Week 5 Assignment (Quiz 16, 20 and 21)
Total points: 197
Due 11.59 pm, January 18, 2025
CHAPTER 16: EXCHANGE RATES AND
INTERNATIONAL CAPITAL FLOWS
Quiz 16 points: 38
Self-Check Questions
1. Suppose U.S. interest rates decline compared to the rest of the world. What would be
the likely impact on the demand for dollars, supply of dollars, and exchange rate for
dollars compared to, say, euros? (4 points)
The demand for dollars would decrease, the supply of dollars would increase and the
exchange rate for dollars would depreciate.
2. How would a contractionary monetary policy affect the exchange rate, net exports,
aggregate demand, and aggregate supply? (4 points)
The exchange rate would appreciate. The net exports would decrease. The AD would
decrease and the AS wouldn’t be affected.
3. Is a country for which imports and exports make up a large fraction of the GDP more
likely to adopt a flexible exchange rate or a fixed (hard peg) exchange rate? (4 point)
This country would likely adopt a fixed exchange rate.
Review Questions
4. What is the foreign exchange market? (2 points)
The foreign exchange market is the market in which people use one currency to buy another
currency.
5. Describe some buyers and some sellers in the market for U.S. dollars. (2 points)
Some buyers and sellers in the market are firms that are involved in international trade of
goods/services, tourists visiting other countries, international investors buying ownership (or
part-ownership) of a foreign firm, or international investors making financial investments that
don’t involve ownership.
6. What is the difference between foreign direct investment and portfolio investment? (2
points)
Foreign direct investment is purchasing a firm (at least 10%) or starting up a new enterprise in
another country, while portfolio investment is an investment in another country that is purely
financial and doesn’t involve any management responsibility.
7. What does it mean to hedge a financial transaction? (2 points)
When you hedge a financial transaction, you are protecting yourself against risk in case
anything happens.
8. What does it mean to say that a currency appreciates? Depreciates? Becomes
stronger? Becomes weaker? (4 points)
When a currency appreciates, it becomes strong. When a currency depreciates, it becomes
weaker.
9. What is the purchasing power parity exchange rate? (2 points)
The purchasing power parity exchange rate is the exchange rate that equalizes the prices of
internationally traded goods across countries.
10. What is the difference between a floating exchange rate, a soft peg, a hard peg, and
dollarization? (4 points)
A floating exchange rate is when a country lets the foreign exchange market determine its
currency value. A soft peg is an exchange rate policy in which the government usually allows
the market to set the exchange rate, but in some cases, the central bank can intervene. A
hard peg is an exchange rate policy in which the central bank sets a fixed and unchanging
value for the exchange rate.
Critical Thinking Questions
11. Can you think of any major disadvantages to dollarization? How would a central bank
work in a country that has dollarized? (4 points)
One major disadvantage to dollarization is that there would be no monetary policy. This
would mean that the central bank can’t make decisions regarding monetary policy.
12. What would make a country decide to change from a common currency, like the euro,
back to its own currency? (2 points)
If the costs of being in a common currency becomes too much, the country might want to go
back to its own currency.
Problems
13. A British pound cost $1.56 in U.S. dollars in 1996, but $1.66 in U.S. dollars in 1998. Was
the pound weaker or stronger against the dollar? Did the dollar appreciate or
depreciate versus the pound? (2 points)
The pound was stronger against the dollar and the dollar depreciated vs. the pound.
CHAPTER 20: INTERNATIONAL TRADE
Quiz 20 points: 62
Self-Check Questions
1. Brazil can produce 100 pounds of beef or 10 autos; in contrast the United States can
produce 40 pounds of beef or 30 autos. Which country has the absolute advantage in
beef? Which country has the absolute advantage in producing autos? What is the
opportunity cost of producing one pound of beef in Brazil? What is the opportunity
cost of producing one pound of beef in the United States? (4 points)
Brazil has the absolute advantage in beef, and the U.S. has the absolute advantage in autos.
The opportunity cost of producing one pound of beef in Brazil is 0.1 autos and the
opportunity cost of producing on pound of beef in the U.S. is 0.75 autos.
2. In Germany it takes three workers to make one television and four workers to make
one video camera. In Poland it takes six workers to make one television and 12
workers to make one video camera.
a. Who has the absolute advantage in the production of televisions? Who has the
absolute advantage in the production of video cameras? How can you tell?
Germany has the absolute advantage in both televisions and video cameras.
You can tell because it takes less works for both goods to be made in Germany.
b. Calculate the opportunity cost of producing one additional television set in
Germany and in Poland. (Your calculation may involve fractions, which is fine.)
Which country has a comparative advantage in the production of televisions?
