Economics - EXAM

Question 1

Describe the balance of payments and its components.

Answer 1

The balance of payments is a statistical statement of transactions between residents and nonresidents during a period. It includes the current account, capital, financial account, and official reserve settlements balance.

Question 2

Define the capital account and its components.

Answer 2

The capital account includes capital transfers (transfers of physical assets or with the goal
to create physical assets) and debt forgiveness, as well as the acquisition/disposal of non-produced, nonfinancial assets (patents, licenses, etc.).

Question 3

What is the financial account in the balance of payments?

Answer 3

The financial account includes transactions concerning assets (NFA), such as direct investment (inward and outward), portfolio investment, and other investments.

Question 4

Describe the components of the balance of (BOP).

Answer 4

The components of the BOP include equity capital, reinvested earnings, portfolio investment, financial derivatives, official reserve assets, and other assets and liabilities.

Question 5

What is the double-entry rule in the balance of payments?

Answer 5

The double entry rule in the BOP states that each transaction should enter into the balance of payments twice, with an increase in assets represented as a positive and an increase in liabilities as a negative.

Question 6

How do errors and omissions occur in the balance of payments?

Answer 6

Errors and omissions in the BOP can occur due to transactions not being registered simultaneously on both sides, some transactions being estimated, and others not being registered at all.

Question 7

Define Net Financial Account (NFA) in the context of the balance of payments.

Answer 7

The Net Financial Account (NFA) in the BOP
represents the difference between a country’s sales of assets to foreigners and its purchases of assets from foreigners.

Question 8

What are the reasons for the existence of errors and omissions in the balance of payments?

Answer 8

The reasons for errors and omissions in the BOP include transactions not being registered simultaneously on both sides, some transactions being estimated, and others not being registered at all.

Question 9

Describe the relationship between GDP, GNP, and GNI in the context of Poland.

Answer 9

GDP is greater than GNP, which is greater than GNI in Poland.

Question 10

How does a positive value of N in the BOP identities indicate a trade surplus?

Answer 10

The Current Account measures the difference between foreign income and expenditure and domestic income and expenditure, including the net export balance (N), Net International Investment (NINV), and Net Receipts from Unilateral Transfers (NUT).

Question 11

Define BOPM6 and its components.

Answer 11

BOPM6, or Balance of Payments Model 6, considers foreign capital (KA), Net Economic Outflows (NEO), Current Account (CA), Net Foreign Assets (NFA), and Official Reserve Transactions (ORS) in the balance of payments.

Question 12

How is Gross Domestic Product (GDP) calculated?

Answer 12

GDP is calculated by summing up Consumption (C), Investment (I), Government Spending (G), and Net Exports (N), where Net Exports is the difference between exports and imports (N = X - IM).

Question 13

Do Gross National Product (GNP) and Gross National Income (GNY) differ?

Answer 13

Yes, GNP is similar to GDP but includes Net Investment from abroad (NINV), while GNY adds Net Unilateral Transfers (NUT) to GNP.

Question 14

Describe the equation expressing Gross National Income (GNY) as the sum of Consumption, Investment, Government Spending, and the Current Account (CA).

Answer 14

The equation GNY = C + I + G + CA expresses Gross National Income as the sum of Consumption, Investment, Government Spending, and the Current Account, which includes the net balance of trade, net income from abroad, and net unilateral transfers.

Question 15

Describe the Twin Deficit Hypothesis.

Answer 15

The Twin Deficit Hypo refers to the observed correlation between a country’s fiscal deficit and its current account deficit, suggesting a
relationship between the two.

Question 16

Define Deficit.

Answer 16

The fiscal deficit occurs when a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings, essentially representing the shortfall between the government’s spending and its income.

Question 17

Explain the relationship between government spending and the trade balance according to the Twin Deficit Hypothesis.

Answer 17

An increase in government spending (fiscal deficit) can boost domestic demand, leading to higher imports and potentially widening the current account deficit.

Question 18

How does borrowing to finance a fiscal deficit contribute to the current account deficit according to the Twin Deficit Hypothesis?

Answer 18

Borrowing to finance a fiscal deficit, especially from foreign sources, can lead to increased capital inflows, contributing to a current account deficit.

