International Trade and Finance – Economics 4451

In Smith’s absolute advantage theory of trade, both countries will gain from trade if each exports that product for which it has lower labor costs
David Hume’s price-specie-flow doctrine demonstrates that trade surpluses and the resulting revenue inflows will cause domestic prices to rise, making the trade surpluses temporary rather than permanent
Ricardo’s principle of comparative advantage shows that even a country with no absolute cost advantage can gain from trade by exporting that product in which its absolute cost disadvantage is relatively least
If each worker in Argentina can produce either 3 bushels of wheat or 1 auto, and each worker in Brazil can produce either 4 bushels of wheat or 2 autos, Brazil has absolute advantage in wheat and autos, but Argentina has a comparative advantage in wheat
In Question 4, a barter exchange rate that would bring about mutually beneficial trade between Argentina and Brazil is 5 bushels of wheat for 2 autos
A central policy lesson of the principle of comparative advantage is that a nation gains from international trade by gaining access to imports at lower opportunity costs than if it produced those goods domestically
With increasing rather than constant opportunity costs, trade between nations results in incomplete specialization, with the opportunity cost of producing exports rising within each nation
Mill’s theory of reciprocal demand showed how both demand and supply must be considered to determine the equilibrium terms of trade between two nations
If trade occurs between a larger and much smaller nation, the smaller nation will get most gains from trade
Empirical studies of actual international trade patterns provide partial support for Ricardo, but find his labor theory of value to have severe limitations
In the Heckscher-Ohlin factor endowment theory of comparative advantage, a nation’s comparative advantage depends on how well endowed it is with specific factors of production such as labor and capital, relative to its trading partners
In the Heckscher-Ohlin theory, two nations have the potential for mutual gains from trade with each other if their transformation schedules reflect different relative abilities to produce labor and capital-intensive goods, based on their relative resource endowments
If a labor-abundant nation trades freely with a capital-abundant nation, there will be a tendency for wages to rise in the first nation relative to wages in the second nation
The empirical finding known as the Leontief paradox was that U.S. exports were more labor-intensive than U.S. imports, even though the United States is regarded as a capital-abundant nation
Potential explanations for the Leontief paradox include all of the following except the United States actually has a larger relative labor force than its major trading partners
According to the product life cycle model, a new product initially produced in the United States may later be exported from developing nations to the United States, once it becomes a mature, standardized product
Linder’s overlapping demand theory of trade maintains that manufactured goods are first produced for the home market, then exported to nations with similar levels of per capita GNP
The growing importance of intraindustry trade often involves differentiated products in industries where economies of scale are present
Differences in environmental regulations between nations are most likely to affect production location and trade patterns when the regulations deal with production pollution such as air pollutions from steel manufacturing
The existence of transportation costs in international trade creates a gap between the prices of goods in the exporting nation and in the importing nation, and reduces the volume of trade
A nominal $1 tariff per pair of imported shoes is a specific tariff
The benefit that a tariff providers for domestic firms to compensate for their inefficiency relative to foreign producers is the protective effect
The increased profits that a tariff provides for domestic firms is the redistributive effect
Foreign trade zones enable domestic companies to defer duties on imported inputs until they are processed and shipped to market
A tariff quota establishes a lower tariff on an initial quantity of imports, and a higher tariff on imports beyond that level
If small nation imposes a tariff (small-nation model), the losses to domestic consumers exceed the gains to domestic firms and to the domestic government
If a large nation imposes a tariff (large-nation model), the net loss to consumers may be less than the benefits from improved terms of trade
The effective tariff rate or effective rate of protection is higher than the nominal tariff rate if nominal tariffs on inputs are lower than the tariff on imports of an industry’s final product
The argument that saving jobs at home requires tariffs to offset the advantages of lower wages in other countries does not consider the impact of labor productivity differences of the potential for comparative disadvantage
“Fair” trade policies to create a “level playing field” are designed to establish import barriers that are comparable to those imposed by a nation’s trading partners
A global import quota creates uncertainty about market access for individual exporting nations
An import quota that reduces imports to the same level as would an equivalent ad valorem tariff will most likely generate less government revenue than would the tariff
A nation that uses an import quota rather than an import tariff to protect its domestic industry will find that over time, as demand for this industry’s product increases, price will rise more rapidly than with a tariff
In comparison with an import quota, a voluntary export restraint… creates potential export opportunities for nonrestrained suppliers
A local content requirement reduces imports by specifying that a minimum percentage of a product’s total value must be produced domestically