The opportunity cost of producing one additional tv set in Germany is 0.75
video cameras while in Poland, it’s 0.5 video cameras. Poland has the
comparative advantage in TVs.
c. Calculate the opportunity cost of producing one video camera in Germany and
in Poland. Which country has a comparative advantage in the production of
video cameras?
The opportunity cost of producing one video camera in Germany is 4/3
televisions while in Poland, it’s 2 televisions. Germany has the comparative
advantage in video cameras.
d. In this example, is absolute advantage the same as comparative advantage, or
not?
In this example, absolute advantage is not the same as comparative advantage.
e. In what product should Germany specialize? In what product should Poland
specialize?
Germany should specialize in video cameras and Poland should specialize in
televisions.
(5 x 2 = 10 points)
Review Questions
3. What is absolute advantage? What is comparative advantage? (4 points)
Absolute advantage is when one country can use fewer resources to produce a good
compared to another country. Comparative advantage is when a country can produce a good
at a lower cost in terms of other goods.
4. Under what conditions does comparative advantage lead to gains from trade? (2
points)
Comparative advantage can lead to gains from trade when a country has specialization in that
comparative advantage against another country.
5. What factors does Paul Krugman identify that supported the expansion of
international trade in the 1800s? (2 points
The factors he identifies are technological advances in transportation and communication,
less tariffs/trade barriers and increased industrialization.
6. Is it possible to have a comparative advantage in the production of a good but not to
have an absolute advantage? Explain. (3 points)
It is possible to have comparative advantage without absolute advantage because even
though a country can have absolute advantage while the other has absolute disadvantage,
there can still be a benefit on both sides of the trade as long as the comparative advantage is
associated with its specialization.
7. How does comparative advantage lead to gains from trade? (2 points)
Comparative advantage leads to gains from trade when a country that specializes in producing
the good/service they produce can do it more efficiently than another country.
8. What is intra-industry trade? (2 points)
Intra-industry trade is international trade of goods within the same industry.
9. What are the two main sources of economic gains from intra-industry trade? (2 points)
The two main sources of economic gains from intra-industry are the division of labor leads to
learning, innovation, and unique skills and economies of scale.
10. What is splitting up the value chain? (2 points)
Splitting up the value chain is when many of the different stages of producing a good happen
in different geographic locations.
11. Are the gains from international trade more likely to be relatively more important to
large or small countries? (3 points)
Gains from international trade are more likely to be important to small countries.
Critical Thinking Questions
12. Are differences in geography behind the differences in absolute advantages? (2 points)
I think differences in geography could contribute to the differences in absolute advantage
because a huge part of where a country gets their resources from is based on the geography
of where they are in the world.
13. Why does the United States not have an absolute advantage in coffee? (2 points)
I think this is because we can’t easily produce coffee beans with our resources.
14. Can a nation’s comparative advantage change over time? What factors would make it
change? (4 points)
A nation’s comparative advantage could change over time. One thing that could do that is if a
country takes over another and can obtain their resources and sell those goods.
Problems
15. France and Tunisia both have Mediterranean climates that are excellent for
producing/harvesting green beans and tomatoes. In France is takes two hours for each
worker to harvest green beans and two hours to harvest a tomato. Tunisian workers
only need one hour to harvest the tomatoes but four hours to harvest green beans.
Assume there are only two workers and each worker works 40 hours a week.
a. Draw a production possibilities frontier for each country. (Hint: Remember the
production possibility frontier is the maximum that all workers can produce at
a unit of time which, in this problem, is a week.
b. Identify which country has the absolute advantage in green beans and which
country has the absolute advantage in tomatoes.
France has the absolute advantage in green beans and Tunisia has the absolute
advantage in tomatoes.
c. Identify which country has the comparative advantage.
France has the comparative advantage in green beans and Tunisia has the
comparative advantage in tomatoes.
d. How much would France have to give up in terms of tomatoes to gain from
trade? How much would it have to give up in terms of green beans? (4 x 2 = 8
points)
France would have to give up 1 tomato to gain 1 green bean and they would
have to give up 1 green bean to gain 1 tomato.
16. In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker
can make 10 tons of rubber or 40 radios.
a. Who has the absolute advantage in the production of rubber or radios? How
can you tell?
Malaysia has the absolute advantage in rubber and Japan has the absolute
advantage in radios. You can tell by comparing both countries’ output.
b. Calculate the opportunity cost of producing 80 additional radios in Japan and in
Malaysia. (Your calculation may involve fractions, which is fine.) Which country
has a comparative advantage in the production of radios?
The opportunity cost of producing 80 additional radios in Japan is 5 tons of
rubber while the opportunity cost in Malaysia is 20 tons of rubber. Japan
would have a comparative advantage since it’s giving up less rubber.
c. Calculate the opportunity cost of producing 10 additional tons of rubber in
Japan and in Malaysia. Which country has a comparative advantage in
producing rubber?
