Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Content Option for Instructors #1 The United States and the Global Economy
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
COI1-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Content Option for Instructors #1 The United States and the Global Economy
COI1-2
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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
COI1-3
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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
COI1-4
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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.
COI1-5
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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
COI1-6
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Content Option for Instructors #1 The United States and the Global Economy
COI1-7
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Content Option for Instructors #1 The United States and the Global Economy
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
COI1-8
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Content Option for Instructors #1 The United States and the Global Economy
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.
COI1-9
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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?
COI1-10
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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
COI1-11
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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.
COI1-12
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
