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Chapter 1 International Economics Is Different Overview The introduction to the subject of international economics has three major purposes: 1. Show that international economics addresses important and interesting current events and issues. 2. Show why international economics is special. 3. […]

Suggested answer to case study discussion question Trade Is Important: For most countries during the past several decades, trade has become more important in the economy. A country’s total international trade (exports and imports) has risen as a percentage of […]

Chapter 10 Arguments for and against Protection Overview This chapter has three purposes: To present a framework and a rule for evaluating arguments offered in favor of limiting imports, to apply the framework and rule to several prominent arguments for […]

Suggested answer to case study discussion question How Sweet It Is (or Isn’t): For a U.S. company that makes jelly beans in the United States, U.S. policies that limit sugar imports increase sugar prices and raise the cost of obtaining […]

Chapter 11 Pushing Exports Overview Chapters 8 through 10 focused on government policies toward imports, with little attention to government policies and business practices in the exporting countries. This chapter shifts to looking at various practices and policies that can […]

Suggested answers to case study discussion questions Antidumping in Action: American steel firmsreacted to increasing steel imports in 2013 by filing a number of new dumping cases. There are at least two reasons that most of these cases would not […]

Chapter 12 Trade Blocs and Trade Blocks Overview This chapter examines two types of trade barriers that are intended to discriminate between foreign countries. A trade bloc has lower or no barriers for trade between its members, while they maintain […]

Suggested answer to case study discussion question Postwar Trade Integration in Europe: The EU had 28 member countries as of 2014. There are four groups of countries that could be candidates the join the EU. First, there are several relatively […]

Chapter 13 Trade and the Environment Overview We begin the chapter with two provocative questions. First, is free trade anti-environment? We argue that it is not. There is no reason to think that trade generally promotes production or consumption of […]

Suggested answers to end of chapter questions and problems 1. There are two effects. First, rising production and consumption bring rising pollution if the techniques used to produce and consume are unchanged. Second, rising income brings increased demand for pollution […]

Chapter 14 Trade Policies for Developing Countries Overview This chapter examines trade issues affecting developing countries. It begins by noting differences between high-income developed or industrialized countries and low- and medium-income developing countries, as well as differences among the developing […]

Suggested answer to case study discussion question Special Challenges of Transition: The international economics of the situation probably favor a country like Ukraine reorienting itself toward the European Union. Ukrainian export producerswill benefit from better access to buyers in high-income […]

Chapter 15 Multinationals and Migration: International Factor Movements Overview This chapter provides a survey of the economics of foreign direct investment (FDI) and the economics of labor migration. Foreign direct investment is a flow of funding provided by an investor […]

Suggested answers to case study discussion questions CEMEX: A Model Multinational from an Unusual Place: CEMEX saw sufficient internalization advantages to conclude that CEMEX wanted to own its operations in Spain, Colombia, and the Philippines, rather than licensing local independent […]

Chapter 16 Payments among Nations Overview This chapter begins the discussion of international finance and macroeconomics—the subject of the rest of the book. Its major purpose is to show how the balance of payments accounts for international transactions and how […]

Suggested answers to end of chapter questions and problems 1. National saving (S) equals private saving plus government saving (or dissaving if the government budget is in decit). For this country, 2. Disagree, at least as a general statement. One […]

Chapter 17 The Foreign Exchange Market Overview The purpose of this chapter is to present the foreign exchange market and exchange rates, with an emphasis on spot exchange rates. Foreign exchange is the act of trading different countries’ moneys. An […]

Suggested answers to case study discussion questions Brussels Sprouts a New Currency: €: As a Japanese citizen, you start with Japanese yen. When you travel to each of these countries, you will need some local currency to spend during your […]

Chapter 18 Forward Exchange and International Financial Investment Overview This chapter presents the uses of forward foreign exchange rates and the returns and risks of international financial investments, both covered and uncovered. It begins by noting that in many situations […]

Suggested answers to case study discussion questions The World’s Greatest Investor: Because Mr. Bessent expected that the yen was going to lose value during the next months, he wanted to establish positions in which he was short the yen. Here […]

