Module 10 – International Sector Flashcards
Define Quota?
- Similar to tariff but no tax advantage to government
- Significant competition among importers for quota
- Requires some method of allocating
- Government could sell quota rights: Value is the above-normal profit
- Division of rent is subject of negotiation: If manufacturer determines sole distributor then he has monopoly power
What are the opportunity costs of 1 loaf in terms of salmon in islands x and y?
A. Island x: 2 Island y: 3
B. Island x: 2.2 Island y: 1.4
C. Island x: 2.2 Island y: .14
D. Island x: 3 Island y:2
The correct answer is D. The opportunity cost of 1 loaf is the number of salmon to be surrendered to acquire the loaf. Since there are no economies of scale the trade offs are constant. In island x the opportunity cost of 140 loaves is 420 salmon; the opportunity cost of 1 loaf is 3 salmon (420/140). The corresponding cost of 1 loaf is 2 salmon in island y.
Main argument for restricting international trade is protection of domestic industries. Explain?
- Logically weak but politically persuasive
- Benefits outweighed by cost to average households
Define Flexible exchange rates
In a free market the exchange rate will adjust to the level where the quantities demanded and supplied are equal
A country has been exporting considerably more than it has been importing for several years and yet its currency has been depreciating steadily against most capitalist countries’ currencies. Which of the following could account for the constant depreciation?
A. Other countries’ currencies were depreciating faster
B. The trade deficit was in services not goods
C. The country had a continuous net outflow of capital exceeding the trade surplus
D. The trade deficit was in goods not services
The correct answer is C. A country’s exchange rate is determined by its balance of payments, a surplus leading to an appreciation a deficit to a depreciation. The balance of payments is the sum of the trade balance and net capital flows. If the currency depreciated in spite of a trade surplus it means that the net capital outflow exceeds the trade surplus.
To reap benefits from international trade a country must have
I. an absolute advantage in the production of at least one good
II. citizens whose tastes and preferences differ from those in other countries.
Which of the following is correct?
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The correct answer is D.
The theory of comparative advantage demonstrates that a country without any absolute advantage in the production of any good can still trade profitably with a nation with an absolute advantage in the production of all goods. By specialising in the production of goods in which each has a comparative advantage total output can increase in both countries and both countries can benefit even if tastes and preferences are identical. Since relative prices, i.e. how much of one good exchanges for the other, will be different, motivation to trade will exist. Thus both I and II are wrong.
The factors which would help our exports would be
I. higher inflation in our trading partners than at home
II. depreciation of our currency against our trading position
Which of the following is correct?
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The correct answer is C. If the prices of our goods were rising at a slower rate than those of foreigners our goods would become relatively more attractive. Thus I is true. If our currency were depreciating, foreigners would acquire more of our currency for theirs than previously again making our exports more attractive. Thus II is true also.
Higher living standards throughout the world would be made possible by
I. an increase in the skills of the labour force in each country.
II. an increase in the stock of capital goods in each country.
III. an increase in protective tariffs in each country. Which of the following is correct?
A. I only.
B. I and II only.
C. I and III only.
D. I, II and III.
The correct answer is B. A higher world standard of living means a higher per capita gross world product. This could occur in a variety of ways – for example, the same world output and a lower population or a lower world output with a disproportion- ately lower population. Assuming a particular world population, however, a higher output would be required to increase living standards. Higher output comes about with an increase in the quantity and/or quality of the factors of production or by a more efficient allocation of these factors. Although an increase in a protective tariff could benefit one country, a universal increase in protective tariffs would lead to a less efficient allocation of world resources and, consequently, a decrease in world output. Both an increase in worker skills and an increase in capital goods would increase output.
Suppose that the pound sterling on foreign exchange markets was being traded for 2.5 Swiss francs, and further suppose that the following day the exchange rate was one pound sterling for 2.8 Swiss francs. Which of the following would be the immediate effect of the change in the exchange rate between pounds sterling and the Swiss franc?
A. Swiss goods would become more expensive for British consumers.
B. Swiss goods would become less expensive for British consumers.
C. Swiss goods would become neither more nor less expensive for British consumers.
D. British goods would become less expensive for Swiss consumers.
The correct answer is B. A Swiss franc still buys the same basket of goods in Switzerland. One pound sterling, however, now exchanges for 2.8 Swiss francs instead of 2.5 Swiss francs, that is, one pound sterling can now buy more Swiss goods than before. Swiss goods have become less expensive for British consumers, just as British goods have become more expensive for Swiss consumers.
What are the three major accounts of balance of payments?
- Current account / trade account: Imports and exports of goods and services
- Capital account: International borrowing and lending transactions
- Official settlements account: Change in holdings of foreign currency
Both islands start to trade and an equilibrium ‘price’ is reached for salmon in terms of loaves. Of the prices given which of the following is the only possible equilibrium price of a salmon?
