International Economics 4th Edition

Solutions Manual to End-of-Chapter Questions 1 Trade in the Global Economy 1. In this question, you are asked to update the numbers for world trade that are shown in Table 1-1. a. Go to the World Trade Organizations website at http://www.wto.org, and look for its trade

the steamship and railroad expansion, all of which encouraged trade. This golden age that lasted up until 1920 experienced large increases in trade and globalization. In fact, the United Kingdom saw an increase of 30%, while Australia, Canada, and Europe all experienced 20% increases at their peaks. Japan reached a

b. Suppose that based on the OCA, Country A and Country B join the CU but Country C does not. Illustrate the OCA line on your diagram based on this information. Answer: See the previous diagram. Country A and Country B lie above the OCA line.

21 A government-applied tariff results in a price of , as shown in Figure 10-6, causing the export supply curve in panel (b) to shift upward by the amount of the tariff from X to X + , resulting in a new equilibrium (point C) in the

41 expectation that these costs will be repaid at the government rate. Indirect subsidies to the military divisions are limited to 4% of the companys annual sales and prohibit production subsidies and, in addition, limit the government from offering buyers low interest rates. military divisions are limited to 4%

10 (21) The Euro 1. Discovering Data Do some research on the Internet to construct an updated version of the map in Figure 21-1. You can find membership information on the websites of the European Union (europa.eu) and the European Central Bank (www.ecb.int). Since this book was written,

10 Export Policies in Resource-Based and High-Technology Industries 1. In Figure 10-8 we showed the value of Chinese exports of rare earth minerals, along with their average price and quantity sold, in three categories of exports. The source for the data in Figure 10-8 is the China Customs

1 10 Export Subsidies in Agriculture and High-Technology Industries Notes to Instructor Chapter Summary The trade policies we examine in this chapter are those that promote exports, often at the expense of consumers and import nations dependent on the product. Export subsidies are used by many countries,

The ECBs key characteristics are as follows: Instruments and goals: Instrument: Interbank lending rate Goals: * Primary: Maintain price stability * Secondary: Support the general economic policies in the Community with a view to contributing the achievement of the objectives of the Community

21 The Euro Notes to the Instructor Chapter Summary This chapter examines the theory of optimum currency areas, focusing on the Eurozone or Euro area. The chapter provides a historical background on Europe to better understand the euros origins. It then develops the theory of optimum currency areas

37 positive consumption externality from the installation of solar panels since this source of energy does not emit carbon, which contributes to global climate change. This means that the SMB curve is above the demand curve and thus leads to additional social gains when more consumption occurs. These

11 (22) Topics in International Macroeconomics 1. (PPP) Richland and Poorland each have two industries: traded TVs and nontraded house maintenance. The world price of TVs is R$100 (R$ = Richland dollar). Assume for now that the exchange rate is R$1 = 1 PP (PP = Poorland peso) and

21 Suppose a tariff in the amount of t dollars is applied on all importers before NAFTA. Then the United States imports Q1 units of auto parts at a price of PAsia + t given by point A, where the quantity Q2 is supplied by Mexico

11 International Agreements: Trade, Labor, and the Environment 1. In Application: The Trans-Pacific Partnership, we summarized some of the provisions of TPP and the views of consumer and environmental groups. The text of the TPP agreement is available at: https://ustr.gov/tpp/#text. We will use that text to dig deeper into

exchange rate actually moved. (Go to http://www.imfstatistics.org/imf/. This is a subscription website, but five-day free trials are available.) exchange rate actually moved. (Go to http://www.imfstatistics.org/imf/. This is a subscription website, but five-day free trials are available.) exchange rate actually moved. (Go to http://www.imfstatistics.org/imf/. This is a subscription website, but five-day

1 International agreements on the environment help to avoid outcomes such as the tragedy of the commons, in which exhaustible resources like fish are overharvested due to the lack of clearly defined property rights for the common property. In addition, the treaties also set guidelines for pollution emission. Without

hold. Changes in the nominal exchange rate reflect: Inflation differentials Convergence in the real exchange rate to its equilibrium value Changes in the equilibrium real exchange rate resulting from changes in productivity and growth Inflation differentials Convergence in the real exchange rate to its equilibrium value Changes

loan demand. An increase in volatility of output leads to an increase in the lending rate and an ambiguous effect on the amount borrowed. APPLICATION The Costs of Default This application considers empirical measures of the costs of default from a recent Bank of England study and other research.

