IE2016Q4 Flashcards

Question

**Why do countries trade in the specific factors model?**

Answer 1

The abundance of factors; factor endowments.

Answer 2

False. Being abundant in a factor is like a comparative advantage. Thus Home is abundant in K if: K/T \> K\*/T\*

Answer 3

Technology is fixed in 2-good specific factor model whereas it is flexible in the Ricardian model. The Ricardian model is only focusing on one factor; labor, whereas the 2-good factor model is taking multiple production factors into account.

Answer 4

Yes. Factors specific to export gain from trade while factors specific to import lose.

Answer 5

Their purchasing power is going to change, so it actually depends on their utility and choice criteria between goods. Thus, it is indeterminate.

Answer 6

Resources; that countries have different resources to produce with. Countries with relatively more of a resource will export goods for which that resource is more useful in production.

Answer 7

A country exports goods that are intensive in the factor they are abundant in, so Western Europe exports highskilled-labor intensive goods to Eastern Europe.

Answer 8

If country gets more of a resource, then the output of the good that uses that resource intensively will rise while the output of the other good will fall. Ex: if Denmark got more labor, it would increase its production of textiles OR if unskilled Iraqis come to Denmark, Denmark will be more abundant in unskilled-labor intensive goods and produce more of that.

Answer 9

A rise in the price of a final good for which a particular resource is more useful in production will increase the payments to that resource Ex: if the price of textiles goes up, Chinese workers get higher wages When opening up to trade, owners of factors in which the country exports will gain from trade, so unskilled labor will benefit when China opens up to trade. SS = Stolper Samuelson

Answer 10

Trade should cause resource prices to converge Ex: Danish and Chinese workers should be paid the same real wages. (This is not the case in the real world though)

Answer 11

The isovalue line is a line showing the relative prices of two goods and thus has a slope of: -Pc/Pf (for cloth and food – the horizontal value as numerator). The isovalue line helps us find the optimal production point.

Answer 12

If a good is labor-intensive as cloth in the graph below (CC), production of cloth will always use more labor relative to capital than will production of food (FF). We can graph the relative factor demand curves (wages/rental cost of capital) and see which one if most labor-intensive.

Answer 13

The labor-intensive industry, in this case the clothing industry, will be able to produce much more, while the food industry (capital-intensive) only will be able to produce a little more. Thus we have a new PPF and a new tangent line with a slope of: -Pc/Pf so that we produce less food and now much more clothing è An economy produces what it is good at (comparative advantage) AND has the resources to produce (Hecksher-Ohlin).

Answer 14

That a country has a lot of that resource; they have lot of labor, they are labor-abundant. REMEMBER: this is a ratio number and is relative to another country. Not absolute quantities.

Answer 15

The country that is abundant in a factor exports the good whose production is intensive in that factor.

Answer 16

Owners of a country’s abundant factors gain from trade, but owners of a country’s scarce factors lose. In theory, however, there are still gains from trade, in the limited sense that the winners *could* compensate the losers, and everyone would be better off.

Answer 17

The fact that after the 25 years following WW2, USA imported more capital-intensive goods than it exported despite having the highest Capital per person ratio in the world. In other words, the Leontief paradox (based on data) is contradicting the Heckscher-Ohlin theory.

Answer 18

* Countries tend to export goods that are _intensive_ in resources they are relatively abundant in. * The owner of _abundant_ factors gain from trade, while the owner of _scarce_ resources lose from trade.

Answer 19

Heckscher-Ohlin is working in the long run where factors can move across sectors.

Answer 20

* Straight-line: Ricardian * Square: 2-specific factor model, * Curve: 3-specific factor model, HO, Standard * Downward sloping: producing less of one good, can produce more of the other goods * Curved: due to marginal product. A little less cloth gives you a lot more food in the beginning and the end you will have that to produce more food you will need to produce a lot less cloth.

Answer 21

Doesn’t matter - it won’t be in the exam ;)

Answer 22

* Specific model; 3 factor-model: Qc(L,K) and Qf(L,T) * HO: Qc(L,K) and Qf(L,K)

Answer 23

-Pc/Pf (Pc because Qc is on the horizontal axis. IF this was Qf it would be –Pf/Pc)

Answer 24

Higher price of cloth = higher relative price (Pc/Pf) and more producers of cloth ➔ production of cloth increases and production of food decreases as more labor now work in the clothing industry. The PPF curve has a slope of: - MPLf/MPLc The isovalue lines (VV1 and VV2) have slopes of –Pc/Pf

Answer 25

Value of production = price x Q of good 1 + price x Q of good 2 = consumption of good 1 + consumption of good 2

Answer 26

* Income effect: increase/decrease in welfare after a given change in the economy such as the relative price level * Substitution effect: change in consumption of goods after a given chance in the economy such as the relative price level.

Answer 27

Terms of trade; the price of the exported good divided by the price of the imported goods. *P _{Export Good}/ P_{Import Good}* * Welfare increases if terms of trade rise (improve) * Welfare decreases if terms of trade fall (worsen) * A worsening of the terms of trade can NEVER make welfare fall below autarchy level. * BUT as worsening your terms of trade more and more, you will end up having export and import of the two goods opposite of your initial autarchy situation * When your terms of trade keeps worsen, you will end up back in autarchy consuming what you are producing

Answer 28

When the production possibility frontier shifts out more in one direction than in the other. PPF will shift out due to technological progress for that product or increased resources for the production of a given product.

Answer 29

Because some countries are abundant in some factors, and tend to produce those products that are intensive in those factors.

Answer 30

Because you can use both factors to produce both goods, and in specific you can only use one factor to produce one good. You can also train labor to work in another sector.

Answer 31

2 factors.

Answer 32

Final goods (output).

Answer 33

4 theorems.

Answer 34

1. HO-theorem 2. Rybczynski theorem 3. Stolper-Samuelson theorem 4. Factor price equalization

Answer 35

Pc/Pf will fall

Answer 36

Home will go to autarchy

Answer 37

* Export-biased: growth that disproportionately expands a country’s production possibilities in the direction of the good it exports * Import-biased: growth biased toward the good a country imports

Answer 38

* Export-biased growth tends to worsen a growing country’s terms of trade, to the benefit of the rest of the world * Import-biased growth tends to improve a growing country’s terms of trade at the rest of the world’s expense. Why? Price of the good you export /price of the good you import ➔ export-biased will increase the relative price whereas import-biased will decrease the relative price

Answer 39

Price of the good you export / price of the good you import

Answer 40

For: * Dk needs young labor (growing elderly people) * Multicultural is good (this is definitely not proven though) * Increase trade through immigrants (shorter psychic distance; gravity model) Against: * High unemployment rate of immigrants (eating the pie instead of growing it) * High crime rates * Cultural differences + building double societies instead of integrating

Answer 41

Immiserizing growth is a theoretical situation first proposed by Jagdish Bhagwati, in 1958, where economic growth could result in a country being worse off than before the growth. If growth is heavily export biased it might lead to a fall in the terms of trade of the exporting country. In rare circumstances this fall in the terms of trade may be so large as to outweigh the gains from growth. Strongly export-biased growth must be combined with very steep RS and RD curve so that the change in the terms of trade is large enough to offset the direct favorable effects of an increase in country’s productive capacity.