Chapter 19 What Determines Exchange Rates? Overview Since the general shift to floating exchange rates in the early 1970s, exchange rates between the U.S. dollar and other major currencies have been variable or volatile. The charts at the beginning of […]

Suggested answers to case study discussion questions PPP from Time to Time: In the 1950s and 1960s, the major countries had fixed exchange rates between their currencies, and these countries generally had rather low inflation rates. In this setting any […]

Chapter 2 The Basic Theory Using Demand and Supply Overview This chapter indicates why we study theories of international trade and presents the basic theory using supply and demand curves. Trade is important to individual consumers, to workers and other […]

Chapter 20 Government Policies toward the Foreign Exchange Market Overview The first half of this chapter examines types of government policies toward the foreign exchange market and provides analysis of government intervention and exchange controls. The second half examines the […]

Suggested answers to end of chapter questions and problems 1. In a clean oat, the government allows the exchange-rate value of its currency to be determined solely by private (or nonocial) supply and 2. We often use the term pegged […]

Chapter 21 International Lending and Financial Crises Overview International capital movements can bring major gains both to the lending or investing countries and to the borrowing countries, through intertemporal trade and through portfolio diversification for the lenders/investors. But international lending […]

Suggested answers to questions and problems 1. Disagree. Borrowing from foreign lenders provides a net gain to the borrowing country, as long as the money is used wisely. For instance, as long as the money is used to 2. Disagree. […]

Chapter 22 How Does the Open Macroeconomy Work? Overview This chapter provides a framework and model for analyzing international macroeconomics. We judge the performance of a national economy against two objectives. Internal balance involves both full employment and price stability […]

Suggested answers to end of chapter questions and problems 1. Mexico. The United States and Mexico have close trading ties, with most of Mexico’s exports destined for the United States. If national 2. Disagree. The recession in the United States […]

Chapter 23 Internal and External Balance with Fixed Exchange Rates Overview This chapter presents the analysis of the macroeconomy of a country that has a fixed exchange rate. As noted in the introduction, this analysis is important because some countries […]

Suggested answer to case study discussion question A Tale of Three Countries: (a) If Germany had raised taxes in 1991, then the story probably would have turned out better. If Germany raised taxes, then more of the eort to restrain […]

Chapter 24 Floating Exchange Rates and Internal Balance Overview This chapter presents the analysis of the macroeconomy of a country that has a floating exchange rate. If government officials allow the exchange rate to float cleanly, then the exchange rate […]

Suggested answers to case study discussion questions Why Are U.S. Trade Deficits So Big?: First, if U.S. private saving decreases, then the United States will need additional financial capital inflows to fund the government budget deficit and domestic real private […]

Chapter 25 National and Global Choices: Floating Rates and the Alternatives Overview This chapter provides a capstone to the discussion of international finance and international macroeconomics by examining the choice between fixed and floating exchange rates. Much of the discussion […]

Suggested answer to case study discussion question What Role for Gold?:Probably not. Internal balance is achieved by maintaining a reasonable level (and growth rate) of GDP so that the county has a reasonable (probably fairly low) unemployment rate and an […]

Chapter 3 Why Everybody Trades: Comparative Advantage Overview This chapter extends the analysis of international trade to consider trade in a multiple-product economy. An economy composed of two products is useful to bring out insights about international trade. This general […]

Suggested answer to case study discussion question Mercantilism: Older than Smith—And Alive Today: Key features of mercantilism include that it places most value on domestic production and exports, that it deemphasizes domestic consumption and denigrates general imports of products, and […]

Chapter 4 Trade: Factor Availability and Factor Proportions Are Key Overview This chapter continues the analysis of international trade in a two-product economy. It picks up from the end of Chapter 3, where it was noted that the assumption of […]

Suggested answers to end of chapter questions and problems 1. Disagree. The Hecksher–Ohlin theory indicates that two countries will trade with each other because of dierences in 2. Disagree. If trade is based on Hecksher-Ohlin differences in factor availability, then […]