Question 19

Describe the implication of higher interest rates on the current account deficit according to the Twin Deficit Hypothesis.

Answer 19

Higher interest rates resulting from heavy government borrowing to finance its fiscal deficit can attract foreign capital seeking better returns, contributing to capital inflows and, consequently, a current account deficit.

Question 20

Describe the absorption approach to Balance of Payments (BOP).

Answer 20

The absorption approach to BOP focuses on the total spending by domestic residents within an economy, encompassing consumption, investment, and government spending.

Question 21

Define the formula A = C + I + G in the context of the absorption approach to BOP.

Answer 21

The formula A = C + I + G represents the total absorption in an economy, where A is absorption, C is consumption, I is investment, and G is government spending.

Question 22

How is GDP related to absorption and net exports in the absorption approach to BOP?

Answer 22

GDP is equal to the total absorption (A) plus net exports (N), where net exports represent the difference between exports and imports.

Question 23

Do a relative decline in domestic spending compared to the overall economic output (GDP) favor an improvement in net exports in the absorption approach to BOP?

Answer 23

Yes, a relative decline in domestic spending compared to GDP can create conditions that favor an improvement in net exports and a more favorable trade balance.

Question 24

Define exchange rate.

Answer 24

Exchange rate refers to the price of one currency in terms of another currency.

Question 25

Describe how exchange rates are quoted in foreign exchange market.

Answer 25

Rates are quoted as foreign currency per unit of domestic currency or domestic currency per unit of foreign currency.

Question 26

Define the foreign exchange market and its global daily turnover.

Answer 26

The foreign exchange market is a dispersed network with no central institution, and it has a global daily turnover of approximately 7.5 trillion USD, roughly 30 times the daily global GDP.

Question 27

Do commercial banks and other depository institutions participate in the forex market? If so, how?

Answer 27

Yes, they engage in foreign exchange transactions to facilitate international trade and investment by buying/selling deposits in different currencies for investment purposes.

Question 28

How do non-bank financial institutions participate in the foreign exchange market?

Answer 28

Non-bank financial institutions participate in the forex market for investment purposes by buying/selling foreign assets such as stocks, bonds, or other financial instruments denominated in foreign currencies to diversify their portfolios and potentially benefit from currency movements.

Question 29

Describe the role of non-financial businesses in foreign currency transactions.

Answer 29

Non-financial businesses in foreign currency transactions as part of their international trade and investment activities, such as receiving payment in foreign currency for exports or buying/selling foreign currencies for investments.

Question 30

Define the role of central banks in foreign exchange transactions.

Answer 30

Central banks manage a country’s monetary policy and engage in foreign exchange transactions as part of their official reserves management, intervening in the foreign exchange market to influence exchange rates or maintain currency stability.

Question 31

List the transaction types on the forex market.

Answer 31

The transaction types on the forex market include spot transactions, outright forwards, FX swaps, currency swaps, and options and other products.

Question 32

Explain the impact of currency depreciation on price competitiveness.

Answer 32

A depreciated currency is less valuable, meaning it can buy fewer foreign-produced goods denominated in foreign currency, affecting price competitiveness.

Question 33

Describe the impact of a depreciated currency on imports and exports.

Answer 33

A depreciated currency means that imports become more expensive while domestically produced goods and exports become less expensive.

Question 34

How is a general trend in price competitiveness measured in terms of exchange rates?

Answer 34

A general trend in price competitiveness can be measured using the nominal effective exchange rate, which is a trade-weighted average of changes in exchange rates.

Question 35

Define the nominal effective exchange rate and its components.

Answer 35

The nominal effective exchange rate is a measure of the general movement (appreciation/depreciation) of a currency, calculated as a trade-weighted average of changes in exchange rates. It involves the number of competitor countries (N), the index of the exchange rate of the partner country (ei), and the overall trade weight assigned to the currency of the trading partner (wi).

Question 36

Describe the nominal exchange rate.

Answer 36

The nominal exchange rate is the rate at which one currency can be exchanged for another, representing the relative value of the two currencies in the foreign exchange market.

Question 37

Define the real exchange rate.

Answer 37

The real exchange rate is the nominal exchange rate corrected by price levels, taking into account the domestic and foreign price levels.