A. 3 loaves
B. 0.5 loaves
C. 0.4 loaves
D. 0.33 loaves
The correct answer is C. Prior to trade 1 salmon exchanged for ⅓ loaf in x. Prior to trade 1 salmon exchanged for ½ loaf in y. After trade the equilibrium price must lie between the extremes of ⅓ (.33) and ½ (.5).
Exxplain the growth rate for imports in:
Z/Z = f (Yd/Yd, INFf/INFf, App/Dep)
The factors affecting exports will be the same as the
factors affecting imports except they act in the opposite direction and will depend upon domestic national income (YD) rather than (YF).
Discuss Theory of Absolute Advantage
- This states that the same commodity can be produced in one country using less labor and capital than in a second country
- Less labor and capital means an absolute advantage
- Trade between similar countries can take place as long as tastes and incomes differ in each country
- If you impede international trade, countries cannot fully exploit their absolute industrial advantage over other countries
- International trade provides greater scope for specialization and economies of scale
- Cross-country differences in endowments of minerals, or in climate-affected agriculture, often provide an obvious basis for international trade
- The theory of absolute advantage not only explains the direction of trade but also explains resource movement
- Indeed, Adam Smith viewed international trade as an important extension of domestic commerce, providing greater scope for the division of labour and economies of scale
‘The last thing British manufacturing companies and hotels want is an appreciating pound sterling.’ The appreciation will
I. make the export of our goods and services more difficult
II. discourage families from holidaying at home
Which of the following is correct?
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The correct answer is C. The appreciating pound sterling will mean foreigners will get fewer pounds for their own currencies, i.e. British manufacturing goods will increase in price in foreign currencies. Thus I is true. The appreciating pound will give British households more foreign currency for their pounds sterling and make vacationing abroad cheaper in terms of pounds sterling. Thus II is true also.
Uncertainty of future exchange rate poses risk for exporting firm, discuss?
- May minimise risk by buying foreign currencies in the futures market; additional costs
- Controversy as to whether fixed or flexible rates are better as:
- Flexible rates enhance world trade and lead to globally efficient allocation of resources
- Fixed exchange rates ensure better exchange rate stability
Define Quota
A quota is a restriction on the amount of a good that may enter a country in a specific time period
Both islands start to trade and an equilibrium ‘price’ is reached for loaves in terms of salmon. Of the prices given which of the following is the only possible equilibrium price of a loaf?
A. 5 salmon
B. 3 salmon
C. 2.5 salmon
D. 2 salmon
The correct answer is C. Prior to trade 1 loaf exchanged for 3 salmon in x. Prior to trade 1 loaf exchanged for 2 salmon in y. After trade the equilibrium price must lie between the extremes of 2 and 3 salmon. 2.5 salmon is the only ‘price’ given which satisfies this criterion.
Move to flexible exchange rates in the1970s was designed to ___
stabilise exchange rates and avoid large devaluation/revaluation
Explain the effect of Tariffs on Supply Curve?
- Shifts the supply curve upward
- Increases price and decreases quantity
- If we assume balanced trade:
- Have no effect on the balance of trade but only on the volume of trade
- Everyone pays more for both imported and domestically
- Resources are not employed efficiently
- World production is reduced
- In short run:
- Workers in protected industry don’t need job search or retraining
Explain X as a measure for exports.
X = f(YF, Pd/PF, ER) and
X/X = f (Yf/Yf, INFd/INFf, App/Dep)
- foreign demand (Yf), a function of foreign national incomes
- domestic (Pd) versus foreign (Pf) prices, the lower the domestic prices the higher the exports
- an exchange rate (ER), if domestic currency depreciates, foreigners can purchase more imports for the same amount of money
INF = inflation and App = currency appreciation, Dep = currency depreciation
The growth rate of exports will depend upon the growth rate of foreign income, relative inflation rates and the degree of appreciation or depreciation of the currency against
a basket of foreign currencies.
If a trade war broke out among the major trading nations in the world and the volume and value of exports halved there would be
I. lower average living standards
II. higher living standards for some persons
Which of the following is correct?
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The correct answer is C. International trade by permitting a more efficient allocation of resources globally leads to higher world income and higher average living standards. A significant decrease in world trade would lead to lower average living standards. Thus I is true. The decrease in trade however would lead to an increase in demand for domestic goods in some sectors and as a result could lead to an increase in the returns to some factor inputs. Thus II is true.
What is the difference between Tariff and Quota? Who gets the above-normal profit:
- Tariff: Government
- Quota : allocation determines the distribution of economic rent
If the US dollar appreciates against the French franc
I. this will cause the French demand curve for dollars to shift to the right
II. a French franc will command more US goods than before the appreciation
Which of the following is correct?
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The correct answer is D. Suppose $1.00 were exchanging initially for 6 French francs and after the appreciation were exchanging for 7 French francs, i.e. if the dollar appreciates it commands more of the foreign currency. This will cause the French francs to move along their demand curve for dollars, i.e. the price has changed, but will not cause a shift. Thus I is wrong. The dollar will now command more French goods, the franc fewer American goods. Thus II is wrong.