Answer 42

* Technology depends upon scale and experience * Best to concentrate production * Drives countries to specialize even if ex-ante identical * Large countries have lower cost * Knowledge spillover * Specialized labor market * Specialized suppliers * Room for helpful government policy * Historical accident: industries can end up in the “wrong” = less efficient country * There can be equilibrium losses from trade * “Infant” industries may need early protection from competition

Answer 43

Constant returns to scale

Answer 44

Disproportionate amounts of one factor relative to another is ineffective. Example: if producing 1 Irish coffee needs one unit of capital and one unit of labor, it is not beneficial to double our input/factor of labor if we don’t get more capital.

Answer 45

* Specialized suppliers (expensive to be away from the specialized suppliers) * Labor market pooling (cheaper to recruit where the specialized labor is located) * Knowledge spillover (“coffee break conversations”) (Lower AC as fixed costs are split out)

Answer 46

* External: when cost per unit depends on the size of the industry but not necessarily on the size of any one firm * Internal: when the cost per unit depends on the size of an individual firm but not necessarily on that of the industry.

Answer 47

No advantages to large firms since the differences are on industry level. Thus the market will typically be many small firms and be perfectly competitive. External economies of scale also increase chances of clusters making the industry even more competitive through specialized suppliers, labor market pooling and knowledge spillover.

Answer 48

Large firms have a cost advantage over small firms and lead to an imperfectly competitive market structure (monopoly or oligopoly)

Answer 49

* Specialized suppliers * Labor market pooling * Knowledge spillover

Answer 50

As demand (Q) increases, the average cost of production falls and therefore we have a forward-falling supply curve; the larger the industry’s output, the lower the price at which firms are willing to sell. Higher demand, lower AC, lower price.

Answer 51

* Specific factor model: prices converge to somewhere between that of the two countries * Economies of scale (WITH increasing returns); prices decreases to somewhere even lower than that of the country with the lowest price before trade because production is at the same place so we have lower AC.

Answer 52

History coincidences. First-mover advantages.

Answer 53

We will have one gigantic firm ⇒ A monopoly. Why? Producing more equals lower marginal costs. (Decreasing AC) The equilibrium will be at the intersection between the demand curve, D and the AC-curve (which is equal to your MC since the firms only produce one unit as they are so small).

Answer 54

The average cost per unit when starting producing a good might be higher than the world price. The start-up cost is larger than the current equilibrium cost. However, if not trading and just supplying its domestic market, Thai-producers of watches would be able to supply the domestic demand with a lower price. Thus, Thailand in this example is worse off by trading.

Answer 55

When costs fall with cumulative production over time rather than with the current rate of production.

Answer 56

That temporarily protecting an industry to enable them to gain experience is favorable since it will help decrease AC and improve competitiveness.

Answer 57

The idea is, that to work effectively you need to eat food but to get food you need food but how will you get food, when you are not full and can work effectively? Classic poverty trap.

Answer 58

That a firm’s average cost of production decreases the more output it produces.

Answer 59

If a firm in imperfect competition sells much more, the prices of its products (the prices of the industry) will decrease.

Answer 60

Derivative: *P'(Q) Q + P(Q) - c'(Q)* (MR - MC)

Answer 61

Because to sell an additional unit, the firm must lower the price of ALL units (not just the marginal one).

Answer 62

Marginal revenue = MR = P – Q/B The gap between price and MR depends on sales, Q, and the slope parameter, B. If Q is higher, MR is lower, because the decrease in price required to sell a greater quantity costs the firm more. The greater is B, the more sales fall for any given increase in price and the closer the MR is to the price of the good.

Answer 63

* Each firm has differentiated products so that consumers don’t shift their preferences due to small price changes * Each firm behaves as if it were a monopolist and ignores the impact of its own price on the prices of other firms

Answer 64

Q = Quantity demanded for a firm in monopolistic competition. S = Total output of the industry N = number of firms B = constant term representing the responsiveness of a firm’s sales to its price P = the firm’s price P= The average price charged by its competitors This implies that if all firms charge the same price, each will have a market share of 1/n. We assume S is unaffected by the average price.

Answer 65

AC depends on the number of firms in an industry and that industry’s size. The more firms, the less each firm produces and thus AC will be higher due to less economies of scale.

Answer 66

Answer is three-fold * CC: the more firms, the higher costs (AC is higher since economies of scale is lower when more firms have to produce the same amount) * PP: the more firms, the lower prices will be due to increased competition (P = c + 1/(b\*n)) ➔ the more firms, the lower the markup over MC. * In point E, the equilibrium number of firms in the industry is achieved. Here firms have profit maximized at the price P2 that is equal to their average cost, AC2 ➔ a long-run equilibrium.

Answer 67

The CC-curve changes as S increases. * Lower equilibrium price * More firms * More varieties for consumers The PP-curve Is not affected; (P = c + 1/(b\*n))

Answer 68

* Product differentiation and international economies of scale lead to trade between similar countries with no comparative advantage differences between them (intra-industry trade) * Consumers benefit from a greater variety of products at a lower price as firms can take advantage of economies of scale.

Answer 69

Two-way exchanges of similar goods. 0. 97 = nearly equal import and export 0. 10 = unequal import/export (in this case import is much higher than export

Answer 70

* Set a lower price * At a higher markup over marginal cost * Produce more output * Earn higher profits

Answer 71

When expected profits across all potential cost levels, Ci, are driven to zero. In external; firms enter until profits for all firms are driven to zero *Make sure you can explain this*

Answer 72

* Horizontal: investment in affiliates who replicates the production process elsewhere in the world * Vertical: break up their production chain and perform some parts of that chain in their foreign facilities. * Outsourcing * Offshoring

Answer 73

That investing in production facilities closer to the customer is beneficial as transport cost are lower (+ trade barriers avoided) BUT at the same time doing so is bad economically as you don’t gain as much from economies of scale.

Answer 74

Instead of outsourcing completely, the corporation still owns the foreign-based subsidiary and thus makes trade within the corporation itself and keeps full control and has lower risk of doing business.

Answer 75

Neither incomes nor other prices change. Welfare only affected by consumption or sale of the single good.

Answer 76

* Specific: fixed charge added for each unit imported: P = P\* + t * Ad valorem: fraction of the value added to each unit imported: P = P\* (1 + t) ⇒ 0,25 % tariff on the value of imported cars: 0,25.

Answer 77

* Import quotas * Export restraints (usually imposed on the importing country’s request)

Answer 78

Graph to the right: X-axis; the difference between the quantity that domestic consumers demand and the quantity domestic producers supply.

Answer 79

Graph to the right: X-axis; the difference between the quantity that foreign produce and the quantity foreign supply.

Answer 80

That we are in equilibrium in the world market meaning that: Domestic demand - Domestic supply (Import demand) = Foreign supply - Foreign demand (Export supply) ⇒ D - S = S\* - D

Answer 81

You can mark the world-market equilibrium with P-autarchy and P\*-autarchy where the lines intersects the y-axis.