Chapter 5 Who Gains and Who Loses from Trade? Overview This chapter has two major purposes. First, it examines the implications for factor incomes of trade that follows the Heckscher-Ohlin (H-O) theory. Second, it examines the empirical evidence on the […]

Suggested answer to case study discussion question The Leontief Paradox: Leontief’s results appeared to directly contradict the Heckscher–Ohlin theory. The United States, a relatively physical capital-abundant country and a relatively labor-scarce country, exported relatively labor-intensive products and imported relatively capital-intensive […]

Chapter 6 Scale Economies, Imperfect Competition, and Trade Overview Standard trade theory presented in Chapters 3-5 is based on perfect competition, with constant returns to scale at the level of the individual firm and constant or increasing cost of expanding […]

Suggested answers to end of chapter questions and problems 1. Disagree. The Heckscher–Ohlin theory indicates that countries should export some products (products that are intensive in the country’s abundant factors) and import other products (products that are 2. Scale economies […]

Chapter 7 Growth and Trade Overview This chapter has two major purposes. First, it shows how the Heckscher-Ohlin model can be used to analyze economic growth and its impact on international trade. Second, it examines additional aspects of technological progress […]

Suggested answer to case study discussion question The Dutch Disease and Deindustrialization: There are several reasons that developments in energy products are prominent as examples of Dutch disease. First, the discovery of major new energy sources, especially new sources of […]

Chapter 8 Analysis of a Tariff Overview This chapter starts the analysis of government policies that limit imports, by examining the tariff —a government tax on imports. Early in the chapter, the first in a series of boxes on Global […]

Suggested answer to case study discussion question They Tax Exports, Too:There are a number of possible reasons that a country would limit the export of a product like cotton. First, if the government uses a tax, it would gain revenue. […]

Chapter 9 Nontariff Barriers to Imports Overview This chapter has four major purposes: 1. Present analysis of an import quota and a voluntary export restraint (VER), for both a small importing country and a large one. 2. Provide an overview […]

Suggested answers to case study discussion questions VERs: Two Examples: In 1981 the U.S. government forced the Japanese government to impose a “voluntary” export restraint, so that total Japanese automobile exports in 1981 had to be 8 percent less than […]

Free trade may lead to more pollution because: a. with free trade the size of the economy increases resulting in higher production and consumption. b. competition among nations invariably leads to less restrictive pollution standards. c. the countries may not […]

Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. If the countries engage […]

Fixed exchange rates are likely to be changed at some point over time. Answer: Firms in a given industry are affected by the tariff imposed on the product they sell, but not by the tariffs imposed on their purchased inputs. […]

By mid-2014, the U.S. government had approved multiple LNG export facilities so natural gas exports from the U.S. have increased significantly. Answer: Tariffs and quotas are one-size-fits-all measures that work as tools to internalize external effects. Answer: FALSE The net […]

In the floating exchange rate system, government officials must intervene in the foreign exchange market to keep the exchange rate from fluctuating. Answer: The official settlements balance is the sum of the capital account balance and the public current account […]

The infant industry argument is valid if the present value of the stream of national benefits is less than the present value of the stream of national costs. Answer: Banks open branches in countries where profits are taxed less and […]

NAFTA has not only eliminated all tariffs and nontariff barriers to trade within the member countries but also allows free human migration across the countries. Answer: A large amount of intra-industry trade is not compatible with the comparative-advantage theory of […]

Assume that a large capital-abundant country trades only two goods with the rest of the world, medical equipment and corn. Medical equipment is relatively capital-intensive. An increase in the country’s endowment of capital will cause the price of medical equipment […]

The impact of economic growth on a country’s willingness to trade is determined solely by the extent of the shift of its production-possibility curve. Answer: Hedging a position exposed to exchange-rate risk is the act of reducing or eliminating a […]

The value of price elasticity of demand for a normal commodity is negative because it indicates: a. the inverse relationship between the price and the quantity demanded for the commodity. b. that the value of the consumer surplus is negative […]