Two countries A and B trade with each other.
A produces and exports good x to B.
B produces and exports good y to A.
Economies of scale exist in the production of good x only. It follows that
I. A benefits from the economies of scale
II. B benefits from the economies of scale
Which of the following is correct?
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The correct answer is C. The existence of economies of scale in the production of x exacerbates the argument for specialisation and exchange since the greater the level of production the fewer the resources required to produce an additional unit of x and thus the better off both countries will be.
Suppose that diplomatic initiatives by the United States led to the opening of extensive trade with Russia. Which of the following best describes the effects this would have on the United States?
A. Incomes in export industries would rise, but not by as much as income in import-competing industries would fall.
B. Incomes in import-competing industries might fall, but not by as much as income in export industries would rise.
C. Per capita income would rise as long as income in both export- and import-competing industries would rise.
D. Incomes in both export- and import-competing industries could either rise or
fall.
The correct answer is B. The effect of opening up trade with Russia would be to increase per capita income in both countries because it would expand the opportu- nities for consumers in each country to consume combinations of goods that are more in accord with their preferences, and it would also permit each country to specialise in the production of those goods for which it has a comparative ad- vantage. Although there would definitely be an increase in US national income, not all workers and employers would share evenly in this increase. It is likely, at least in the short run, that those in import-competing industries would face a decline in income. This decline would not be as great, however, as the increase in incomes in export industries.
This year I shall be travelling from the UK to Israel, where I will give 6 lectures to the Israeli MBA students. I shall fly there and back on British Airways, shall stay in hotels in Tel Aviv and Jerusalem where I shall have a week’s vacation.
The value of Israeli exports in these activities is
I. the lecturing fee
II. the airline ticket bill
III. the Tel Aviv and Jerusalem hotel bills
Which of the following is correct?
A. II only
B. II and III only
C. III only
D. I, II and III
The correct answer is C. As a UK citizen I am supplying services to Israel, i.e. the lectures are a UK export as are the BA flights. Thus I and II are wrong. The hotels in Israel however are selling services to me, i.e. they are Israeli exports and UK imports. Thus III is true.
The question of who bears the burden of a tariff depends upon the price elasticities of demand and supply of the good in question. The more price elastic the demand for the good, given the supply curve
I. the more the tariff will be borne by the consumer
II. the greater will be the decrease in consumer surplus
Which of the following is correct?
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The correct answer is D. The more price inelastic is the demand of a good the less responsive is quantity demanded to a price increase and vice versa. Thus the more price inelastic the demand is the greater will be the burden of a tariff on the consumer and the greater the loss in consumer surplus and vice versa. Thus I and II are wrong.
What are the opportunity costs of 1 salmon in terms of loaves in islands x and y?
A. Island x: .33 Island y: 2.0
B. Island x: .33 Island y: .5
C. Island x: 1.33 Island y: 1.5
D. Island x: 1.33 Island y: 2.0
The correct answer is B. The opportunity cost of 1 salmon is the number of loaves to be surrendered to acquire the salmon. Since there are no economies of scale the trade offs are constant. In island x the opportunity cost of 420 is 140 loaves; the opportunity cost of 1 salmon is .33 loaf (140/420). The opportunity cost of 1 salmon is .50 loaf (100/200).
Currently islands x and y devote one half of the salmon/loaves resources to the production of each
Salmon output Loaves output
Island x 210 70
Island y 100 50
Total 310 120
If trade were to occur and island x produced only salmon and island y only loaves combined total output would be 420 salmon and 100 loaves which is 110 more salmon [420 − (210 + 100)] and 20 fewer loaves [100 − (70 + 50)] than in the table above.
What is the maximum number of salmon possible taking both islands together if over 120 loaves are produced?
A. 301
B. 308
C. 317
D. 357
The correct answer is D. For every additional loaf produced in x, 3 salmon must be given up. For every additional loaf produced in y, 2 salmon must be given up. Therefore it pays to have y produce only 100 loaves and x to give up 63 salmon to secure 21 loaves. Loaves total will be 121 (100 + 21) and salmon output (420 − 63) for x and 0 for y, i.e. 357.
Assuming no other production costs, transportation costs, or trading restrictions, which of the following is correct?
A. Country X will export wheat and import cloth.
B. Country X will export both wheat and cloth.
C. Country X will neither export nor import wheat or cloth.
D. The pattern of trade cannot be determined from the above information.
The correct answer is A. Compared with country Y, country X can produce a unit of wheat and also a unit of cloth with few resources; thus country X has an absolute advantage in the production of both commodities. Country X, however, requires three times more man-days to produce cloth compared with wheat, while country Y requires only twice the number of man-days to produce cloth compared with wheat. Therefore, since country X has a comparative advantage in wheat production and country Y has a comparative advantage in cloth production, country X will export wheat and import cloth.
