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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 Organization’s website at […]

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 Inter-War Period Because of World War I and its aftermath, the trade–to–GDP […]

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 […]

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 […]

41 expectation that these costs will be repaid at the government rate. Indirect subsidies to the This agreement lowered subsidies from estimates of 7.5% to 12% of the cost of production and resulted in an increase in the price of […]

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 […]

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 […]

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. […]

The ECB’s 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 […]

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 euro’s origins. It […]

37 positive consumption externality from the installation of solar panels since this source of In fact, when China subsidizes panels and exports them to the United States and Europe at below cost, the social gains are even greater. Yet, both […]

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 […]

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 […]

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. […]

Teaching Tip 3: The break-even condition for lenders (the equation following Figure 22- 10) implies a value of the lending rate. Solving for rL, we get rL = (1 + r − p)/p = [(1 + r)/p] − 1 The […]

11 International Agreements: Trade, Labor, and the Environment Notes to Instructor Chapter Summary This chapter shows that without international agreements, countries have a strong incentive to choose policies that could result in the prisoner’s dilemma. Namely, a country would impose […]

hold. Changes in the nominal exchange rate reflect: 2 Exchange Rates in the Short Run: Deviations from Uncovered Interest Parity The UIP condition relies on arbitrage to ensure that the expected return on foreign deposits equals the return on domestic […]

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 […]

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 […]

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 […]

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 […]

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 […]

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 […]

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 5 Arbitrage and Interest Rates Recall that most foreign currency operations involve bank deposits. […]

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 […]

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 Reserve’s Economic Data (FRED) […]

Money Growth, Inflation, and Depreciation When developing the theory of PPP, we examined both absolute and relative PPP. Because economists are often more interested in studying the behavior of inflation rather than the level of prices, it is convenient to […]

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 country’s inflation […]

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 […]

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 Economist’s Big Mac Index to investigate these claims. Go to http://www.economist.com/content/big-mac–index to […]

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 […]

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%, […]

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 […]

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 […]

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 […]

b. Calculate the official settlements balance for Rijkdom. Did the central bank of Rijkdom experience a decrease or an increase in its foreign reserve holdings? Explain this in terms of the figure you calculated and what the official settlements balance […]

those available from the exchange of assets: GNE + CA + FA + KA = GNDI How the Balance of Payments Accounts Work: A Microeconomic View The balance of payments must balance. The sum of the current account, the capital […]

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: 5. Continuing from the previous question, we […]

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 […]

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. […]

own each other’s 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 To understand how this ownership of capital […]

3. Calculate consumption each period based on the assumption that the country wants to maintain the same level of consumption each period. Step 2 shows us that PV(Q) = 2079 = PV(C). Therefore, we know that the present value of […]

Factors That Shift the IS Curve The following exogenous factors lead to a shift in the IS curve. For each bullet, the first example is an increase in demand, as illustrated in Figure 18–9. ■ Government purchases: ↑ ⇒ D […]

2. This question uses a numerical example to understand the connections between the goods, money, and foreign exchange (FX) markets. Use the information in the table below to answer the questions that follow. Goods Market Money Market FX Market C […]

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 […]

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 Cooperative and Noncooperative Adjustments to Exchange Rates Instead […]

8 (19) Fixed Versus Floating: International Monetary Experience 1. Discovering Data Visit the International Monetary Fund’s 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 […]

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 […]

Answer: The increase in government spending leads to a rightward shift in the IS b. The Eurozone countries decrease the money supply. Answer: The decrease in foreign money supply leads to a leftward shift in the LM* curve. This leads […]

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 […]

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 […]

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 […]

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 […]

A More General Balance Sheet The items on the general central bank balance sheet follow. We still assume that central bank capital equals zero. ■ Assets: ● Foreign assets—these are used to defend the exchange rate peg: * Foreign reserves […]

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%. […]

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 […]

4 Trade and Resources: The Heckscher–Ohlin Model Notes to Instructor Chapter Summary This chapter presents the Heckscher–Ohlin model with two factors (capital and labor), two goods (computers and shoes), and two countries (Home and Foreign). A test of the model […]

APPLICATION Opinions Toward Free Trade Workers’ attitudes toward limitations on free trade depend on whether we are in the short run or long run. More specifically, assuming that workers earn a portion of the rental on the specific factor in […]

4 Trade and Resources: The Heckscher–Ohlin 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 […]

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 […]

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, […]

21 Rybczynski theorem: In the Heckscher‒Ohlin model with two goods and two factors, an increase in the amount of a factor found in an economy will increase the output of the industry using that factor intensively, and decrease the output […]

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 […]

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 […]

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 Heckscher–Ohlin model, we assumed perfectly competitive markets, where there are many firms, each producing […]

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? b. Access the U.S. TradeStates Express website at http://tse.export.gov/tse/tsehome.aspx. Click […]

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 Heckscher‒Ohlin models […]

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 services—consumer goods. But, a significant amount of trade involves intermediate goods and services or inputs […]

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 […]

21 jobs—the 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 […]

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, China’s textile and apparel exports to the United States […]

States and occurs in addition to the deadweight loss of area +. 4 Import Tariffs for a Large Country We now understand that for small countries, which take world prices as given, tariffs create deadweight losses for them and these […]

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 […]

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 Consumer and Producer Surplus The effect of the tariff protection on […]

an exporter is dumping potatoes in the economy. Given the following scenarios, rank each from best to worst in terms of the importing country’s welfare. Explain. i. Free trade ii, Foreign dumping iii. Foreign dumping with an antidumping duty iv. […]

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 […]

Numerical Example of Dumping To understand why it is profitable for the Foreign firm to export the good at below- average cost, we use the following hypothetical information pertaining to its costs and demand. Fixed costs = $100 Marginal costs […]