978-0077660772 Chapter 1 McConnell Brue Flynn 20e

Content Option for Instructors #1 The United States and the Global Economy

McConnell Brue Flynn 20e

DISCUSSION QUESTIONS

1. Describe the four major economic flows that link the U.S. with other nations. Provide a

specific example to illustrate each flow. LO1

Answer: The four major economic flows are: the flows of goods and services

2. How important is international trade to the U.S. economy? In terms of volume of exports and

imports, what country is the United States’ most important trading partner? Was the United States

the world’s leading export country in 2012? If not, which country was? Place the following four

countries in descending order in terms of exports as a percentage of GDP: the United States,

Belgium, Canada, and Japan. What key factors account for the rapid growth of world trade since

the Second World War? LO2

Answer: Exports and imports constituted 14 percent and 17 percent of GDP

respectively in 2012. These proportions have more than doubled since 1975. The

3. What role do domestic opportunity costs play in determining a nation’s area of comparative

advantage and therefore specialization relative to that of a trading partner? Provide a numerical

example (no need for a table) to support your answer. How does specialization and trade reduce a

nation’s total cost of obtaining products? Why is specialization sometimes incomplete, such that

countries import some of the same categories of goods that they export? LO3

Answer: A country has a comparative advantage in producing a specific good if that

nation has the lowest opportunity cost for the good. Countries with the lowest

opportunity cost will specialize in producing that good and trade it with other nations that

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Content Option for Instructors #1 The United States and the Global Economy

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Content Option for Instructors #1 The United States and the Global Economy

4. True or False? “U.S. exports create a demand for foreign currencies; foreign imports of

U.S. goods generate supplies of foreign currencies.” Explain. Would a decline in U.S.

consumer income or a weakening of U.S. preferences for foreign products cause the

dollar to depreciate or appreciate? Other things equal, what would be the effects of that

depreciation or appreciation on U.S. exports and imports? LO4

Answer: The first part of this statement is incorrect. U.S. exports create a

domestic supply of foreign currencies, not a domestic demand for them. The

5. If the European euro were to decline in value (depreciate) in the foreign exchange

market, would it be easier or harder for the French to sell their wine in the United States?

Suppose you were planning a trip to Paris. How would the depreciation of the euro

change the dollar price of this trip? LO4

Answer: If the European euro declines in value, it means that Americans can

receive more euros for each dollar. Therefore, they do not need as many dollars to

6. What measures do governments use to promote exports and restrict imports? Who

benefits and who loses from protectionist policies? What is the net outcome for society?

LO5

Answer: Governments promote exports by providing subsidies to export producers,

which effectively lowers their costs and enables them to sell their products at lower

prices on world markets. Subsidies enable export firms or industries to compete against

Restriction of imports can be accomplished by protective tariffs, by import quotas,

The benefits of protectionist policies are to the industry that has to compete on

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Content Option for Instructors #1 The United States and the Global Economy

run. There may also be some political benefits as those protected groups have a

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Content Option for Instructors #1 The United States and the Global Economy

The costs of protectionist policies are more widespread. The costs of protectionist

policies arise because resources are not being used as efficiently as they might be

7. Identify and state the significance of each of the following: (a) WTO, (b) EU, (c) euro, and (d)

NAFTA. What commonality do they share? LO6

Answer: (a) The WTO oversees trade agreements reached by member nations and

arbitrates trade disputes among them. (b) The EU is a trading bloc of 25 European

8. Explain: “Free-trade zones such as the EU and NAFTA lead a double life. They can

promote free trade among members, but pose serious trade obstacles for nonmembers.”

Do you think the net effects of these trade blocs are good or bad for world trade? Why?

How do the efforts of the WTO relate to these trade blocs? LO6

Answer: Free-trade zones increase the efficient use of resources within the zones

The evidence seems to point to the net effect of trade blocs as being good for

Some might argue that such blocs are bad for world trade because the unity and

The WTO provides a forum for the trade blocs to meet and negotiate further

reductions in trade barriers among the trade blocs.

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Content Option for Instructors #1 The United States and the Global Economy

9. Speculate as to why some U.S. firms strongly support trade liberalization while other

U.S. firms favor protectionism. Why might some U.S. labor unions strongly support trade

liberalization while other U.S. labor unions strongly oppose it? LO6

Answer: When trade barriers are eliminated, some U.S. firms will be hurt by the

increased competition from foreign companies. On the other hand, if trade

10. What are the major forms of trade adjustment provided by the U.S. government? How does

such assistance help bolster support for free-trade agreements? Do you think workers who lose

their jobs because of changes in trade laws deserve special treatment relative to workers who lose

their jobs because of other changes in the economy, say, changes in patterns of government

spending? LO7

Answer: The Trade Adjustment Assistance Act of 2002 introduced some new

novel elements to help those hurt by shifts in international trade patterns. Such as:

11. What is offshoring of white-collar service jobs and how does that practice relate to

international trade? Why has it recently increased? Why do you think more than half of the

offshored jobs have gone to India? Give an example (other than that in the textbook) of how

offshoring can eliminate some American jobs while creating other American jobs. LO7

Answer: The off-shoring of white collar service jobs refers to jobs relating to data

12. LAST WORD How does a fair-trade product differ from an otherwise imported

good? What is the purported benefit of fair-trade certification on purchases of goods such

as chocolate, coffee, bananas, and tea? Do fair trade goods improve average wage and

level of income in low-income nations? Why or why not?