Answer 82

* Consumers lose in the importing country (price increases) while prices decrease in the exporting country. Thus, consumers in the importing country lose, and those in the exporting country win. * Suppliers/producers in the importing country gain, while those in the exporting country lose (looking at how much the suppliers are paid for their products).

Answer 83

**Length x width x 0.5**

Answer 84

Exporting country: producers gain, consumers are hurt and the government loses. Export subsidies worsens the terms of trade because it lowers the price of the export in the foreign market from Pw to Ps\* ⇒ The cost will always be bigger than its benefits.

Answer 85

The profits received/earned by the holders of import licenses.

Answer 86

Home market: Producers gain, consumers are hurt and the license holder will earn quota rents. The difference from import tariffs is, that here the licensee will earn some money instead of the government. Money will go to the foreign producers instead of domestic government.

Answer 87

A voluntary export restraint; a quota on trade imposed from the exporting country’s side (typically on request of the importer). The effects are exactly the same as for an import quota.

Answer 88

A regulation that requires some specified fraction of a final good to be produced domestically. Producers’ point of view: same protection as an import quota Consumers/firms that must buy domestically: allows firms to import more, as long as they also buy more domestically.

Answer 89

* Sellers only sell abroad if the foreign price is greater than the domestic price plus the tariff. * Sellers only sell domestically if the foreign price is less than than the domestic price plus the tariff

Answer 90

* **_Flat for the big economy:_** The big economy’s supply or demand is affected a lot in quantities when prices change ⇒ Very elastic. * **_Steep for the small economy:_** The small country’s economy is affected relatively little in quantities supplied and demanded when prices change ⇒ Inelastic.

Answer 91

Government revenue gain = tariff \* Q

Answer 92

Simply because the government revenue gain is given out to a third-party making these trade policy tools more costly than import tariffs.

Answer 93

* Restrictions on trade causes net losses so from a cost-benefit point of view the benefits are simply outweighed by the costs. * Other costs: * Free trade will make the world benefit from economies of scale * Access to bigger markets are more beneficial for entrepreneurs which will drive more innovations. * Rent-seeking costs

Answer 94

Only about 1 % since tariffs are usually really small and import quotas etc. rare. Protection level is generally low. The real gains are bigger when taking economies of scale etc. into account but it is hard to estimate.

Answer 95

* In some cases, there is a terms of trade argument for tariffs (almost only for bigger countries that can affect world price). This also holds for export in some situations such as with Saudi Arabia’s oil export restrictions. * Be aware that these gains will be on other countries expense who will very likely want a friendly talk. * **_The argument of domestic market failure;_** consumer and producer surplus might not be the best way to measure the actual cost and benefits of free trade. A tariff might yield extra social benefits than those examined in the consumer and producer surplus * **_Theory of the second best;_** this is not directly against free trade, but states the fact that restrictions can be beneficial if the markets do not act properly. * Politically, the opportunity of protecting industries cause lobbyism by influential groups.

Answer 96

Consumer and producer surplus might not be the best way to measure the actual cost and benefits of free trade. A tariff might yield extra social benefits than those examined in the consumer and producer surplus.

Answer 97

This is not directly against free trade, but states the fact that restrictions can be beneficial if the markets do not act properly.

Answer 98

A market in the country is not doing its job right. This could be: * The labor market is not clearing * The capital market is not allocating resources efficiently It is often a question of marginal social benefit from the learning curve. Protecting industries will keep the industry running and it might improve its productivity through technological innovations etc.

Answer 99

The idea that a hands-off policy is desirable only if all markets are working properly. If they are not, a government intervention that appears to distort incentives in one market may actually increase welfare by offsetting the consequences of market failures elsewhere. For example, if the labor market is malfunctioning and fails to deliver full employment, a policy of subsidizing labor-intensive industries, might turn out to be a good idea.

Answer 100

* Mutual agreement helps mobilize support for freer trade * Negotiated agreements on trade can help governments avoid destructive trade wars.

Answer 101

8 rounds. Uruguay Round in 1994. * Decreasing average tariffs with 40 % (from 6.3 to 3.9 %) * Decreasing protectionism on clothing and agricultural industries Forming WTO * Adding service trade to the agreement (GATT was only products) * Property rights, patents, copyrights (TRIPS)

Answer 102

The Doha round from 2001 (to absolute failure in 2010) focused again on reducing tariffs but primarily focused on the agriculture industry, which is the industry of highest political importance.

Answer 103

* _Free trade area:_ no tariffs between borders (NAFTA countries can charge different tariff rates from imported goods from for example China) * _Custom union:_ have to agree on tariff rates (all EU countries must charge the same tariff rate on each imported good from countries outside the region)

Answer 104

* **_Trade diversion:_** when a trade agreement (typically regional) divert part of world trade into trade with regional countries. Mercosur (Argentina, Brazil, Uruguay and Paraguay) tripling their trade in 4 years as an example. The increased trade came at the expense of other trade so that the net effects on the economies involved probably were negative. Joining an agreement leads to the replacement of low-cost imports from outside the zone with higher-cost goods from member nations. * **_Trade creation:_** trade agreements that increases international trade by lowering trade barriers. Joining an agreement leads to replacement of high-cost domestic production by imports from other members of agreement.

Answer 105

Trade agreements that increases international trade by lowering trade barriers. Joining an agreement leads to replacement of high-cost domestic production by imports from other members of agreement.

Answer 106

When a trade agreement (typically regional) divert part of world trade into trade with regional countries. Mercosur (Argentina, Brazil, Uruguay and Paraguay) tripling their trade in 4 years as an example. The increased trade came at the expense of other trade so that the net effects on the economies involved probably were negative. Joining an agreement leads to the replacement of low-cost imports from outside the zone with higher-cost goods from member nations.

Answer 107

There was a strong belief that the road for economic growth was a strong manufacturing sector. Thus to develop strong manufacturing industries, governments temporarily supported these new industries until they had grown strong enough to meet international competition (The infant industry argument). As of historic fact, both Japan and USA’s strong manufacturing industries started out under protection. However, it does not always hold as of the case with India and Pakistan who have protected their manufacturing industries for decades without luck simply because the protection has caused lack of competition and thus productivity progress.

Answer 108

Encouraging domestic industries by limiting imports of manufactured goods.

Answer 109

Poor manufacturing industries is not just due to lack of experience but rather lack of: * Skilled labor * Entrepreneurs * Managerial competences * Social organization * Reliable supplies of electricity etc. Import-quotas can help an inefficient sector survive, but it cannot directly make that sector more efficient

Answer 110

**Yes and no** - it might be indeterminate. Trade (import/export) as percentage of GDP has increased a lot for developing countries and the trade barriers has decreased a lot causing increased bonds between countries of the world. Looking at actual numbers however, many Latin American countries now grow faster than with import-protection, India and China has been growing faster but economists have found that only a limited share of the growth can be allocated to trade liberalization. India and China + the Asian Tigers are though the best examples of why free trade should be beneficial.

Answer 111

**Hong Kong, South Korea, Taiwan and Singapore.** Many countries has followed up whereas India and China are most important.