The opportunity cost of producing 10 additional tons of rubber in Japan is 160
radios while in Malaysia, it’s 40 radios. Malaysia would have a comparative
advantage here because they are giving up fewer radios.
d. In this example, does each country have an absolute advantage and a
comparative advantage in the same good, or not?
In this example, each country does have an absolute and a comparative
advantage in the same good.
e. In what product should Japan specialize? In what product should Malaysia
specialize?
Japan should specialize in radios and Malaysia should specialize in rubber.
(5 x 2 = 10 points)
CHAPTER 21: GLOBALIZATION AND PROTECTIONISM
Quiz 21 points: 97
Self-Check Questions
1. Explain how a tariff reduction causes an increase in the equilibrium quantity of
imports and a decrease in the equilibrium price. (3 points)
A tariff reduction would cause in increase in the quantity of imports demanded because the
imports would make the consumers want them more. A tariff reduction would cause a
decrease in equilibrium price because with reduced taxation, the price of the quantity for
consumers can go down because the foreign price is lower.
2. Explain how a subsidy on agricultural goods like sugar adversely affects the income of
foreign producers of imported sugar. (3 points)
A subsidy on agricultural goods can affect the income of foreign producers by increasing the
supply of domestic producers and decreasing the market price. This would cause consumers
to be more inclined to pay for the domestic product rather than the foreign product.
3. Explain how trade barriers save jobs in protected industries, but only by costing jobs in
other industries. (4 points)
Trade barriers can save jobs in protected industries, but only by costing jobs in other
industries when consumers pay higher prices to protected industries and don’t have money to
spend on goods from other industries.
4. Explain how trade barriers raise wages in protected industries by reducing average
wages economy-wide. (4 points)
When trade barriers are used, they help increase wages for protected industries. This cause
the demand to be higher for protected industries and not for unprotected. This causes the
wages to ultimately decline as well.
5. How do trade barriers affect the average income level in an economy? (2 points)
Trade barriers reduce the average income level in an economy.
6. How does the cost of “saving” jobs in protected industries compare to the workers’
wages and salaries? (2 points)
The cost of “saving” jobs in protected industries is usually much higher than the actual wages
and salaries of these workers.
7. Explain how predatory pricing could be a motivation for dumping. (4 points)
Predatory pricing could be a motivation for dumping because if people know they can make
more money by selling more of the lower priced goods, they can strategically make money
and ripping people off.
8. What is the difference between a free trade association, a common market, and an
economic union? (3 points)
A free trade association is when there is free trade between members. A common market is
when there is free trade in goods, services, labor or financial capital between members while
having a common external trade policy. An economic union is an agreement between
countries to allow free trade between members, a commons external trade policy, and
coordinated monetary and fiscal policies.
9. Why would countries promote protectionist laws, while also negotiate for freer trade
internationally? (2 points)
Countries would promote protectionist laws while also negotiating for freer trade because
with protectionist laws, it can protect certain groups, but freer trade can still help the overall
economy and not have drops in wages, salaries, etc.
10. What might account for the dramatic increase in international trade over the past 50
years? (2 points)
There could be less trade barriers, better transportation and industrialization of countries
around the world.
11. How does competition, whether domestic or foreign, harm businesses? (3 points)
It can harm businesses by decreasing their profits, pressure them into changing the way they
do business or by making it harder to compete with this competition with better quality
goods.
12. What are the gains from competition? (3 points)
Competition can aid in innovation, it can provide a lot more options for consumers to choose
form and it can lower prices for consumers because of the rise in competition and the need to
sell.
Review Questions
13. Who does protectionism protect? What does it protect them from? (2 points)
Protectionism protects domestic producers/workers. It protects them from competition with
imports from foreign countries.
14. Name and define three policy tools for enacting protectionism. (3 points)
The three policy tools for enacting protectionism are tariffs- taxes that governments place on
imported goods, import quotas- numerical limitations on the quantity of products that a
country can import, and nontariff barriers- ways a nation can draw up rules, regulations,
inspections, and paperwork to make it more costly or difficult to import products.
15. How does protectionism affect the price of the protected good in the domestic
market? (2 points)
Protectionism increases the price of the protected good in the domestic market.
16. Is international trade likely to have roughly the same effect on the number of jobs in
each individual industry? (2 points)
International trade is not likely to have roughly the same effect on the number of jobs in each
individual industry.
17. How is international trade, taken as a whole, likely to affect the average level of
wages? (2 points)
International trade, taken as a whole, is likely to increase the average level of wages.
18. Is international trade likely to have about the same effect on everyone’s wages? (2
points)
International trade is not likely to have the same effect on everyone’s wages.
