Reading 14: international trade and capital flows Flashcards
The income from a financial investment in Country P by a citizen of Country Q is most likely included in:
Country P’s GDP but not its GNP.
Country Q’s GNP and GDP.
Country P’s GDP and GNP.
The income from a financial investment in Country P of a citizen of Country Q is included in Country P’s GDP but not its GNP. It is included in Country Q’s GNP but not its GDP. (LOS 14.a)
Which of the following effects is most likely to occur in a country that increases its openness to international trade?
Increased prices of consumer goods.
Greater specialization in domestic output.
Decreased employment in exporting industries.
Openness to international trade increases specialization as production shifts to those products in which domestic producers have a comparative advantage. Greater competition from imports will tend to decrease prices for consumer goods. Increasing international trade is likely to increase profitability and employment in exporting industries but may decrease profitability and employment in industries that compete with imported goods. (LOS 14.b)
Which of the following statements about international trade is least accurate? If two countries have different opportunity costs of production for two goods, by engaging in trade:
each country gains by importing the good for which it has a comparative advantage.
each country can achieve a level of consumption outside its domestic production possibility frontier.
the low opportunity cost producer of each good will export to the high opportunity cost producer of that good.
Each country gains by exporting the good for which it has a comparative advantage. (LOS 14.c)
With regard to the Ricardian and Heckscher-Ohlin models of international trade, the amount of capital relative to labor within a country is a factor in:
both of these models.
neither of these models.
only one of these models.
In the Ricardian model, labor is the only factor of production considered. In the Heckscher-Ohlin model, comparative advantage results from the relative amounts of labor and capital available in different countries. (LOS 14.d)
An agreement with another country to limit the volume of goods and services sold to them is best described as:
a quota.
a voluntary export restraint.
a minimum domestic content rule.
Voluntary export restraints are agreements to limit the volume of goods and services exported to another country. Minimum domestic content rules are limitations imposed by a government on its domestic firms. Import quotas are limitations on imports, not on exports. (LOS 14.e)
Which of the following groups would be most likely to suffer losses from the imposition of a tariff on steel imports?
Domestic steel producers.
Workers in the domestic auto industry.
Workers in the domestic steel industry.
Imposing a tariff on steel imports benefits domestic steel producers and workers by increasing the domestic price of steel and benefits the national government by increasing tax (tariff) revenue. However, the increase in the domestic price of steel would increase costs in industries that use significant amounts of steel, such as the automobile industry. The resulting increase in the price of automobiles reduces the quantity of automobiles demanded and ultimately reduces employment in that industry. (LOS 14.e)
The most likely motivation for establishing a trading bloc is to:
increase economic welfare in the member countries.
increase tariff revenue for the member governments.
protect domestic industries in the member economies.
The motivation for trading blocs is to increase economic welfare in the member countries by eliminating barriers to trade. Joining a trading bloc may have negative consequences for some domestic industries and may decrease tariff revenue for the government. (LOS 14.f)
In which type of regional trade agreement are economic policies conducted independently by the member countries, while labor and capital are free to move among member countries?
Free trade area.
Common market.
Economic union.
These characteristics describe a common market. In a free trade area, member countries remove restrictions on goods and services trade with one another but may still restrict movement of labor and capital among member countries. In an economic union, member countries also coordinate their economic policies and institutions. (LOS 14.f)
The goal of a government that imposes restrictions on foreign capital flows is most likely to:
stimulate domestic interest rates.
decrease domestic asset price volatility.
encourage competition with domestic industries.
Decreasing the volatility of domestic asset prices may be a goal of a government that imposes capital restrictions. Other typical goals include keeping domestic interest rates low and protecting certain domestic industries, such as the defense industry. (LOS 14.g)
Which of the following is least likely a component of the current account?
Unilateral transfers.
Payments for fixed assets.
Payments for goods and services.
Purchases and sales of fixed assets are recorded in the capital account. Goods and services trade and unilateral transfers are components of the current account. (LOS 14.h)
A current account deficit is most likely to decrease as a result of an increase in:
domestic savings.
private investment.
the fiscal budget deficit.
Other things equal, an increase in domestic savings would tend to decrease the current account deficit, while an increase in private investment or an increase in the fiscal budget deficit would tend to increase the current account deficit. (LOS 14.i)
Which international organization is primarily concerned with providing economic assistance to developing countries?
World Bank.
World Trade Organization.
International Monetary Fund.
The World Bank provides technical and financial assistance to economically developing countries. The World Trade Organization is primarily concerned with settling disputes among countries concerning international trade. The International Monetary Fund promotes international trade and exchange rate stability and assists member countries that experience balance of payments trouble. (LOS 14.j)
