International Trade and Balance Of Payments

International Trade and Balance of Payments TUTORIAL 9 Short-answer Problems 1. Define the four basic types of trade barriers. Which is more effective in blocking imports, a tariff or a quota? 2. Country A it takes 10 hours to produce one unit of Good X and 2.5 hours to produce one unit of Good Y. In Country B it takes 15 hours to produce one unit of Good X and 7.5 hours to produce one unit of Good Y. (i) State which country has a comparative advantage in the production of Good X (ii) State which country has an absolute advantage in the production of Good X. 3. With a given amount of resources (labour, land and capital) two countries, A and B, can produce either Good X or Good Y according to the production possibilities set out in the table below: Country A Units of Good X Either 500 Units of Good Y or 1,500 B Either 200 or 1,000 (i) State the opportunity cost of producing one unit of Good X in each country prior to the commencement of international trade. (ii) State which country has a comparative advantage in the production of Good Y. (iii) State which Good will be exported by Country A if trade is opened up between the two countries. (iv) Calculate in whole units the amount of Good Y per unit of Good X at which trade would be mutually beneficial between both countries. (v) Describe what is meant by an improvement in a country’s terms of trade. 4 Who gains and who loses from a protective tariff? Explain. 5. The next three questions refer to the below graph, where Sd and Dd are the domestic supply and demand for a product. The world price of the product is $12. (a) How much total revenue would go to domestic producers if the market were closed to international trade compared to a market open to international trade? Explain. (b) If the economy is open to trade, but a $3 per unit tariff were applied, what would be the total revenue going to domestic producers, foreign producers and to the government? Explain. (c) What would be the difference in revenue with a tariff of $3 per unit versus a quota of 20 units? 6. Evaluate the validity of the argument that a new industry in a nation needs protection from foreign competition if it is to prosper. 7. Evaluate the argument: “Restricting imports from other nations will save U.S. jobs.” 8. What are the major components of the current account in the balance of payments? How is the current account balance determined? 9. What are the major components of the capital and financial account? 10. What is the official reserves account and how is it used in the balance of payments? 11. Answer the next five questions on the basis of the following hypothetical data for a nation Malthusia. All numbers are in billions of dollars. Goods exports +$45 Goods imports –51 Service exports +15 Service imports –6 Net investment income –10 Balance on capital account +3 Net transfers +12 Foreign purchases of Malthusia assets +25 Malthusia purchases of assets abroad –33 (a) What was the balance on goods? (b) What was the balance on goods and services? (c) What was the balance on the current account? (d) What is the balance on the financial account? (e) What is the balance on the capital and financial account? 12. Why is a balance-of-payments deficit not necessarily good or bad if it occurs in one given year, but potentially very harmful if maintained over a number of years? Multi-Choice Questions 1. The table below shows the quantities of cars and bicycles that one unit of input can produce in the UK and the USA. Assume that these are the only two goods that the countries produce. One unit of input produces: Bicycles Cars 20 2 UK 30 4 USA Given the table above, which of the following is true? A. The USA is likely to export bicycles to the UK. B. The UK has an absolute advantage in the production of bicycles. C. The USA has a comparative advantage in the production of bicycles. D. The USA has an absolute advantage in the production of bicycles. 2. If country A has a comparative advantage in the production of good X over country B, then: A. Country A should not trade with country B B. The domestic opportunity cost of producing X in country A is higher than in country B C. The domestic opportunity cost of producing X in country A is lower than in country B D. The domestic opportunity cost of producing X in country A is higher or lower than in country B 3. Studies show that: A. it is impossible to estimate the benefits of trade barriers. B. costs and benefits of trade barriers are about equal. C. benefits of trade barriers exceed their costs in developing nations. D. costs of trade barriers exceed their benefits, creating an efficiency loss for society. 4. Suppose the United States eliminates high tariffs on German bicycles. As a result, we would expect: A. the price of German bicycles to increase in the United States. B. employment to decrease in the German bicycle industry. C. employment to decrease in the U.S. bicycle industry. D. profits to rise in the U.S. bicycle industry. 5. A protective tariff will: A. increase the sales of foreign exporters. B. increase the price and sales of domestic producers. C. increase the welfare of domestic consumers. D. create an efficiency gain in the domestic economy. 6. Other things equal, a tariff is: A. superior to an import quota for Americans because a tariff increases the profits of foreign producers. B. inferior to an import quota for Americans because a tariff increases the profits of domestic producers. C. superior to an import quota for Americans because a tariff generates revenue for the United States Treasury. D. inferior to an import quota for Americans because a tariff generates revenue for the United States Treasury. 7. As it relates to international trade, dumping: A. is a form of price discrimination illegal under U.S. antitrust laws. B. is the practice of selling goods in a foreign market at less than cost. C. constitutes a general case for permanent tariffs. D. is defined as selling more goods than allowed by an import quota. 8. Which of the following would call for inpayments to the United States? A. gold flows into the United States B. U.S. firms sell insurance to Brazilian shippers C. U.S. sends foreign aid to developing countries D. U.S. imports German automobiles 9. Which of the following would call for outpayments from the United States? A. U.S. exports computer software B. U.S. purchases assets abroad C. foreigners purchase assets in the United States D. foreign tourists spend money in the United States 10. The financial account balance is a nation's: A. net investment income minus its net transfers. B. exports of goods and services minus its imports of goods and services. C. sale of real and financial assets to people living abroad minus its purchases of real and financial assets from foreigners. D. domestic investment spending minus domestic saving. 11. Which of the following would contribute to a United States balance of payments surplus? A. the United States makes a unilateral tariff reduction on imported goods B. General Motors pays a dividend to a Swiss stockholder C. the United States cuts back on U.S. military personnel stationed in Germany D. Russian vodka becomes increasingly popular in the United States