Assignment: INTERNATIONAL ECONOMICS
1. Define the following terms:
a. Opportunity Cost
b. Comparative Advantage
c. Autarky
d. Tariff
e. Producer Surplus
f. Consumer Surplus
g. Free trade area
h. Exchange rate risk
i. Currency depreciation
j. The forward market for currencies
2. When a country engages in international trade, what is expected to happen to the price of imported goods compared to autarky? What is expected to happen to the price of exported goods compared to autarky? Use the supply and demand model to explain your answers.
3. Use the table below for Question 4:
|
Output per Hour Worked
|
|
|
Brazil
|
China
|
|
Lumber
|
30
|
10
|
|
T-Shirts
|
60
|
40
|
a. Which country has absolute advantage in the production of lumber? Which country has absolute advantage in the production of t-shirts? How do you know?
b. Under autarky, what are the relative prices of lumber and t-shirts in each country?
c. Which country has comparative advantage in lumber? Which country has comparative advantage in t-shirts? How do you know?
d. If Brazil and China trade, which good would you expect each country to produce?
e. What are the upper and lower bounds for the terms of trade between Brazil and China for lumber?
4. Give two reasons why a country might impose a tariff on imported goods. Discuss the tradeoffs that nations make when imposing tariffs - who is benefits and who loses? What are some reasons for the widespread use of tariffs despite their overall implications for national welfare?
5. Use the table below for Question 7:
Supply and Demand for Tangerines, France
|
Price ($/bushel)
|
Quantity Supplied
|
Quantity Demanded
|
|
0
|
0
|
45
|
|
1
|
4
|
40
|
|
2
|
8
|
35
|
|
3
|
12
|
30
|
|
4
|
16
|
25
|
|
5
|
20
|
20
|
|
6
|
24
|
15
|
|
7
|
28
|
10
|
|
8
|
32
|
5
|
|
9
|
36
|
0
|
a. Draw the supply and demand schedules for tangerines in France.
b. Give the autarky price and quantity of tangerines in France.
c. Assume that Germany can supply tangerines to France for $3/bushel, and Italy can supply tangerines to France for $2/bushel. Under free trade, from whom will France purchase tangerines? What will be the quantity of tangerines produced in France, the total quantity purchased, and the volume of imports?
d. Calculate the increase in consumer surplus under free trade, compared to autarky.
e. Now suppose that levies a $2 per bushel tariff on tangerines. Now who does France buy tangerines from? What is the quantity produced, consumed, and imported?
f. How much revenue will be collected from the tariff?
g. Calculate the deadweight loss that results from the tariff.
6. True or false? The US could reduce its current account deficit by importing more products from Europe and South America.
7. Complete the following table:
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International Transaction
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Current (C) r Financial (F)
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Debit (-) r Credit (+)
|
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a.
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A US investment firm buys a controlling interest in an German business
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|
|
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b.
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A grandmother in Florida sends a cash gift to her grandchildren in Turkey
|
|
|
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c.
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A Japanese firm builds a factory in the US
|
|
|
|
d.
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US government sends foreign aid to Bangladesh
|
|
|
|
e.
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A Japanese firm receives income from a factory that it previously built in the US state of Alabama
|
|
|
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f.
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A US investor buys a 3-year European treasury note
|
|
|
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g.
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US Imports food products from Mexico
|
|
|
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h.
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China's central bank buys US treasury bonds
|
|
|
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i.
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British tourists spend dollars in New York while on vacation.
|
|
|
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j.
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A European investor is paid a dividend on Google stock that she purchased a few years ago
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8. Suppose the interest rate in the US is 4%, while the interest rate in France is 3%.
a. If the dollar/euro exchange rate is $1.19/euro, and the forward rate is also $1.19/euro, then where does the wise investor choose to invest? Why?
b. If the spot and forward exchange rates are equal, as in Part a, what will happen to the forward rate as investors respond to the difference in interest rates between the US and France? Use a supply and demand model to answer the question.
c. What if the forward rate is $1.21/euro? Where should a wise investor invest then?
9. Suppose that the current exchange rate between dollars and British pounds is $1.49 / pound.
a. What is the exchange rate expressed in pounds / $?
b. Draw a market diagram illustrating how the exchange rate will change if US consumers decide to boycott British products.
c. Under the boycott in Part b, do you expect the dollar to appreciate or depreciate against the pound?
10. Suppose that initially, the dollar/yen exchange rate is $0.05391 in New York, and $0.05562 in Mexico City.
a. Explain how a currency arbitrager could exploit this difference in exchange rates to make a profit. Give a numerical example based on a $1 million transaction.
b. Use supply and demand diagrams for the currency markets in New York and Mexico City to demonstrate and discuss how the exchange rates would evolve in response to currency arbitrage. What is a likely equilibrium exchange rate in each market?