A rise in the domestic product of an economy deteriorates its current account balance. Answer: Increases in a country’s endowments of factors of production increase current output, but do not contribute to long-run economic growth. Answer: FALSE If Canada has […]

In a two-country two-commodity model, if a country has higher labor productivity in producing both the goods, it must produce and export both the goods to the other country. Answer: The production effect of a tariff measures the welfare gain […]

Suppose the dollar per pound exchange rate is $2 per pound while the dollar per Swiss franc exchange rate is 50 cents per franc. From the given information we can conclude that the Swiss franc per pound exchange rate is: […]

The figure given below represents the domestic market for wheat in a small country. Imports of wheat are prohibited. Following the imposition of a $20 per bushel export subsidy to the country’s wheat exports, the country consumed _____ bushels of […]

Political risk is the possibility that the government of the host country will alter its policies in ways that harm the multinational enterprise. Answer: Contractionary monetary policy will shift the LM curve to the right. Answer: FALSE The net national […]

Which of the following arises when the knowledge that IMF rescue packages are possible leads lenders to be less careful about their international lending practices? a. Global contagion b. Moral hazard c. Debt overhang d. Debt restructuring Answer: Which of […]

Which of the following was a criterion to participate in the European Monetary Union? a. The country’s inflation rate must be less than or equal to 1.5 percentage points above the average inflation rate for the three lowest inflation EU […]

Most or all of the mark-up revenue from a quota will be captured by the government if the government auctions off import licenses. Answer: New technology developed by a multinational corporation in one of its research facilities in a leading […]

Small open economies are probably more vulnerable to contagion than large and relatively closed economies. Answer: Relatively high costs of converting natural gas to LNG will increase the price of natural gas in the U.S. and reduce consumption of natural […]

The price elasticity of demand measures the responsiveness of consumers to changes in the price of a product. Answer: If a country’s currency is a reserve currency, then intervention in the foreign exchange market to maintain a pegged exchange rate […]

Assume a country that produces only cloth and paddy. Cloth production requires significant amounts of labor and capital, but relatively less land. Assume that paddy production requires relatively less labor and capital, but relatively large amounts of fertile arable land. […]

A country’s balance of payments records: a. the prices that a country pays for its imports and the prices that the country receives for its imports. b. the flows of value between that country’s residents and residents of the rest […]

In Heckscher-Ohlin theory, differences in _____ across countries are considered to be the basis for comparative advantage. a. consumer tastes and preferences b. factor endowments c. production technologies d. economic freedom Answer: The table given below shows the number of […]

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a […]

While international trade will benefit both the importing and exporting country in a two-country world, the gains from trade in the exporting country must be greater than the gains from trade in the importing country. Answer: Free trade can be […]

Which of the following is true of mercantilism? a. Mercantilists believed that free trade is always beneficial for the trading nations. b. Mercantilists believed that under free trade each of the trading countries benefit equally. c. Mercantilists believed that a […]

According to the factor-price-equalization theorem, free trade between any two countries equalizes: a. product prices as well as the prices of individual factors of production between the countries. b. product prices between the countries but not the prices of individual […]

In the absence of trade, a country produces at a point where its production-possibility curve is tangent to the highest possible community indifference curve. Answer: If markets are perfectly competitive, the free-trade price of a good in an importing country […]

Making effective monetary policy for the euro zone should be a relatively easy task for the European Central Bank (ECB) since the euro member countries are very similar. Answer: Just before the Asian crisis, Thailand had large current account deficits. […]

A country’s nonofficial financial account balance equals its net foreign investment. Answer: The Bretton Woods conference led to the creation of the International Monetary Fund (IMF). Answer: TRUE The assignment rule says that, with fixed exchange rates, fiscal policy should […]

The figure given below shows the market for shoes in the U.S. The domestic price line with tariff lies above the international price line. Dd and Sd are the domestic demand and supply curves of shoes respectively. The tariff revenue […]

In 2010, _____ dollarized to escape from hyperinflation. a. Zimbabwe b. Argentina c. El Salvador d. Palau Answer: The figure given below represents the U.S. market for steel imports from Korea. The Korean government provides an export subsidy of $25 […]