Answer 112

* The inability of firms in high-technology industries to capture the benefits of that part of their contribution to knowledge that spill over to other firms * The presence of monopoly profits in highly concentrated oligopolistic industries.

Answer 113

It is all about knowledge spillover to other industries. As goes for the military who have developed multiple technologies used across many industries today.

Answer 114

Basically just any strategic policy. What does it mean? That we through trade policies increase our welfare on other countries’ expense and thus risk causing a trade war.

Answer 115

That only a limited number of firms can act in an industry (related to game theory) Thus in some cases, government subsidies can give the necessary advantage over other firms so that they do not enter. The idea is highly criticized as you will have to move resources from one industry to another no matter what.

Answer 116

**For:** * International trade increases production and output so that pollution increases with the increase in production and consumption * Due to international trade, pollution heavy industries often tend to move to countries with few regulations. Example: the shipbreaking industry is highly focused in pollution haven, Alang in India. **Against:** * Countries and consumers change their production and consumption mix as they grow richer towards products that reduce the environmental impact ⇒ Example: The US now focus on services rather than goods and tends to use less energy and raw material * Growing wealth tend to lead to growing political demands for environmental quality * Pollution is a negative externality of interest to all countries in the world. Thus, international trade gives the more environment-conscious countries more influence on other countries by the possibility of imposing trade-policies hurting polluting countries ⇒ For example carbon-doxide tariffs

Answer 117

A theory backed by empirical evidence that as countries grow richer, they first increases pollution and afterwards decreases their environmental (per GDP dollar) impact as they become developed. Thus, again the increased GDP (production and output) will still hurt the environment as people become richer.

Answer 118

Jinkins stemmer radikale venstre, så det er her er nok fint at vide. Kan give ham et smil på læben, hvis man på en eller anden måde kan få det med i eksamen.

Answer 119

That parties take policy positions (such as a tariff position) to maximize support. If two parties, both will be placed exactly such as they get ½ of the votes each. ***t\* is always median in equilibrium.***

Answer 120

Collective action is about sharing your voice. Political campaign funding is together with the median voter theory what make politicians win elections. * Policies with large aggregate loss but small individual loss are difficult to change ⇒ Fx. US sugar consumers or EU consumers of agricultural products. ⇒ These **WON’T** SHARE THEIR VOICE * Small groups with concentrated losses are more willing to pay effort fixed cost ⇒ Fx. US sugar producers or EU farmers. ⇒ THESE **WILL** SHARE THEIR VOICE

Answer 121

Gross National Product

Answer 122

* Consumption * Investment (by companies - NOT private consumers investments in stock fx.) * Government purchases * Current account balance (net exports with foreigners)

Answer 123

_The **value** of all **final goods and services** produced by **the country’s factors of production** and **sold on the market in a given time period**_ * The value; in common terms - normally the domestic currency * Final goods and services - only FINAL goods and services * Final goods can also be investments * By the country’s factors of production; use of the country’s labor, land, or capital. * Does not have to be produced domestically (within the border of the country) * Sold on the market in a given time period; Only final goods in the given time period * Used textbooks fx do NOT count ⇒ that is “exchange”

Answer 124

**National income.** **National income** = GNP - depreciation + unilateral transfers (but we just say national income = GNP) The value of all final goods and services produced by the country’s factors of production and sold on the market in a given time period

Answer 125

GNP adds/subtracts whether Danes receive more income from their overseas investments than foreign nationals receive from their investments in Denmark. **GNP = GDP + net transfers received** Only count stuff produced by factors owned by nationals Measure of stuff produced

Answer 126

As in an open economy, a trade deficit will make the country “dissave” ⇒ reduce their foreign wealth by exporting less than they import.

Answer 127

Y = C + I + G Y = C + I + G + EX - IM Think of Y as fixed. Why is that? Fx if you decrease Import, Y (output) does not increase.

Answer 128

* Import with GNP; whenever some of the intermediate goods (/factors used) in producing the final good are foreign/foreigned owned. * Import with GDP; whenever the product is produced on the other side of a border.

Answer 129

The difference between exports of goods and services and imports of goods and services: **CA = EX - IM**

Answer 130

By having a positive inflow of capital; other countries lending to you ⇒ This is the case for US.

Answer 131

**Current account balance:** * Import and export * Net income: Income of financial assets for domestic and population foreign population (income received – income paid; salaries, income from financial investments, dividends etc.) * Net unilateral transfers/Net transfers received (negative for developed countries; it is donor money for emerging markets) aids, donations, workers’ remittances * Capital account **The financial account:** * Value of assets (foreigners lending money to the country) * Buying assets overseas * Official reserve transactions: on behalf of the central bank * Net capital flows/capital account balance _Net errors and omissions = Statistical discrepancy_ Current account + capital account = Financial account

Answer 132

Fiat money is currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith.

Answer 133

**For:** * Some things are not okay such as forcing companies to not give workers 12-hours workdays (by laws in Denmark fx). * Foxconn’s suicide nets really show how bad sweatshops are for workers. * Domestic regulations, why not foreign? * We can step in and help them (government intervention); minimum wage, maximum 10-hour workdays etc. * Sweatshops are terrible * People don’t always make good choices * Small changes in regulations won't shut down factories **Against:** * They chose to work there themselves * Alternatives are worse; no jobs * Increased regulations will make capital investments more beneficial and thus jobs will end up being eliminated; example of minimum wage in California of jump from USD 10 to 15 for fast food workers made the fast food chains invest in automated ordering, which eliminated many jobs. * Migration not possible politcally * Better regulations not possible * Close down factories

Answer 134

Let's assume the bookstore buys sweatshirt for $10 and sell it for 100$, the $10 dollar is not counted toward GNP, but $90 (the markup) is counted in the GNP as consumption.

Answer 135

* Debit; when a native pays a foreigner * Credit; when a foreigner pays a native

Answer 136

Any central bank transaction in private markets for foreign currency assets used to change the amount of money in circulation (money supply) and affect the foreign exchange rates.

Answer 137

S = Y - C - G Y = C + I + G (+CS) so I = Y - C - G (- CA) S = I (closed economy) S - CA = I (open economy)

Answer 138

Closed: by building up its capital stock. Open: by building up its capital stock AND by acquiring foreign wealth by running a trade surplus

Answer 139

Sp = Y - T - C Sg = T - G S = Y - C - G = (Y - T -C) + (T-G) = Sp + Sg

Answer 140

That it always enters the balance of payments twice. Thus, the double bookkeeping system should be used and both a crediting and debiting should be made.

Answer 141

**_Indirect:_** The price of the domestic currency in terms of foreign currency⇒ Number of units of foreign currency per unit of domestic currency. EURO/DKK = 0.13 **_Direct:_** The foreign currency in terms of the domestic currency ⇒ Number of units of home currency per one unit of foreign currency. DKK/EURO = 7.45

Answer 142

* Depreciations and appreciations. * Devaluation and revaluations.