22 Topics in International Macroeconomics Notes to Instructor Chapter Summary This chapter covers extensions to the models presented in earlier chapters. There are four topics covered: purchasing power parity (PPP), especially the issue of why price levels are higher in richer countries; uncovered interest parity (UIP),

Page 1 1. When measuring real purchasing power parity (PPP) between China and the United States, prices of goods measured in dollars at the exchange rate in both nations resulted in: A) higher prices for goods in China compared with the United States. B) lower prices for goods in

1 (12) The Global Macroeconomy 1. Discovering Data In this problem you will use data from the Bureau of Economic Analysis (BEA) to investigate the dependence of the United States on foreign markets over time. Go to the BEA website at www.bea.gov and under the National tab open the

12 The Global Macroeconomy Notes to the Instructor Chapter Summary This chapter provides students with a broad overview of international macroeconomics. The chapter uses several key concepts to introduce the subject to students without formal modeling. At the end of each topic, there are two sections that review

Country (currency) Currency Symbol (1) Per $ (2) Per (3) Per (4) Per $ (5) Per (6) Per Canada (dollar) C$ 1.063 1.59 1.302 1.161 1.913 1.629 Denmark (krone) DKr 6.081 9.098 7.449 5.309 8.743 7.447 Euro (euro) 0.816 1.221 0.713 1.174 Japan (yen) 88.49 132.39

because some foreign exchange transactions are relatively rare, making it more difficult to exchange currency directly. When a third currency is used in these types of transactions, it is known as a vehicle currency. As of April 2007, the most common vehicle currency was the U.S. dollar, which was used

13 Introduction to Exchange Rates and the Foreign Exchange Market Notes to the Instructor Chapter Summary This chapter introduces students to exchange rates, to the foreign exchange (forex) market, to the way foreign currency is exchanged in private and government transactions, and to arbitrage conditions in the forex

2 (13) Introduction to Exchange Rates and the Foreign Exchange Market 1. Discovering Data Not all pegs are created equal! In this question you will explore trends in exchange rates. Go to the St. Louis Federal Reserves Economic Data (FRED) website at https://research.stlouisfed.org/fred2/ and download the daily United States

YF PF EH/F (home currency depreciates, foreign currency appreciates) YF PF EH/F (home currency depreciates, foreign currency appreciates) YF PF EH/F (home currency depreciates, foreign currency appreciates) Money Growth, Inflation, and Depreciation When developing the theory of PPP, we examined both absolute and relative PPP. Because economists are often

If the government adopts a fixed exchange rate regime, or sets the percentage change in the exchange rate equal to a constant, this will keep the inflation rate constant. The drawback of this approach is that the home countrys inflation rate changes each time the foreign

14 Exchange Rates I: The Monetary Approach in the Long Run Notes to Instructor Chapter Summary This chapter develops the long-run model of exchange rate determination that will be used in later chapters. Beginning with the theory of purchasing power parity, exchange rates are linked to prices and

3 (14) Exchange Rates I: The Monetary Approach in the Long Run 1. Discovering Data: In recent years China has been routinely accused of currency manipulation. Use The Economists Big Mac Index to investigate these claims. Go to http://www.economist.com/content/big-mac-index to access the full dataset. Answers will depend on

Short-Run Policy Analysis We begin by studying temporary shocks. These shocks do not affect long-run prices or expected exchange rates. A Temporary Shock to the Home Money Supply Figure 15-8 illustrates the effects of a temporary increase in the home money supply. The reverse would apply to a

1979. (The M1 growth rate was annualized, then smoothed, using a 3-month moving average.) Between June and August of 1978, the M1 growth rate fell from almost 12% to about 6%. The Fed funds rate rose from 7.60% to 8.04%, and continued rising until December when it settled at about

15 Exchange Rates II: The Asset Approach in the Short Run Notes to Instructor Chapter Summary This chapter combines the asset approach, based on the uncovered interest parity (UIP) condition from Chapter 13, with the monetary approach from Chapter 14 to develop a comprehensive model of exchange rate

5 (16) National and International Accounts: Income, Wealth, and the Balance of Payments 1. Discovering Data In this question you will study the official macroeconomic statistics reported in your country. These can be found by searching the web for National Accounts and your countrys name. In the United States,

16 National and International Accounts: Income, Wealth, and the Balance of Payments Notes to Instructor Chapter Summary This chapter begins by discussing an integrated view of national income and product (NIP) accounts with balance of payments (BOP) accounts. The chapter then presents NIP accounts in detail. For advanced

FA = (CA + KA) Using the data given in the question: FA = ($1,000 + $75) FA = $1,075 million Because FA < 0, foreign purchases of Rijkdoms assets < Rijkdomians purchases of foreign assets. Rijkdom is a net importer of assets. It is accumulating assets. FA

those available from the exchange of assets: GNE + CA + FA + KA = GNDI This simplifies to the BOP identity: CA + KA + FA = 0 This simplifies to the BOP identity: CA + KA + FA = 0 This simplifies to the BOP identity:

assumption in this question) i. What about in later years? State the levels of CA, TB, NFIA, and FA in year 1 and thereafter. Answer: In subsequent years, the values are as follows: TB = Q C I = 301.6 300.77 0 = 0.83 NFIA = 0.83

