the subsidy will cover some of the difference) yet receive the higher price domestically. -The effects of a subsidy are the opposite of those of a tariff.-subsidies can promote exporting (by giving local producers an advantage to product them, they can export them at a cheaper price)