Answer 143

The price of domestic goods in terms of foreign goods, denoted by ∈. The real exchange rate determines your choice between consuming domestic or foreign goods. ∈ = EP/(P\* (the foreign price)) When increasing, domestic goods are becoming more expensive relative to foreign goods and NX decrease (Marshall-Lerner) When the real exchange rate = 1 ⇒ We have perfect PPP (however, there are many reasons to why this don’t hold in practice). _Examples:_ Selling bike at P = 4000 DKK ⇒ exchanging into euros and get 520 euros ⇒ go to Germany where the price of a new bike is 260 euros (P^\*). Thus EP/P^\* = 520/260=2. or (4000x0.13)/260 = 2.

Answer 144

* Commercial Banks (especially with interbank trading) * Multinational corporations * Nonbank financial institutions * Pension funds * Insurance companies * Hedge funds * Central banks

Answer 145

A currency is one that is widely used to denominate international contracts made by parties who do not reside in the country that issues the vehicle currency. Number one is USD, number two is Euro closely followed up by number 3 the Japanese Yen.

Answer 146

* Spot ⇒ Spot-on exchange rates are the exchange rate agreed right now on the spot when making a deal. * Forward exchange rates are quoted in transactions - example: we have a future transaction in 30 days and want to make sure that we get a certain exchange rate to secure profits.

Answer 147

A spot sale of a currency combined with a forward repurchase of that currency.

Answer 148

The expected real rate of return: the rate of return computed by measuring asset values in terms of some broad representative basket of product that savers regularly purchase. In other words, the expected return in terms of actual purchasing power in the future; REAL return. (Value tomorrow - Value today) / Value today ⇒ The good old: (Ee - E) / E

Answer 149

* Risk * Liquidity But we are ignoring these factors in our equilibrium analysis.

Answer 150

* **Rate of depreciation**: the percentage increase in fx. The dollar/euro exchange rate over a year ((Future exchange rate - Current exchange rate)/Current exchange rate) ⇒ (Ee - E)/ E ⇒ Ee is higher than E. * **Rate of appreciation**; simply the opposite. It does not matter whether we measure returns in terms of one currency or the other as long as we measure them both in terms of the same currency ⇒ (Ee - E) / E ⇒ Ee is lower than E.

Answer 151

Today’s interest rate + ((Future exchange rate - current exchange rate)/current exchange rate) Interest rate + ((Ee - E) / E)

Answer 152

The condition stating that the expected returns on deposits of any two currencies are equal when measured in the same currency. Otherwise we would have arbitrage. The expected returns have to be equal Interest (i) = Interest foreign (i\*) + ((Ee- E)/E)

Answer 153

We expect it to appreciate further

Answer 154

We expect it to depreciate further.

Answer 155

In 2; the expected return on dollar deposits is higher than that of euro deposits. All euro deposits owners will want to buy dollar deposits instead but the owners of dollar deposits will not be willing to sell at the current exchange rate as it will give them a lower rate of return. Thus, the euro deposit owners will offer a better exchange rate, which will bring the dollar/euro exchange rate down (euros become cheaper in terms of dollars)

Answer 156

The dollar will appreciate and the green line will shift up/to the right and the new equilibrium will be in point 1’.

Answer 157

Rate of return on an investment - usually on government debt.

Answer 158

M1; the money supply by the central bank. We do not go into detail in how the money supply is set.

Answer 159

* Medium of exchange (instead of trade on a mutual coincidence of wants basis. Need Coca Cola, and you need a haircut). * Unit of account (compare prices easily) * Store of value (an asset - the most liquid)

Answer 160

* The expected return the asset offers compared with the returns offered by other assets * Increase in interest rate, demand for money will fall * (The riskiness of the asset’s expected returns) * The asset’s liquidity * A rise in the average value of transactions carried out by a household or firm causes its demand for money to rise

Answer 161

* The interest rate (R) * Increasing interest rate, decreasing money demand * The price level (P) * Increasing price level, increasing money demand (A rise in the average value of transactions carried out by a household or firm causes its demand for money to rise) * Real national income (GNP = Y) * When GNP increases, the demand for money increases given the price level, as more goods and services will be purchased

Answer 162

R = interest rate ⇒ money demand decreases, as R increases Y = GNP ⇒ Money demand increases, as R increases P = Price level ⇒ Money demand increases as P increases

Answer 163

Money demand / Price level = L(R, Y) * Double prices ⇒ Doubling in money demand * Recession in the economy = Y decreases = Money demand decreases * Interest rate up = better to hold illiquid assets = Money demand decreases

Answer 164

When Money supply / Price level = L(R, Y) * Punkt 3: I If more demand than supply for money: * People will promise more money in the future for money today * As interest rates rise, people less willing to hold money * Punkt 1: If more supply than demand for money: * People with money will buy bonds for lower interest rate * As interest rates fall, people more willing to hold money

Answer 165

If money supply increases ⇒ The interest rate will decrease (money market). When interest rate decreases, less capital inflow ⇒ less demand for USD and USD depreciates such that E(USD/EUR) increases (The price of 1 Euro will increase to make the interest parity condition hold).

Answer 166

P = Money supply / L(R, Y) P = Money supply / Money demand Increase in money supply causes a proportional increase in the price level

Answer 167

Change in P / P = (Change in money supply / money supply) - (Change in money demand / money demand)

Answer 168

A change in the money supply have no effect on the long-run values of the interest rate or real output. Why? In the long-run, output levels are determined by the economy’s endowments of labor and capital and not money supply. (Think back to macroeconomics long-run equilibrium - it’s about capital and human capital)

Answer 169

All else equal, a permanent increase in a country’s money supply causes a proportional long-run depreciation of its currency against foreign currencies. Similarly, a permanent decrease in a country’s money supply causes a proportional long- run appreciation of its currency against foreign currencies. *(picture is example of increase in money supply)*

Answer 170

* Excess demand for output and labor (as interest rate decreases, people invest more in Y = C + I + G + CA) ⇒ Labor demand increases ⇒ Wages increase ⇒ Prices increase * Inflationary expectations (Pe \> P) * Raw materials prices

Answer 171

When the exchange rates immediate response to a disturbance is greater than its long-run response ⇒ What happens when money supply increases. For example 15-13D where the depreciation after a money supply rise is more significant than the actual long-run effects.

Answer 172

**Yes:** * Will get influence on monetary policy * Price transparency * Currency risk elimination * Eliminating transaction fees * Arguing that there will be no loss of cultural heritage **No:** * Investments flowing into Denmark due to the 2.25 + - pegging * Insurance: having our own currency is like having a small lifeboat on the big ship. With the Euro we will be sinking with the rest of the Euro-zone. * Worked well so far * The Euro-zone and EU is quite unpopular in Denmark already. * We get price transparency and very low transaction fees with the solution we have now. * Costs of changing to a new currency

Answer 173

Yes. Import and export between countries is a zero-sum game.

Answer 174

Yes. Capital inflow and outflow from one country to another is a zero-sum game. Either you get more capital inflow than you have capital outflow, or you don’t.

Answer 175

The law stating that in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency.

Answer 176

That a fall in domestic PPP (rise in domestic prices) will be followed by a proportional currency depreciation. Absolute PPP (this does definitely not hold in the real world)

Answer 177

* Law of one price: applies to individual commodities * PPP theory: applies to the general price level

Answer 178

Here we say that the change in the exchange rate between two currencies over any period equals the difference between the percentage changes in national price levels. If absolute PPP holds (which it doesn’t in the real world), then relative PPP would also hold. However, if relative PPP hold, then absolute PPP does not have to hold.