Question 38

How is the real exchange rate related to purchasing power parities?

Answer 38

The real exchange rate is a basic concept to both absolute and relative purchasing power parities, as it reflects the relative purchasing power of two currencies.

Question 39

Do the domestic and foreign price levels impact the real exchange rate?

Answer 39

Yes, the domestic and foreign price levels directly impact the real exchange rate, as it is calculated based on the nominal exchange rate and these price levels.

Question 40

Describe the effective exchange weights for the EU from 1995-2021.

Answer 40

The effective exchange weights for the EU from 1995-2021 refer to the weighted average of bilateral exchange rates of the euro against the currencies of its main trading partners, reflecting the importance of each partner in EU trade.

Question 41

Describe the real exchange rate and how differs from the nominal exchange rate.

Answer 41

The real exchange rate reflects the relative price levels of two countries’ currencies, considering inflation differences, while the nominal exchange rate is the rate at which one country’s currency can be exchanged for another’s, without considering changes in the price levels.

Question 42

Define the real effective exchange rate (REER) and its significance in international trade.

Answer 42

The REER is a measure that assesses the value of a country’s currency in relation to a basket of other currencies, taking into account differences in price levels between the home country and its trading partners. It is essential for understanding a country’s international competitiveness in terms of trade.

Question 43

How is the real exchange rate calculated and what does a value greater than 100 indicate?

Answer 43

The real exchange rate is calculated by multiplying the nominal exchange rate by the ratio of the domestic price level to the foreign price level, typically expressed as an index number. A value greater than 100 indicates that the domestic currency is overvalued compared to the foreign currency.

Question 44

Do changes in the real exchange rate measure the price competitiveness of one country compared to another?

Answer 44

Yes, changes in the real exchange rate measure the price competitiveness of one country compared to another, taking into account inflation in both countries and changes in the nominal exchange rate.

Question 45

Describe the components of the Real Effective Exchange Rate (REER) formula.

Answer 45

The components include the nominal exchange rate, the foreign country’s price level, the home country’s price level, the weight assigned to the currency of each trading partner, and the number of trading partners.

Question 46

Define Harmonized Competitiveness Indicators.

Answer 46

They are standardized measures used to assess and compare the competitiveness of different countries or regions in a consistent and comparable manner.

Question 47

How are competitiveness indicators crucial for understanding a country’s ability to compete in international markets?

Answer 47

Competitiveness indicators help in understanding a country’s ability to produce goods and services that can compete effectively in international markets.

Question 48

Do harmonized competitiveness indicators provide a common framework for evaluating competitiveness?

Answer 48

Yes, they ensure that assessments are based on consistent criteria and methodologies, allowing for meaningful comparisons across different entities.

Question 49

Describe the components of harmonised competitiveness indicators.

Answer 49

The components include exchange rates, price levels, productivity, innovation, infrastructure, and trade balances.

Question 50

Define harmonised competitiveness indicators.

Answer 50

Harmonised competitiveness indicators are a set of economic, financial, and structural factors used to assess a country’s competitiveness, allowing for cross-country comparisons and trend identification.

Question 51

How do harmonised competitiveness indicators facilitate discussions at national and international levels?

Answer 51

They facilitate discussions by providing meaningful cross-country comparisons and identifying trends or patterns that may influence global economic dynamics.

Question 52

Do harmonised competitiveness indicators include assessment of trade balances? If so, why?

Answer 52

Yes, they include assessment of trade balances, including the current account balance and export competitiveness, to understand economic competitiveness.

Question 53

Describe the role of infrastructure in harmonized competitiveness indicators.

Answer 53

Infrastructure, including transportation, communication, and technology, impacts a country’s ability to compete and is a key factor in competitiveness assessments.

Question 54

Describe the Big Mac Purchasing Power Parity (PPP) example.

Answer 54

The Big Mac PPP example illustrates the concept of PPP by comparing the price of a Big Mac in different countries and using it to determine the exchange rate for maintaining purchasing power.

Question 55

Absolute PPP using the Big Mac example.

Answer 55

Absolute PPP, as demonstrated by the Big Mac example, suggests that the exchange rate should be set so that the price of a Big Mac is the same when converted to a common currency.