19. What are main reasons for protecting “infant industries”? Why is it difficult to stop
protecting them? (4 points)
The main reasons for protecting “infant industries” are mostly to help them to mature into
bigger industries before they start to be involved with bigger industries. This helps them to
acclimate better. It’s difficult to stop protecting them because it can be unfair to have such
high inequality.
20. What is dumping? Why does prohibiting it often work better in theory than in
practice? (4 points)
Dumping is selling goods below their cost of production. Prohibiting it often works better
than in theory than in practice because when you prohibit it just makes things cost the actual
cost of production so it becomes expensive.
21. What is the “race to the bottom” scenario? (2 points)
The “race to the bottom” scenario is when production locates in countries with the lowest
environmental (or other) standards, putting pressure on all countries to reduce their
environmental standards and vice versa.
22. Name several of the international treaties where countries negotiate with each other
over trade policy. (3 points)
The international treaties where countries negotiate with each other over trade policy are the
General Agreement on Tariffs and Trade (GATT), the Free Trade Agreement, the Common
Market, and the Economic Union.
23. Who gains and who loses from trade? (2 points)
Anyone can gain and lose from trade. The one who gains more is the one with the
comparative advantage.
24. What are some ways that governments can help people who lose from trade? (2
points)
Governments can help people who lose from trade by helping with income and
unemployment, helping with job searching, or creating programs for workers.
Critical Thinking Questions
25. Show graphically that for any tariff, there is an equivalent quota that would give the
same result. What would be the difference, then, between the two types of trade
barriers? Hint: It is not something you can see from the graph. (5 points)
Th difference between a tariff and a quota is who would receive the money from each trade
barrier. For a tariff, the government would receive it and for a quota, would go to the
domestic industries.
26. If trade barriers hurt the average worker in an economy (due to lower wages), why
does government create trade barriers? (2 points)
The government creates trade barriers anyway because they could be protecting certain
industries from the effect of international trade on those businesses.
27. How would direct subsidies to key industries be preferable to tariffs or quotas? (2
points)
Direct subsidies are preferrable to tariffs or quotas because with subsidies, there is more
support for firms, there is clearer pricing, and are clearer about how the government is
involved.
28. What are some examples of innovative products that have disrupted their industries
for the better? (3 points)
Some innovative products that have disrupted industries in positive ways are iPhones, electric
cars, or streaming entertainment and media services.
Problems
29. Assume two countries, Thailand (T) and Japan (J), have one good: cameras. The
demand (d) and supply (s) for cameras in Thailand and Japan is described by the
following functions:
QdT = −60 P
QsT =− +5P
QdJ = −80 P
J
10 1P
Qs =− +
2
P is the price measured in a common currency used in both countries, such as the Thai
Baht.
a. Compute the equilibrium price (P) and quantities (Q) in each country without
trade.
Thailand: P = 5.98 and Q = 30.13. Japan: P = 90 and Q = 35.
b. Now assume that free trade occurs. The free-trade price goes to 56.36 Baht.
Who exports and imports cameras and in what quantities?
Thailand would export 281.9 cameras and Japan would import 18.18 cameras.
(4 + 4 = 8 points)
30. The country of Pepperland exports steel to the Land of Submarines. Information for
the quantity demanded (Qd) and quantity supplied (Qs) in each country, in a world
without trade, are given in the tables below.
Pepperland
Price Qd Qs
60 230 180
70 200 200
80 170 220
90 150 240
100 140 250
Land of Submarines
Price Qd Qs
60 430 310
70 420 330
80 410 360
90 400 400
100 390 440
a. What would be the equilibrium price and quantity in each country in a world
without trade? How can you tell?
In Pepperland the equilibrium price and quantity would be 70 and 200, while in
Land of Submarines it would 90 and 400. You can tell just by looking at each
chart.
b. What would be the equilibrium price and quantity in each country if trade is
allowed to occur? How can you tell?
The equilibrium price and quantity in Pepperland would be 80 and quanitiy
demanded- 170 and quantity supplied- 220. In Land of Submarines it would be
80 and quantity demanded- 410 and the quantity supplied- 360. You can tell by
finding the differences and seeign where they would be equal.
c. Sketch two supply and demand diagrams, one for each country, in the situation
before trade.
d. On those diagrams, show the equilibrium price and the levels of exports and
imports in the world after trade.
e. If the Land of Submarines imposes an anti-dumping import quota of 30, explain
in general terms whether it will benefit or injure consumers and producers in
each country.
In Pepperland, the producers would be injured and the consumers would
benefit. In the Land of Submarines the producers would benefit and the
consumer would be injured.
f. Does your general answer change if the Land of Submarines imposes an import
quota of 70?
The general answer would be the same, but the extent to which it would hurt
or help would be reduced.
(6 x 2 = 12 points)