Answer 179

Other things equal, money supply growth at a constant growth rate eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level (Yn) or the long-run relative prices of goods and services.

Answer 180

* Transport costs and restrictions to trade DO EXIST (assumption of the model that they do not) * In the real world we also have monopolistic and oligopolistic markets * The inflation data reported in different countries are based on different commodity baskets. * Firms engaging in “pricing to market” strategies

Answer 181

* An increase in world relative demand for one country’s output (this also implies rising prices for both traded and non-tradable goods) causes a long-run real appreciation of that country’s currency and vice versa. * A relative expansion of a country’s output (from increased production due to productivity improvements) causes a long-run real depreciation of that country’s currency.

Answer 182

* Shifts in relative money supply levels ⇒ only effect is an increase in all dollar prices INCLUDING the dollar price of the euro * Shifts in relative money supply growth rates ⇒ permanent increased money supply growth rate raises the long-run inflation rate (Fisher effect), raises the interest rate and the real money demand declines (depreciation of dollar), price in US rises ⇒ the purely monetary change brings a long-run nominal exchange shift in line with relative PPP. * A change in relative output demand ⇒ A rise in the relative demand for a country’s products, lead to a long-run nominal appreciation (rise in the relative price of products due to increased demand) * A change in relative supply ⇒ excess supply leads to lower prices and thus a real depreciation

Answer 183

The sum of two components, namely 1. The expected rate of real dollar depreciation against the euro and 2. The expected inflation difference between the US and Europe (in pure PPP theory only the inflation has influence

Answer 184

1. Exchange rate stability 2. Monetary Policy Autonomy 3. Freedom of financial flows Only two properties can be reached simultaneously.

Answer 185

_What it says:_ **Production Possibility Frontier (PPF) for home country** Amount of hours it takes to produce one unit of cheese multiplied by units of cheese you produce + amount of hours it takes to produce one unit of wine multiplied by units of wine you produce has to be equal to or less than the amount of labour home country has. I.e. you cannot use more labour than you have.

Answer 186

What it says: Home has a comparative advantage in producing cheese. It says that the relative time you spend on cheese to wine is less in home than in foreign. Assume a_c=1 and a_w=2 then a_c/a_w=1/2=0.5 Assume a_c\*=2 and a_w\*=1 then a_c\*/a_w\*=2/1=2 I.e. home country has to sacrifice (0.5) relatively less to produce one more unit of cheese than foreign country (2).

Answer 187

_What it says:_ It says that the wage is equal to the price of one unit of cheese divided by the amount of hours it takes to produce one unit of cheese. Assume that the price of one unit of cheese is 20 DKK, so P_c=20, and it takes 2 hours to produce one unit of cheese, so a_c=2. Then the wage will be: w=P_c / a_c= 20 / 2=10 I.e. the autarchy wage is the value of a worker’s product. It also says that the wage has to be the same for wine-workers, because there is free movement between sectors.

Answer 188

_Cheese:_ a_CL\< a_CL\*→1\<6=home has an absolute advantage in producing cheese _Wine:_ a_CW\< a_CW\*→2\<3=home has an absolute advantage in producing wine

Answer 189

_Cheese:_ a_LC/ a_LW\< a_LC\* / a_LW\*→1/2\< 6/3→0.5\<2 So home has a comparative advantage in producing cheese- _Wine:_ a_LW/ a_LC\< a_LW\* / a_LC\*→2/1 \> 3/6→2\<0.5 So foreign has a comparative advantage in producing wine.

Answer 190

Another way of writing autarchy wage: w=P_ca_c= P_w/a_w

Answer 191

Countries with bad technology (low productivity). In other words, developing countries. Remember that all countries weakly gains from trade in the Ricardian model.

Answer 192

* Goods with a small comparative advantage, will be produced in both countries, if the trade costs / distance is high, as these costs outweigh the gains from the comparative advantage * Goods with a large comparative advantages will still be specialized in one of the countries.

Answer 193

(Factory output value - Factory input value) / Number of employees

Answer 194

That trade with low wage countries hurt high wage countries. This in somewhat true in the short-run for low-skilled workers who lose their jobs, but in the long-run the high wage country as well as the low-skilled worker who will educate themselves also gain.

Answer 195

π=P_C\* k/ a_C- r_kk=0 It says that your profit is equal to the price of clothes times the amount of clothes you can produce given the capital you have, minus the rent of capital times the capital you use. And it has to be equal to zero, because you don’t have any profits.

Answer 196

It says that, the relative supply is t / a_F, which means how many units of food you can supply of the land you have. So if you have 100 arches of land and it takes 4 hours to produce one unit of food, you will get t / a_F=100 / 4=25 units of food. The same is true for k / a_C. So the whole term tells you how many units of food you can supply relative to the amount of clothes you can supply. So, if you can produce 25 units of food, and 5 units of food, then the term will be 25 / 5=5, which will be you relative supply of food to clothes. I.e. you supply 5 times more food than clothes.

Answer 197

Those who own the factor in which a country is relative abundant.

Answer 198

Ohlin said; If technology is shared, factor prices (Rk, Rt and w) will equalize across countries _if factors can move_, but not if only goods are traded. In the real world however, factor prices differ a lot between countries. For example, the real wage of production workers in Nigeria is not equal to the real wage of Danish production workers.

Answer 199

* 2-Specific: w = Pc/ac = Pf/aw (Price of good / hours spent on producing one unit of that good) * 3-Specific: w = MPLc \* Pc = MPLw \* Pw (Marginal product of labor in producing the good \* the price of the good).

Answer 200

-(Pc / Pf) = -(MPLc / MPLf) With this we can find the equilibrium wage by drawing a tangent line to the PPF.

Answer 201

* Capital owners: Gain * Land owners: Lose * Labor: Indeterminate

Answer 202

The capital owners will gain as w/Pf decreases as Pf increases, (and the landowners will lose as Pf decreases relative to w (w / Pf)). Labor input increases in clothing and decreases in food production. Note that the vertical axis is (w/Pc) and horizontal axis is labor input.

Answer 203

A country exports goods that are intensive in the factor they are abundant in, so Western Europe exports highskilled-labor intensive goods to Eastern Europe.

Answer 204

If a country gets more of a resource, then the output of the good that uses that resource intensively will rise while the output of the other good will fall. Ex: if Denmark got more labor, it would increase its production of textiles OR if unskilled Iraqis come to Denmark, Denmark will be more abundant in unskilled-labor intensive goods and produce more of that.