Question 56

What is the significance of the Big Mac PPP example in understanding exchange rates?

Answer 56

The Big Mac PPP example helps in understanding how exchange rates are determined based on the price of a standardized product (Big Mac) across different countries.

Question 57

What does the Big Mac PPP example reveal about exchange rates between the United States and Germany?

Answer 57

The example shows that if a Big Mac costs $5 in the United States and €4 in Germany, the exchange rate based on Absolute PPP would be 1.25 USD/EUR to maintain purchasing power parity for the Big Mac.

Question 58

Do you think the Big Mac PPP example is an effective way to explain the concept of PPP? Why or why not?

Answer 58

The Big Mac PPP example is effective in illustrating PPP as it simplifies the concept by using a universally available product (Big Mac) to demonstrate how exchange rates are determined to maintain purchasing power parity.

Question 59

Describe the impact of an increase in interest rates on the domestic currency according to UIP.

Answer 59

An increase in home interest rates leads to an appreciation of the domestic currency as it attracts foreign capital seeking higher returns, increasing demand for the domestic currency.

Question 60

Define UIP and explain its implications on exchange rates.

Answer 60

UIP (Uncovered Interest Parity) suggests that an increase in home interest rates should lead to an appreciation of the domestic currency, while an increase in foreign interest rates or an expectation of foreign currency appreciation should lead to a depreciation of the domestic currency.

Question 61

How does an increase in foreign interest rates or an expectation of foreign currency appreciation impact the domestic currency according to UIP?

Answer 61

It leads to a depreciation of the domestic currency as higher foreign interest rates attract capital away from the domestic currency, causing its value to decline.

Question 62

Describe the graphical representation of Uncovered Interest Parity (UIP).

Answer 62

It is a simple supply and demand diagram for the foreign exchange market, with the horizontal axis representing the quantity of the domestic currency and the vertical axis representing the exchange rate.

Question 63

Do an increase in home interest rates cause currency appreciation or depreciation in UIP?

Answer 63

An increase in home interest rates (or expectation of higher future rates) might shift the demand curve for the domestic currency to the right, causing the currency to appreciate.

Question 64

Define equilibrium exchange rate in the context of UIP.

Answer 64

It is the point where the demand for and supply of the domestic currency are equal, determining the prevailing exchange rate in the market.

Question 65

How do real-world factors influence the relationship between interest rates and exchange rates in UIP?

Answer 65

Factors such as risk, transaction costs, and capital mobility restrictions can influence the actual relationship between interest rates and exchange rates. Additionally, rational expectations and perfect information, assumed by UIP, may not always hold in practice.

Question 66

Describe the simplifying assumption of perfect competition in models of international trade.

Answer 66

It assumes that markets are perfectly competitive, meaning there are many buyers and sellers with no single entity having the ability to influence prices, allowing for straightforward analysis of supply and demand forces.

Question 67

Describe the assumption of constant returns to scale in the context of international trade models.

Answer 67

The assumption of constant returns to scale in international trade models means that doubling the inputs results in a of outputs, simplifying the analysis and allowing for clear predictions about the impact of changes in production levels.

Question 68

Define the concept of homogeneous products in international trade models.

Answer 68

Homogeneous products assumption in international trade models means that products are identical across firms and countries, facilitating analysis by focusing on the impact of comparative advantage without considering product differentiation.

Question 69

How does the assumption of factor immobility simplify the analysis in international trade models?

Answer 69

The assumption of factor immobility in international trade models simplifies the analysis by ignoring the complexities introduced by factors moving across borders, such as labor and capital.

Question 70

Describe the significance of the assumption of full employment in international trade models.

Answer 70

The assumption of full employment in international trade models means that all available labor and capital are fully utilized, helping isolate the effects of trade on the distribution of goods and services.

Question 71

Explain the importance of recognising the underlying assumptions in international trade models.

Answer 71

Recognising the underlying assumptions in international trade models is crucial as it helps in understanding the limitations and complexities of the models, and how relaxing some assumptions can lead to more realistic but complex analyses.

Question 72

Do international trade models accurately represent real-world economies?

Answer 72

International trade models provide insights into specific economic concepts, but real-world economies are more complex, and relaxing some assumptions can lead to more realistic models but might also increase the complexity of the analysis.