Suppose that the training, skills, and attitudes received by employees in the computer gaming development industry have positive spillover effects as workers leave the industry and move to other jobs. The specificity rule suggests that the best way to achieve […]

The figure given below shows the market for computers in the U.S. The domestic price line inclusive of the tariff lies above the international price line. Dd and Sd are the domestic demand and supply curves of computers respectively. Under […]

Adam Smith’s theory of absolute advantage is based on the labor theory of value. Answer: Since the 1980s, the United States has been the dominant net lender in the world. Answer: FALSE From 2004 to 2014, global foreign exchange trading […]

World Trade Organization rules allow a government to take actions to control environmental damage caused by its own firms’ production. Answer: According to the Heckscher-Ohlin theory, if the proportion of labor to capital in a country is greater than the […]

The formation of a trade bloc necessarily improves well-being worldwide because it is a step toward free trade. Answer: In the long run, a country with a relatively high inflation rate tends to have a depreciating currency. Answer: TRUE Externalities […]

In an economic union, member countries do not have free flow of factors of production but have a common internal policy. A bank deposit in Germany denominated in euros is a Eurocurrency deposit. Answer: FALSE Intra-industry trade in differentiated products […]

In the Plaza Agreement, the United States agreed to reduce its fiscal deficit. If additional domestic production will lead to positive spillover effects, then an import tariff that increases domestic production would better adhere to the specificity rule than would […]

Which of the following theories correctly predicts that a country will export those goods that use the country’s abundant factor(s) intensively and import those goods that use the country’s scarce factor(s)? a. a. The theory of absolute advantage b. b. […]

International capital-flow shocks tend to be less disruptive with floating exchange rates than with fixed exchange-rates. Answer: Too much of a good is produced if some external benefits of producing or consuming it are ignored by the private decision makers. […]

Which of the following indicates the difference between the volume of exports and imports of a product? a. Net trade b. Intra-industry trade c. Total trade d. Terms of trade Answer: Suppose the domestic supply (QS U.S.) and demand (QD […]

The table given below shows the number of labor hours required to produce 1 umbrella and 1 bushel of corn in the U.K. and the Rest of the World. Which of the following statements is true? a. The United Kingdom […]

A central bank can sterilize the increase in the money supply that results from an intervention to defend a fixed exchange rate by selling domestic government bonds. Proposals for reform of antidumping policy include restricting its use to cases where […]

Foreign Direct Investment (FDI) refers to: a. the flow of funding provided by an investor or lender to establish or acquire a foreign company or to expand or finance an existing foreign company that the investor owns and controls. b. […]

Everything else remaining unchanged, the effect of domestic spending shocks on a country with a floating exchange rate differs depending on: a. whether sterilized intervention is used or not. b. the mobility of capital across countries. c. the current trade […]

An increase in government spending will: a. shift the IS curve to the left. b. shift the IS curve to the right. c. increase the slope of the IS curve. d. shift the LM curve to the right. Answer: Assume […]

Unlike a tariff, quotas do not allow domestic monopolists to assert their monopoly pricing powers. Answer: Forward exchange contracts are used for hedging but not for speculating. Answer: FALSE In a two-country two-good model, the opening of trade will necessarily […]

_____ purchasing power parity states that a bundle of tradable products will have the same cost in different countries if the cost is stated in the same currency. a. Full b. Partial c. Relative d. Absolute Answer: Under a floating […]

Monetary policy under a fixed exchange rate regime will be: a. more effective than fiscal policy. b. more powerful with high capital mobility than with low capital mobility. c. likely to cause large and persistent deficits. d. constrained and relatively […]

Under a floating exchange rate system, an increase in the international demand for electronic appliances manufactured in Japan will result in: a. Deflation in the Japanese economy. b. An increase in Japan’s trade deficit with other countries. c. An appreciation […]

A major reason why agricultural products are heavily subsidized in the European Union is because farmers have strong political lobbies. Answer: With floating exchange rates, the negative effects of international trade shocks on internal balance are worsened by the effects […]