6 (17) Balance of Payments I: The Gains from Financial Globalization 1. Discovering Data Go to the BEA website (bea.gov). Find the latest annual balance of payments data for the United States. Answers will depend on the year of the data and the date retrieved. The following

17 Balance of Payments I: The Gains from Financial Globalization Notes to Instructor Chapter Summary This chapter connects the balance of payments to long-run economic growth and highlights the benefits of international finance for consumption smoothing, investment, and risk sharing. The key lessons from this chapter are as

own each others labor, so labor income is the same as in the home portfolio case. From panel (b), we observe that the countries are able to reduce the variation in income through owning a portion of the other countrys capital stock. Note that the total level of output in

output is equal to 100 thereafter, PV(Q) = 79 + = 2079. output is equal to 100 thereafter, PV(Q) = 79 + = 2079. output is equal to 100 thereafter, PV(Q) = 79 + = 2079. 3. Calculate consumption each period based on the assumption that the country wants

demand through two channels: investment demand and external demand (trade balance). A decrease in the interest rate leads to a depreciation in the home currency and a real depreciation (because of sticky prices), increasing the trade balance. demand through two channels: investment demand and external demand (trade balance). A decrease

models predictions. In this case, the increase in output led to an increase in imports that offset any potential gains in the trade balance associated with the depreciation in the dollar. models predictions. In this case, the increase in output led to an increase in imports that offset any potential

18 Balance of Payments II: Output, Exchange Rates, and Macroeconomic Policies in the Short Run Notes to Instructor Chapter Summary This chapter develops a standard short-run macroeconomic model for the open economy. It begins with an overview of the components of demand and their determinants, then derives a

group of countries are often asymmetric, and it may be difficult for one country to allow output to deviate from the desired level to help out another country. In the end, these asymmetric shocks should average out, but this requires a long-term commitment. For example, in the ERM, countries pleaded

8 (19) Fixed Versus Floating: International Monetary Experience 1. Discovering Data Visit the International Monetary Funds website (http://www.imf.org) and locate the latest classification of exchange rate regimes in all countries around the world. How many countries are fixing and how many are floating? Answer: Answers will vary depending on

19 Fixed Versus Floating: International Monetary Experience Notes to Instructor Chapter Summary This chapter examines the choice of fixed versus floating exchange rate regimes in more detail. We consider the potential benefits of a fixed exchange rate regime, such as efficiency gains from reduced transactions costs, fiscal discipline,

Answer: The increase in government spending leads to a rightward shift in the IS curve. This leads to an increase in home countrys interest rate and an implied appreciation in the home currency, shifting IS* to the left. In a fixed exchange rate regime, the home countrys central bank

2 Trade and Technology: The Ricardian Model 1. In this problem you will use the World Development Indicators (WDI) database from the World Bank to compute the comparative advantage of two countries in the major sectors of gross domestic product (GDP): agriculture, industry (which includes manufacturing, mining, construction, electricity,

9 (20) Exchange Rate Crises: How Pegs Work and How They Break 1. Discovering Data From Figure 2-4(13-4) in Chapter 2(13), identify three countries with fixed exchange rates. Now use the Internet to search for and visit the websites of each of these countries central banks and download the

Time 4 onward: Price level continues to grow at the rate of the money supply, and real money demand remains unchanged at 4,608 billions. See the previous table. e. Illustrate the behavior of the following variables between t = 1 and t = 5: domestic credit, reserves,

20 Exchange Rate Crises: How Pegs Work and How They Break Notes to Instructor Chapter Summary This chapter develops a new central bank balance sheet model to examine exchange rate crises. The chapter begins with an overview of what an exchange rate crisis is and the costs associated

need to allow for a more detailed bank balance sheet. Here, we will distinguish between different types of foreign and domestic assets and liabilities. need to allow for a more detailed bank balance sheet. Here, we will distinguish between different types of foreign and domestic assets and liabilities. need to

12 =() =() = ( ) Substituting the information above gives =((10%) 100)((5%) 60)40 =17.5% We see that the percentage increase in the rental on capital, 17.5%, is far greater than the percentage increase in the relative price of manufacturing, 10%. =((10%) 100)((5%) 60)40 =17.5% We see that the

3 Gains and Losses from Trade in the Specific-Factors Model 1. In the chapter, we learned that workers displaced by import competition are eligible for compensation through the Trade Adjustment Assistance program. Firms are also eligible for support through Trade Adjustment Assistance for Firms, a federal program that provides

4 Trade and Resources: The HeckscherOhlin Model Notes to Instructor Chapter Summary This chapter presents the HeckscherOhlin model with two factors (capital and labor), two goods (computers and shoes), and two countries (Home and Foreign). A test of the model is discussed with Leontief s paradox. Additionally this

The preceding equations relating the changes in product prices to changes in factor prices are called the magnification effect, because changes in prices of goods have magnified effects on the earning of factors of production. The preceding equations relating the changes in product prices to changes in factor

4 Trade and Resources: The HeckscherOhlin Model 1. In this problem you will learn how to download data for U.S. export and imports for highly disaggregated products. Supposes that you are hired by a company that wants to start exporting the product it already sells in the United States.