Question 73

Describe the role of models in international trade in understanding key principles.

Answer 73

Models in international trade are valuable for understanding key principles, but their predictions should be interpreted with an awareness of the underlying assumptions and the real-world nuances that might affect outcomes.

Question 74

What is the gravity model in the context of international trade?

Answer 74

The gravity model in international trade focuses on the relationship between the volume of trade between two countries and the distance between them, emphasising the significance of geographical proximity in trade relationships.

Question 75

Describe the main geographical and physical barriers that can affect international trade.

Answer 75

Geographical distance, physical barriers such as mountains or seas, and being landlocked can all impact international trade.

Question 76

Define the term ‘main trading partners’ in the context of international trade.

Answer 76

Main trading partners refer to the countries with which a particular country conducts the majority of its trade, either through imports or exports.

Question 77

How can political barriers in international trade be addressed?

Answer 77

Political barriers can be addressed through the creation of regional trade arrangements and global trade liberalisation at organisations like the World Trade Organisation (WTO).

Question 78

Describe the impact of cultural barriers on international trade.

Answer 78

Cultural barriers can impact international trade by influencing consumer preferences, business practices, and communication styles, which can affect the success of trade relationships.

Question 79

Do the main trading partners of a country tend to change over time?

Answer 79

Yes, the main trading partners of a country can change over time due to shifts in economic conditions, geopolitical factors, and changes in trade agreements.

Question 80

Describe the trade relationships between New Zealand USA, and China based on given content.

Answer 80

New Zealand has trade relationships with Australia, USA, and China. USA has trade relationships with Canada, Mexico, and China. Brazil has trade relationships with China, USA, and Argentina.

Question 81

Define the concept of scatter plots and how they are used in the context of trade vs. GDP and trade vs. Distance.

Answer 81

Scatter plots are used to display the relationship between two variables. In the context of trade vs. GDP and trade vs. Distance, scatter plots can visually represent the correlation between trade volume and GDP as well as trade volume and distance.

Question 82

How do the size of European economies and the value of their trade with the USA relate to the given content?

Answer 82

The size of European economies and the value of their trade with the USA are not explicitly mentioned in the given content. However, they could be analyzed using scatter plots to understand their trade relationships with the USA and the impact of their GDP on trade volume.

Question 83

Describe the OLS method for estimating gravity equations.

Answer 83

The OLS method for estimating gravity equations involves using ordinary least squares regression to analyse the relationship between flows and factors such as GDP, distance, and other variables.

Question 84

Define absolute and comparative advantage in the context of classical trade theories.

Answer 84

Absolute advantage refers to a country’s ability to produce a good more efficiently than another country, while comparative advantage refers to a country’s ability to produce a good at a lower opportunity cost than another country.

Question 85

How do the classical trade theories differ in their explanations for trade?

Answer 85

The classical trade theories differ in their explanations for trade based on factors such as technology (efficacy of production), resource endowment, and relative prices, with each theory emphasizing different factors as the main driver of trade.

Question 86

Describe the production possibility frontiers (PPF) in the context of classical trade theories.

Answer 86

The production possibility frontiers in classical trade theories can be linear (as in Smith and Ricardo’s theories) or concave (as in HOS and neoclassical theories), representing different assumptions about the trade-offs between producing different goods.

Question 87

Does the neoclassical trade theory emphasise relative prices as a main factor for trade?

Answer 87

Yes, the neoclassical trade theory emphasises relative prices as the main factor influencing trade, distinguishing it from other classical trade theories.

Question 88

Describe the key concept of the Ricardian model in international trade theory.

Answer 88

The key concept of the Ricardian model is comparative advantage, where countries specialize in producing goods in which they have a lower opportunity cost compared to other countries.

Question 89

Define the Heckscher-Ohlin (H-O) theory and its main focus in international trade.

Answer 89

The Heckscher-Ohlin theory introduces the concept of factor endowments and focuses on how countries will export goods that intensively use their abundant factor of production and import goods that use the scarce factor.

Question 90

How does the Ricardian model demonstrate the potential for mutually beneficial trade between countries?

Answer 90

Even if one country is less efficient in producing both goods, the Ricardian model shows that there is still potential for mutually beneficial trade if the opportunity costs differ.

