Internationell ekonomi

Question 1

What does absolute advantage mean?

Answer 1

A country has absolute advantage if it takes less hours to produce a good.

Question 2

What does comparative advantage mean?

Answer 2

A country has comparative advantage in a good if its opportunity cost is less than another countrys

Question 3

What is and ad valorem tariff?

Answer 3

A tax equal to a certain percentage of the value of the product.

Question 4

What is a specific tariff?

Answer 4

A tax equal to a fixed amount of money per unit of traded goods.

Question 5

What is a compound tariff?

Answer 5

A tax with both ad valorem and specific components.

Question 6

What is a voluntary export restraint (VER)?

Answer 6

When the government gives the quota licenses to foreign producers. Foreign firms can raise the price and earn the quota rents on top of their normal profits. It makes the welfare costs bigger.

Question 7

What is the difference between a free trade area (FTA) and a customs union (CU)?

Answer 7

• FTA: members agree to eliminate trade barriers among themselves but maintain individual barriers against non-members.
• CU):members remove trade barriers among themselves and form common barriers among non-members.

Question 8

What is trade creation?

Answer 8

Trade creation is an expansion in trade resulting from the formation of a customs union.

Trade creation = Import after CU - import before CU

Question 9

What is trade diversion?

Answer 9

Trade diversion is the shift in the source of trade from a low cost producer to a customs union member country.

If imports came from B before CU but now comes from C, trade diversion = Imports B pre CU - Imports B post CU

Question 10

If a country has a current account surplus, do they have a financial account surplus or deficit?

Answer 10

If a country has a current account suplus then they have a financial account deficit.

(If they have a CAB deficit, then they have a financial account surplus).

Question 11

According to the uncovered interest rate parity condition, does a rise in domestic interest rates increase or decrease the level of E?

Answer 11

An increase in domestic interest rates decreases the level of E

Question 12

According to the uncovered interest rate parity condition, does a rise in foreign interest rates increase or decrease the level of E?

Answer 12

An increase in foreign interest rates increases the level of E

Question 13

What does purchasing power parity theory say?

Answer 13

PPP refers to the concept that the same basket of goods should cost the same when prices are measured in the same currency regardless of where it is located.

Question 14

According to PPP, what does 1 > EPPP/E mean?

Answer 14

That the foreign currency is overvalued and the domestic currency is undervalued.

Question 15

According to PPP, what does 1 < EPPP/E mean?

Answer 15

That the foreign currency is undervalued and domestic currency is overvalued.

Question 16

When is the demand for imports elastic and when is it inelastic?

Answer 16

• If the %△Q exceeds the %△P, then demand is said to be elastic (more then 1).
• If %△Q is less than the %△P, then demand is said to be inelastic (less than 1).

(ED = %△Qimports / %△Pimports

Question 17

What happens to the current account balance when demand is elastic and inelastic?

Answer 17

• If the demand is elastic, deprecation will improve cab.
• If the demand is inelastic, deprecation will not improve cab.

Question 18

What does the Marshall-Lerner Condition say?

Answer 18

It states that for a country’s current account (CAB) to improve following a depreciation of its currency, the sum of the domestic and foreign elasticities of demand for imports be greater than one.

Question 19

What does the J Curve effect say?

Answer 19

The J curve refers to the time pattern of the current account balance following currency devaluation. The pattern traces out a path similar to the letter J, that is, after the devaluation, the current account balance deteriorates for a while (due to inelastic import demands) before improving.

Question 20

What does the absorption approach say?

Answer 20

The absorption approach is the theory of the current account balance that extends the elasticities model by examining how domestic spending must change relative to domestic output in order for devaluation to be successful in improving the current account balance.

Question 21

What is the formula for the open economy multiplier?

Answer 21

1 / s + m

where s is the marginal propensity to save and m is the marginal propensity to import.

Question 22

Is a country trade deficit or trade surplus if it’s import exceeds it’s export?

Answer 22

Trade deficit.
Net exports is negative.

Question 23

Is a country trade deficit or trade surplus if it’s export exceeds it’s import?

Answer 23

Trade surplus.
Net exports is positive.

Question 24

What does twin deficits phenomenon mean?

Answer 24

Twin deficits phenomenon refers to the fact that countries may experience simultaneous government budget deficit and current account deficit.