41 World Gains from Migration The sum of triangles ABC and A*BC representing Home and Foreign gains, respectively, gives the larger triangle A*AB, which denotes the increase in the world gross domestic product (GDP) due to immigration. For example, when the first migrant leaves Foreign for Home, the

5 Movement of Labor and Capital Between Countries 1. Under Headlines: Brussels Resumes Policy Push to Share out Refugees across EU, there is a map showing persons seeking asylum in the European Union, as of May 2015. In this question, you will be asked to update these figures to

21 point B in Figure 5-8, where the unchanged relative price of computers is just tangent to the outermost PPF. Note that this new PPF is biased in the direction of shoes because of the increase in the endowments devoted to the shoe industry. This long-run result of factor

1 5 Movement of Labor and Capital Between Countries Notes to Instructor Chapter Summary The objective of this chapter is to consider the effect on earnings from the factors of production and output from movement of all the factors of production across industries and countries. Two

21 21 21 rose over 20% relative to the level in 1994. In both sectors, real wages increased by 2003 to the levels reached in 1994. As an alternative to examining real wages, we could instead study the real monthly income, which would more accurately reflect

1 6 Increasing Returns to Scale and Imperfect Competition Notes to Instructor Chapter Summary In the Ricardian and modified specific-factors model as well as in the HeckscherOhlin model, we assumed perfectly competitive markets, where there are many firms, each producing a homogeneous product, and where no

6 Increasing Returns to Scale and Monopolistic Competition 1. a. Of two products, rice and paintings, which product do you expect to have a higher index of intra-industry trade? Why? Answer: We would expect that paintings would have a higher index of industry trade, because they are differentiated

36 4 Conclusion In this chapter, we focused on a different type of trade than in previous chapters. Here, we looked at the intermediate products used in production not trade in final goods and services. The Ricardian and HeckscherOhlin models do not apply to intermediate production goods

1 1 1 7 Offshoring of Goods and Services Notes to Instructor Chapter Summary Up to this point, we have focused on the trade of final goods and servicesconsumer goods. But, a significant amount of trade involves intermediate goods and services or inputs that are used to build end

7 Offshoring of Goods and Services 1. What type of occupation would you like to pursue after graduation? To see what is available, to the Bureau of Labor Statistics website at: https://www.bls.gov/ooh/. a. Find four occupations that you think fit the four categories shown in the horizontal

21 jobsthe mid-level wage jobs. This means that low- and mid-level wage categories were impacted with lower employment in the 1980s, while in the 1990s, the mid-level wage workers were more heavily impacted. This reflects a trend toward greater loss for mid- level wage workers. Again, from 2007 to

Growth in Exports from China Figure 8-12 compares the changes in clothing and textiles exports with the United States following the elimination of the MFA. Panel (a) shows that in 2005, Chinas textile and apparel exports to the United States increased by more than 40% relative to the previous year,

States and occurs in addition to the deadweight loss of area +. Note that the deadweight loss for the steel tariff was $186 million per year, substantially less than the loss from the discriminatory tariff. This informs us that discriminatory tariffs that are applied unequally to specific nations are

8 Import Tariffs and Quotas Under Perfect Competition 1. At the opening of this chapter, we referred to the events of May 1995, when the United States considered putting tariffs on imports of luxury cars from Japan. Specifically, on May 16, 1995, U.S. Trade Representative Mickey Kantor announced

effective price of computing power fell rapidly in the United States between 1982 and 1988. Brazil, however, did not achieve the same low prices as the United States during the same period. More specifically, by 1992, Brazil was able to achieve the effective prices of computers that the United States

an exporter is dumping potatoes in the economy. Given the following scenarios, rank each from best to worst in terms of the importing countrys welfare. Explain. i. Free trade ii, Foreign dumping iii. Foreign dumping with an antidumping duty iv. Coordination between the foreign and domestic

9 Import Tariffs and Quotas Under Imperfect Competition 1. Figures A, B, and C are taken from a paper by Chad Bown: The Pattern of Anti dumping and Other Types of Contingent Protection (World Bank, PREM Notes No. 144, October 21, 2009), and updated from Chad Brown, 2012, Global Anti- dumping

We will now argue that this strategy may be profitable for the Foreign firm in spite of the lower export prices compared to local prices and in spite of an export price below the firms average costs. We will show how this may occur with a numerical example. We will