Question 91

Do the Heckscher-Ohlin (H-O) theory predict about factor prices over time as trade occurs?

Answer 91

The H-O model predicts that factor prices will equalize over time as trade occurs, leading to the convergence of wages and returns on capital between trading partners.

Question 92

Describe the factors that influence modern trade.

Answer 92

Various factors influence modern trade theories, including differences in technology, transportation costs, and non-economic considerations.

Question 93

Do classical trade theories incorporate additional elements to account for complexities? If so, what are they?

Answer 93

Yes, modern trade theories often incorporate additional elements to account for complexities beyond the original theories.

Question 94

Define gains from trade according to Smith, Ricardo, and HOS.

Answer 94

According to Smith and Ricardo, gains from trade are in terms of greater consumption possibilities and general efficacity of production. According to HOS, gains from trade are in terms of greater consumption possibilities and general efficiency of use of resources production.

Question 95

How do countries specialise in goods according to Ricardo and HOS?

Answer 95

According to Ricardo, countries specialize in goods where their comparative advantage is greater than the relations of prices. According to HOS, countries specialise in goods where the relations of factor intensities are greater than the relations of factor abundance.

Question 96

Describe the empirical approaches used in classical trade theories, specifically in the context of Ricardo.

Answer 96

In the context of Ricardo, empirical approaches include RCA and its determinants, as well as the relation of productivities and wages.

Question 97

What is an example of an empirical approach used in classical trade theories, specifically in the context of Poland?

Answer 97

An example is Poland’s RCA for HS sections.

Question 98

Describe the formula for RCA in the context of international trade.

Answer 98

RCA = (Eij / Eit) / (Enj / Ent), where E – exports, i – country, n – set of countries, j - goods and t – set of goods.

Question 99

What are the distribution effects in the context of the Heckscher-Ohlin-Samuelson model of international trade?

Answer 99

The distribution effects include the impact on labor and capital, as well as the differentiation between high-skilled and low-skilled labor.

Question 100

Define the Rybczynski theorem and its implications in international trade.

Answer 100

The Rybczynski theorem describes the relationship between changes in a country’s endowments of factors of production and the resulting changes in output. It has implications for phenomena like Dutch disease and immiserizing growth.

Question 101

How do economies of scale relate to international trade?

Answer 101

Economies of scale can affect international trade by influencing the production costs and competitiveness of firms, potentially leading to changes in trade patterns and market dynamics.

Question 102

Describe the concept of economies of scale.

Answer 102

Economies of scale refer to the phenomenon the average cost of producing a unit of output decreases as the scale of production increases.

Question 103

Define external economies of scale.

Answer 103

External economies of scale occur at the industry level, meaning that the cost per unit of output depends on the size of the entire industry, not just a specific firm.

Question 104

How do external economies of scale benefit firms in an industry?

Answer 104

As the industry as a whole expands, individual firms within that industry experience lower average costs.

Question 105

Do you have an example of external economies of scale?

Answer 105

Examples include improvements in infrastructure, shared resources, and a more skilled labor force that benefit all firms in the industry.

Question 106

Describe internal economies of scale at the firm level.

Answer 106

Internal economies of scale occur at the firm level, leading to lower average costs per unit as a specific firm expands its production. This can result from a decrease in fixed costs, specialization of the workforce, increased dimensions, financial economies of scale, and network economies of scale.

Question 107

Define monopolistic competition.

Answer 107

Monopolistic competition is an imperfectly competitive industry where each firm can differentiate its product from competitors’ products and behaves as if it were a monopolist, ignoring the impact of its price changes on competitors’ prices.

Question 108

What are the advantages of suppliers moving close to a cluster in terms of economies of scale?

Answer 108

Suppliers moving close to a cluster can lead to decreased transportation and service costs, benefiting from external economies of scale.

Question 109

What are some examples of internal economies of scale?

Answer 109

Examples of internal economies of scale include specialization of labor, bulk purchasing discounts, and more efficient use of technology, which can lead to increased efficiency and lower costs per unit for larger firms.

Question 110

Describe the sales function under monopolistic competition.

Answer 110

The sales function under monopolistic competition is represented by the equation Q = S