Question and Answers
Chapter 8
Question 1
Comparative advantage is the ability of a person, firm or country to produce a good at a lower price than the market competitors. This enables the producer to sell the goods at a lower price than its rivals, all the while making a more profit.
Question 2
Question 3
Laypeople tend to think that trade is mostly about goods whereas economists consider many other factors
Gains are often stealth for economists
Economists view trade as having distributional effects.
Economists consider opportunity cost as being relative unlike laypeople
Question 4
Trade affects the distribution of income by widening the gap in the payment and benefits derived from trade. With more resources one is able to get more return from trade and thus the income gap continues to grow.
Question 5
i) The country’s vast natural resources
ii) The country has a large disposal of skilled workforce
iii) English is the most spoken language of business in the world.
iv) US have put in place efficient institutions for the protection of trade.
Question 6
Inherent comparative advantage is advantages that are unchangeable like a country that has a natural mineral when compared with one that does not. Transferrable advantages on the other hand are based on factors that are dynamic and can change easily.
Question 7
US is losing its comparative advantages because it is losing ground to other nations in education index, in training engineers and US companies outsourcing jobs to Asian countries. In the education sector, US have remained stagnant for almost a decade while Korea and China have been dominated.
Question 8
The dollar to appreciate against the Yuan would mean that it would take more Yuan to buy one USD than it did before the appreciation.
Question 9
An appreciation of the US dollar will widen the trade deficit in the country. A stronger dollar will mean will make American goods more expensive thereby hobbling export. The sink in export will hurt the economy because trade will reduce.
Question 10
A resource curse is a strange situation in which a country that is blessed with natural non-renewable resources experience stagnating and sometimes contracting economies. This situation is brought about by an over-dependence on that resource. The resource curse affects the exchange rate by depreciation of the country’s economy when the commodity prices fall and trade deficit widens.
Match the Terms
Balance of Trade: a
Comparative advantage: c
Currency appreciation: j
Currency depreciation: d
Exchange rate: f
Inherent comparative advantage: g
Resource curse: i.
Trade deficit: e
Trade surplus: b
Transferrable comparative advantage: h
Problems and Application
h) General principle
The principle of comparative advantage applies in the establishment of trade between two countries. If one country has a lower opportunity cost to produce a certain commodity, it can sell the product at a lower price while realizing bigger margins as compared to other rival countries.
Chapter 19
Short Answer Questions
Question1
The main traders with US are Japan, Mexico, China, Canada and Germany
Question 2
US trade has changed over the recent years from one where US was the strongest trading nations with heaps of comparative advantages over other countries to one where there is legitimate competition from other nations. US has experienced rivalry from the Asian market especially China.
Question3
A creditor nation is one which has invested more resources in other countries than other countries have in it whereas a debtor nation has more countries investing in it than it has invested in. the US is a debtor nation after it reported a negative balance of payment in 1988.
Question 4
As a foreign importer, I would prefer a tariff to a quota because the quota limits the degree of competition whereas the tariff only raises the price.
Question 5
The congress can pass trade regulations that limit the free trade in the country. Enactments by congress are usually closely associated with antitrust laws. Therefore, it is easy for congress to pass laws regulating trade.
Question 6
Congress wants to restrict trade in order to prohibit anti-competitive conduct and monopolies. By passing regulations on trade, the Congress is able to protect the rights and economic well-being of local traders.
Question 7
Free trade encourages lower prices on consumer goods, increased exports to other countries, a greater variety of goods and more benefits from economies of scale.
Question 8
Free Trade agreements help boost international trade by making exportation and importation of goods cheaper as the countries involved seek to introduce cheaper tariffs.
Matching the Terms
1. Economies of scale: c
2. Embargo: b
3. Free trade association: g
4. GATT: i
5. Infant industry argument: l
6. Learning by doing: m
7. Most-favored nation: d
8: quota: a
9. Regulatory trade restrictions: f
10. Strategic bargaining: n
11. Strategic trade policy: e
12. Tariff: a
13. Trade adjustment assistance program: k
14. World Trade Organization: h
Problems and Application
1 a) Regulatory trade restriction
b) Quota
c) Regulatory trade restriction
d) Tariff
Chapter 10: Macroeconomics
Short answer questions
Question 1
The Keynesian model states that the market can go below or above its potential in terms of production whereas the Classical model calls for self-regulation by the market. In terms of potential output, Keynesian model allows for there to be greater output.
Question 2
Growth is measured by tracking gross domestic product and the standard of living in the country.
Question 3
Growth depends on the specialization of the workforce in the market. When a market has specialized products, they have a greater market share hence greater growth.
Question 4
The areas to focus on to increase economic growth are: increasing the quality of skilled labor, increasing output from industries, better technology, better resources and increased consumer spending.
Question 5
A well-functioning financial system ensures proper flow of funds from surplus to shortages through direct market financing or indirect bank-based financing.
Question 6
Classicalist thought that there was a situation where there would be full employment, meaning maximum output from an economy hence the economy would stop growing.
Question 7
The new growth theory suggests that human unlimited wants and desires will lead to an ever-increasing exponential economic growth.
Question 8
Innovation in technology creates positive externalities of knowledge that can be used to further advance the innovation. Learning by doing encourages innovation since technology becomes easier the more it is used.
Matching the Terms
1. Classical growth model: e
2. Division of labor: n
3. Human capital: h
4. Law of diminishing marginal productivity: j
5. Learn by doing: m
6. New growth theories: i
7. Patents: b
8. Per capita growth: a
9. Positive externalities: g
10. Productivity: o
11. Rule of 72: f
12. Say’s Law: l
13. Social capital: k
14. Specialization: h
15. Technology: a
Problems and Applications
Question 1
The Keynesian model states that the market can go below or above its potential in terms of production whereas the Classical model calls for self-regulation by the market. In terms of potential output, Keynesian model allows for there to be greater output.
Question 2
Procedure in which you divide 72 by growth rate of income to get the number of years it will take to double.
a)
If the growth rate is 2 percent it will take 36 years for income to double. If the rate is 4 percent, it will take 18 years and a growth rate of 6 percent will only take 12 years.
b)
If a country’s income doubles in 16 years, the growth rate is 4.5%