Answer 205

A rise in the relative price of an output intensive in a factor will increase the real returns to that factor, and decrease returns to the other factor ⇒ A rise in the price of a final good for which a particular resource is more useful in production will increase the payments to that resource Ex: if the price of textiles goes up, Chinese workers get higher wages When opening up to trade, owners of factors in which the country exports will gain from trade, so unskilled labor will benefit when China opens up to trade. SS = Stolper-Samuelson

Answer 206

Trade should cause resource prices to converge Ex: Danish and Chinese workers should be paid the same real wages. *(This is not the case in the real world though)*

Answer 207

* _Heckscher-Ohlin_ * A country exports goods that are intensive in the factor they are abundant in, so Western Europe exports highskilled-labor intensive goods to Eastern Europe. * _Stolper-Samuelson:_ * A rise in the relative price of an output intensive in a factor will increase the real returns to that factor, and decrease returns to the other factor * Ex: if the price of textiles goes up, Chinese workers get higher wages * When opening up to trade, owners of factors in which the country exports will gain from trade, so unskilled labor will benefit when China opens up to trade. * _Rybchinsky:_ * If a country gets more of a resource, then the output of the good that uses that resource intensively will rise while the output of the other good will fall. * Ex: if Denmark got more labor, it would increase its production of textiles OR if unskilled Iraqis come to Denmark, Denmark will be more abundant in unskilled-labor intensive goods and produce more of that. * _Factor-price equalization:_ * Trade should cause resource prices to converge * Ex: Danish and Chinese workers should be paid the same real wages.

Answer 208

* Proofs of the theorems require that both goods are produced in both countries. * The model assumes technology is the same everywhere * The model assumes that Capital cannot move * Output goods have the same price everywhere

Answer 209

1. Prices increase with distance *p_ij=p_ijd_ij* 2. Quality is proportional to price *m_i/ p_ij=k* for all *i* 3. Number of goods is proportional to GDP (higher GDP means more goods) *n_i=GDP / q* 4. CES demand g_ij=n_i(m_i/ p_ij) -⁰¹

Answer 210

Exports halves if distance doubles.

Answer 211

Indeterminate. Two effects: 1. Remoteness rises for both countries - increases trade *(R_j= equation here)* 2. Distance increase - decreases trade *(equation here)* However, we expect remoteness in Denmark to be affected much less, and therefore, we expect that Denmark will export relative less to Sweden than they will import from Sweden.

Answer 212

Increase in trade 1. Remoteness of both countries rises 2. Distance remains the same

Answer 213

Trade increases.

Answer 214

Trade decreases. Remoteness in both Denmark and Sweden falls. Hence, a reduction in trade between DK and SE.

Answer 215

It measures the country's set of alternatives. I.e. how many countries are around the country itself. If the country has many countries around (i.e. many alternatives) the remoteness falls. Hence, trade with each country falls a bit also. It is the reason why, when we move Sweden into the Atlantic Ocean, that the remoteness rises for both countries, because Denmark do not have Sweden as close anymore, and Sweden will not have any European countries close anymore. However, Sweden’s set of alternatives decreases much more than Denmark’s set of alternatives. That is the reason we would expect a fall in the ratio of imports to Denmark from Sweden to exports from Denmark to Sweden.

Answer 216

Because remoteness is much higher in Australia and New Zealand (i.e. few set of alternatives). Austria and Portugal have a lower remoteness because they have a lot more alternatives of trading-partners.

Answer 217

Results in 4 times as much trade. 2\*GPDi \* 2\*GDPj = 4\*Xij

Answer 218

No, because the right-hand side is only positive numbers, so will never be zero. However, zero trade exist between Swaziland and Haiti

Answer 219

The same as an increase of distance by 2,500 - 4,000 km.

Answer 220

We focus on demand, whereas we in the other trade models has focused on supply and just made a curved demand curve.

Answer 221

It does not make a difference on relative prices. Biased growth is _focused on which good gets biased growth - NOT the country._

Answer 222

* Extensive margin: Number of firms exporting (only 18 % of American firms) * Intensive margin: How much each firm exports Trade costs reduce both.

Answer 223

* =P_*Q(L)-wL* * w=P_*MPL* Firms get 0 profit.

Answer 224

* π=P\*Q-C(Q)* * oπ / oQ=P-C'(Q)* * → P=C'(Q)* Average cost is equal to price (because of zero profits)

Answer 225

If all firm charge same price, they will have 1/n market share *P=P→Q=S / n* Because, when P=P, then *(P-P)=0*, *so→ bx(P-P)=0*, and we have that: *Q=S[1/n-0]*, which is that same as *Q=S\*1n→Q=S/n* If they charge lower price, then they will have higher market share P\>P→Q If they charge higher price, they will have lower market share P S/n

Answer 226

1. Free trade is beneficial only if your country is strong enough to stand up to foreign competition. 2. Foreign competition is unfair and hurts other countries when it is based on low wages (pauper labor argument). 3. Trade exploits a country and makes it worse off if its workers receive much lower wages than workers in other nations.

Answer 227

_Squared:_ In autarchy, the PPF will be squared, as you can produce given the factors you have. So if you have 100 acres of land, you can only produce with this land, but it does not limit how much clothes you can produce with your capital. _Bowed:_ when trading

Answer 228

Price of the good you export / price of the good you import Remember: A worsening of TOT can never make to below autarchy!

Answer 229

Bad! If supply of the good you export rises, then price rises, and Price of export / price of import (aka Terms of Trade) falls! However, productivity growth usually increases income, even though it worsens TOT.

Answer 230

Good! If supply of the good you import rises, then price rises, and Price of export / price of import (aka Terms of Trade) rises!

Answer 231

A gravity equation will never match a zero trade flow, because the right hand side of the gravity equation consists of _strictly positive numbers multiplied_ together.

Answer 232

1. Trade barriers and non-tradable products (EXPLAINS WHY ABSOLUTE PPP PERFORMS POORLY) * Trade barriers (tariffs) cause a wedge in prices * Non-tradables enter the consumption basket 2. Imperfect competition + Price-adjustments to markets 3. Differences in measures of average prices for baskets of goods and services * Different “baskets” in countries * Different “baskets” over time in the same country

Answer 233

* _Short-run_: As money supply increases, real money supply increases as PRICES are fixed and thus, R (interest rate) decreases and E increases (home currency depreciates) * _Long-run_: In the long-run (medium run in macroeconomics), real money supply returns to its initial level as PRICES increase. * Thus, a 10 % increase in money supply equals a 10 % increase in inflation in the long-run (medium run in macro). * E will be below its initial level due to overshooting. * R is back to initial level + (GNP) ⇒ Neutrality of money.

Answer 234

* YES - the exchange rate E will not go back to its initial level due to either overshooting (Money supply increase) or undershooting (Money supply decrease). The interest rate (R ) will be at its initial level, (GNP will also) and money market will be back at initial equilibrium ⇒ Neutrality of money.

Answer 235

* Money supply; permanent rise in money supply = permanent and proportional depreciation of that currency. * Interest rates: increased interest rate = decreases money demand = increase in the long-run price level ⇒ depreciation of currency. NOTE: this is the opposite of the short-run where an increase in interest rate is said to make the currency appreciate * Output levels: increased output = increased money demand = fall in long-run price level = appreciation of currency

Answer 236

The market size increase.

Answer 237

CA Surplus = X \> IM That also means that Savings \> investments (CA = S \> I = X \> IM). A CA surplus can imply many things. In the case of Germany used in the question, the savings may be higher than investments due to the aging population, who save up to keep a certain standard of living during retirement.