Answer: Fair Trade Standards guarantee the producers higher-than-market prices

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Content Option for Instructors #1 The United States and the Global Economy

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REVIEW QUESTIONS

1. Which of the following is not one of the four major economic flows linking the U.S. economy

with that of other nations? LO1

a. Trade flows.

b. Resource flows.

c. Financial flows.

d. Foreign aid flows.

Feedback: The four major economic flows linking the U.S. economy with that of other

2. The United States usually runs a __________in its international trade in goods and a

__________ in its international trade in services. LO2

a. Deficit, deficit.

b. Deficit, surplus.

c. Surplus, deficit.

d. Surplus, surplus.

Feedback: In recent decades the United States had tended to run trade deficits in goods

3. A country that has an absolute advantage over another country in producing a product

__________ a comparative advantage as well. LO3

a. Will have.

b. May have.

Feedback: If a country has an absolute advantage over another country in producing a

4. True or False: Consider the exchange rate between the U.S. dollar and the Japanese yen. If the

exchange rate changes from $1 = ¥80 to $1 = ¥105, then the dollar has “appreciated” in value

against the yen. LO4

Feedback: When a single dollar is able to buy more units of a given foreign currency, the

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5. Tariffs and quotas __________ domestic producers but __________ domestic consumers. LO5

a. Help, help.

b. Help, harm.

c. Harm, help.

d. Harm, harm.

Feedback: Tariffs and quotas help domestic producers who face foreign competition.

PROBLEMS

1. Assume that the comparative-cost ratios of two products—baby formula and tuna fish—are as

follows in the nations of Canswicki and Tunata:

Canswicki: 1 can baby formula ≡ 2 cans tuna fish

Tunata: 1 can baby formula ≡ 4 cans tuna fish

In what product should each nation specialize? Which of the following terms of trade would be

acceptable to both nations: (a) 1 can baby formula ≡ 2 1/2 cans tuna fish; (b) 1 can baby formula

≡ 1 can tuna fish; (c) 1 can baby formula ≡ 5 cans tuna fish? LO3

Feedback: The opportunity cost of producing 1 can of baby formula in Canswicki is 2

cans of tuna fish.

The opportunity cost of producing 1 can of baby formula in Tunata is 4 cans of tuna fish.

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Content Option for Instructors #1 The United States and the Global Economy

Which of the following terms of trade would be acceptable to both nations:

(a) 1 can baby formula ≡ 2 1/2 cans tuna fish?

These terms of trade are acceptable. The best Canswicki can do without trade is produce

(b) 1 can baby formula ≡ 1 can tuna fish?

These terms of trade would not be acceptable. Canswicki would not be willing to trade 1

(c) 1 can baby formula ≡ 5 cans tuna fish?

2. The following hypothetical production possibilities tables are for China and the United States.

Assume that before specialization and trade the optimal product mix for China is alternative B

and for the United States is alternative U. LO3

a. Are comparative-cost conditions such that the two areas should specialize? If so, what product

should each produce?

b. What is the total gain in apparel and chemical output that would result from such

specialization?

c. What are the limits of the terms of trade? Suppose that the actual terms of trade are 1 unit of

apparel for 1½ units of chemicals and that 4 units of apparel are exchanged for 6 units of

chemicals. What are the gains from specialization and trade for each nation?

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Content Option for Instructors #1 The United States and the Global Economy

chemicals.

c. Limits of the terms of trade = 1000 units of apparel for 1 ton of chemicals and 1000

Feedback: a. Yes, the two areas should specialize.

The opportunity cost of producing 1000 units of apparel is 1 ton of chemicals in China.

b. The first step is to determine total production before any trade takes place.

China’s optimal product mix before trade is alternative B (given above):

The United States’ optimal product mix before trade is alternative U (given above):

Combined, the optimal mix before trade is:

The next step is to determine total production after specialization. Recall China will

specialize in apparel production (produce only apparel) and the United States will

specialize in Chemical production (produce only chemicals).

The final step is to determine the total gain for each good, which is the difference

between total production before trade and total production after trade.

c. To determine the limits of the terms of trade we look at opportunity cost. The

opportunity cost of producing 1000 units of apparel is 1 ton of chemicals in China. The

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Content Option for Instructors #1 The United States and the Global Economy

Now assuming the actual terms are 1000 units of apparel for 1.5 tons of chemicals and

that the ACTUAL amount traded (exchange) is 4000 units of apparel for 6 tons of

chemicals we can find the new consumption levels for each country.

3. Initially assume that it costs $1.36 to purchase 1 euro. How many euros are needed to buy $1?

How many dollars are needed to purchase an item priced at 84 euros? Next, assume that the

exchange rate changes to $1.30 per 1 euro. Will it take more euros or fewer euros to buy the

American item priced at $84? Did the euro appreciate or depreciate relative to the dollar? Did the

dollar appreciate or depreciate relative to the euro? LO4

Answer: 0.74 euros are required to buy $1. $114.24 is needed to buy an item priced at 84

Feedback: To find how many euros are required to buy $1, we must divide 1 euro by

How many dollars are needed to purchase an item priced at 84 euros? Since every euro is

Next, assume that the exchange rate changes to $1.30 per 1 euro. Will it take more euros

Did the dollar appreciate or depreciate relative to the euro? When the euro depreciates

against the dollar, the dollar must appreciate against the euro – now fewer dollars are

required to buy one euro.

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