Answer 238

The naive gravity model predicts that trade between two countries depends on only two factors, which is the size of the two economies (GDPi and GDPj) and the distance between the two countries (Dij) Two things: * Size of the economy (positively) * Distance between the economies (negatively)

Answer 239

* Transportation costs * Time it takes to ship * Transaction costs * Cultural distance * Communication costs * ‘Other variables’ * Border effect * Technology * Cultures and language (e.g. relating to colonies)

Answer 240

A constant

Answer 241

Remoteness is how far away a country is, and the more isolated you are the more you trade with your neighbour

Answer 242

*(equation here)* Remoteness is the sum of the GDP of all countries divided by distance If *d_j goes up→R_j goes up*

Answer 243

*(equation here)*

Answer 244

*(equation here)* As the size of country Z’s economy increases, GDP-world increases ⇒ Rj decreases ⇒ Xij decreases.

Answer 245

*a_L*: ‘How many hours to produce one unit’

Answer 246

MPL: ‘How many units produced in 1 hour’

Answer 247

*MPL=1 / a_L* → inverse relationship Also Al = 1 / MPL

Answer 248

The number of good x that could have been produced with the resources used to produce good y. Rule to remember: when you say: ‘costs of x in terms of y’, then remember that the first good mentioned, i.e. x, will be over the second good mentioned, i.e. y. Milk in terms of shoes would be written as: *a_LM/ aLS* Shoes in terms of milk would be written as: *a_LS / a_LM*

Answer 249

1. Labour mobility 2. Zero profit

Answer 250

The relative price of good1 in terms of good2 (Pgood1/Pgood2) is equal to the opportunity cost of good1 in terms of good2 (agood1/agood2). AUTARCHY.

Answer 251

Step 1: Find the PPF for both countries (either with algebra or by finding intersection) Step 2: Construct the world relative supply curve Step 3: Determine the world demand equilibrium

Answer 252

Step 1: Draw graph and type in known opportunity costs Step 2: Draw staircase Step 3: Consider the 5 cases of specialization

Answer 253

Demand is usually given. If on our graph, the relative prices are Px/Py and the demand function given is: Dy/Dx = Px/Py we are all good to go. However, it is more likely that the demand curve will be inverse of our graph’s relative prices. For example as Dx / Dy = pyw / pxw = Qx+Qx\* / Qy+Qy\* (where our graph says Px/Py on the vertical axis) So you have to find the inverse of the price relation, and you get that by:

Answer 254

To draw the demand curve, pick two (or more) values for Q_x+Q_x* / Q_y+Q_y* (your horizontal axis) and insert into the demand function to get your vertical axis value, the relative prices associated with the chosen relative demand-values. Note: of course remember to draw the RD curve through the equilibrium value found earlier (your RS value, which you of course also set into the demand function).

Answer 255

After having determined which country will specialize in what (if both specialize in something. One country could for example still produce both goods), you calculate each country’s NEW PPF by calculating what it can produce of the good it specializes in, and what the country can trade those units of that good into. *[attached image here]* REMEMBER TO ILLUSTRATE THE FINDINGS TOO BY DRAWING A NEW WORLD-PPF FROM THE NUMBERS CALCULATED.

Answer 256

HO is a long-run model where all factors can be used in the production of all goods. * Specific with land + capital for cloth and food: Qfood = (T, L) and Qcloth = (K, L) * HO with land + capital for cloth and food: * Qfood = (T, L) and Qcloth = (T, L) * Qfood = (K, L) and Qcloth = (K, L)

Answer 257

* Intensity: Refers to goods * Abundance: Refers to countries

Answer 258

“Countries abundant in a factor will export the good intensive in that factor.

Answer 259

If a country’s relative amount of a factor increases, then the output of the good intensive in that factor will rise, while the output of the other good will fall (_also in absolute terms)._

Answer 260

A rise in the relative price of an output intensive in a factor will increase the relative returns to that factor, and decrease returns to the other factor.

Answer 261

Trade causes factor prices to converge.

Answer 262

1. We realize that 1/alx is the same as MPLx. 2. We now calculate the wage in terms of one of the goods. We choose good x * Wx = MPLx 3. We now divide both sides of the equation with Px to get:

Answer 263

This is good to know ⇒ By far the easiest way to find the equilibrium wage. However, the other method (another flashcard) is more in-depth with the explanation. No matter which method is chosen, this will help spot the equilibrium wage quickly (good for double-checking or time-saving).

Answer 264

Labor moved away from TV-production ⇒ MPLtv increases ⇒ Wage in TV increases ⇒ MPK decreases (wage expenses increase = lower margin). They lose.

Answer 265

Labor moved towards bacon-production ⇒ MPLb decreases ⇒ Wage in bacon decreases = MPT increases (wage expense decrease = higher margin). They win.

Answer 266

* Factors specific to a country’s exporting sector whose relative price increases, will gain from trade * Factors specific to a country’s importing sector, whose relative price decreases, will lose from trade. * Mobile factor (Labor) is ambiguous ⇒ depending on their consumption-choice.

Answer 267

Assumption: Technology is the same for all countries so that ac = ac\* and af = af\* + Math: If we divide an inequality by the same unit, we don’t change the inequality.

Answer 268

* Land owners: ambiguous (as ambiguous in cloth consumption) * Capital owners: better off (as better off in food consumption)

Answer 269

Used to show the number of a good (x) that can be bought from 1 input of a factor (in this case capital, k).

Answer 270

* The size of the economies * The country with the steepest curve will be most affected by the tariff.

Answer 271

That the country imposing the tariff is large enough to affect world prices ⇒ Pt = Pt\* + t (you start out by calculating Pt\* and then add + tariff to P). If extremely small and can’t affect world prices, then: Pt = Pworld + t

Answer 272

Using the other trade policy tools, the gain will not go to the government but instead someone else, which might be domestic producers or a foreign country’s producers ⇒ Higher cost.

Answer 273

Since all countries can marginally affect the world prices Pw, all countries do in theory have an optimal tariff where E \> B + D. (it would not be the case, if we assume that a country is extremely small so it cannot affect world prices)

Answer 274

Because the concept of all countries having an optimal positive tariff is based on taking all other countries tariffs as given. In the real world, imposing a tariff can lead to a trade-war so we end up in a “race to the bottom”. Therefore, we have organizations such as WTO to make long-term agreements avoiding trade-wars.

Answer 275

E = Home currency / Foreign currency ===\> E(DKK/USD) ⇒ The amount of Home currency it takes to buy 1 foreign currency. ⇒ That is E(DDK/USD) = 6.5.

Answer 276

If E has increased, our own currency has DEPRECIATED relative to the foreign currency. It has become more expensive to buy 1 USD or 1 EURO or 1 GBP etc.

Answer 277

The uncovered interest parity condition:

Answer 278

Adjusted for different exchange rates, the prices of goods in different countries must be the same (Individual goods).

Answer 279

PPP is ABSOLUTE PPP. The prices of a basket of goods must be the same across countries when adjusted for different exchange rates.

Answer 280

The percentage change in exchange rates between two currencies equal the percentage difference in prices.