A domestic subsidy to enable an industry to compete against imports avoids the deadweight consumer surplus loss of a tariff because it does not distort
A nation that uses an export subsidy will find that its export volume will increase
A nation that reduces export prices to offset the effects of a domestic recession is engaging in sporadic dumping
A nation that enables an emerging industry to sell exports at prices below production costs in order to weaken foreign competition is engaging in predatory dumping
Nontarrif barriers include all of the following except a corporate income tax
The Smoot-Hawley Act of 1930 represented the highest tarrif levels in U.S. history
The rationale for a scientific tariff is to raise import prices to the extent that foreign production costs are lower than domestic costs
The Reciprocal Trade Agreements Act of 1934 made reductions in U.S. tariffs contingent on the willingness of trading partners to lower their tariffs
Compared with the Tokyo Round, the Uruguay Round of GATT negotiations focused primarily on trade in professional services an agricultural products
The escape clause is part of trade remedy law designed to provider temporary relief for workers and firms disrupted by reductions in tariffs or other trade barriers
A countervailing duty protects firms from injury caused by foreign export subsidies
A Japanese government export subsidy would create an overall welfare gain for the United States, as U.S. consumers would gain more than U.S. firms would lose
U.S. industrial policy includes all the following except: nationalization of key industries such as steel
Strategic trade policy often involves subsidies and other support for high-technology firms in concentrated industries
Economic sanctions against foreign nations are most successful when influential groups within the target nation support the objectives of sanction-imposing government
Deteriorating commodity terms of trade refers to the contention that, for developing countries, prices of their primary product exports have fallen over time relative to prices of their manufactured imports
Primary product prices tend to fluctuate significantly because supply and demand are inelastic with respect to price
The manager of an international commodity buffer stock would be expected to purchase commodities when price is below target level
Buffer stocks often have been excessive and costly to maintain because target prices have exceeded equilibrium levels
Import substitution is a development strategy in which countries use tariffs to promote domestic production of manufactured goods previously imported
Export promotion is a development strategy in which countries try to industrialize by supporting manufactured products in which they have a potential comparative advantage
The United Nations Conference on Trade and Development was established in the mid 1960’s as a forum to lobby for a new international economic order
The generalized system of preferences involves a selective reduction of industrial nation tariffs on imports of manufactured goods from developing nations
The term “newly industrializing countries” refers to a group of East Asian nations that have used export promotion strategies to support industrialization
OPEC’s ability to maintain a successful oil cartel depended on the ability of OPEC to enforce production cutbacks among its members
A credit on the U.S. balance of payments will result if Sony of Japan purchases computer software from Microsoft of the United States
A debit on the U.S. balance of payments will result if Lloyds of London sells an insurance policy to Chrysler Corporation
The U.S. balance of payments impact of a $3,000 payment by an immigrant farm worker in the United States to family members in Mexico would be a debit on the unilateral transfers account
The U.S. balance of payments impact of a $5 million profit repatriation payment by a subsidiary of IBM in France to its parent corporation in the United States would be a credit under income receipts and payments, on the current account
The capital and financial account of the balance of payments includes all the following except dividends and interest received from foreign investments
A current account balance-of-payments surplus implies an excess of exports over imports of goods, services, and unilateral transfers
An outlaw of official reserve assets would be recorded as a capital and financial account credit
The difference between a nation’s balance of payments and its balance of international indebtedness reflects the difference between flow and stock concepts
A nation’s net foreign investment position will worsen or decline if it’s balance of payments shows a current account deficit
A nation that wants to reduce its net indebtedness to other nations would be advised to reduce its merchandise trade deficits
A preferential trading arrangement with free trade among members and different external tariffs set by each member is a free trade area
A preferential trading arrangement with free trade among members, a common external tariff, and free movement of labor and capital among members is a common market
A preferential trading arrangement with free trade among members and a common external tariff is a customs union
Suppose that Country A has domestic firms that could supply its entire market for Product X at a price of $10, while Country B firms could supply Product X at $8 and Country C firms at $6. If Country A initially has a 50 percent tariff on imports of Product X and then forms a free trade area with Country B. trade diversion and potential welfare losses for Country A will occur
In Question 4, suppose instead that Country A initially has a 100 per cent tariff on imports of Product X; if all other assumptions remain the same trade creation and welfare gains for A will occur
Potential dynamic effects of economic integration include all the following except trade creation because of importing from a more efficient partner country
The common agricultural policy (CAP) of the EU protects EU farmers with variable levies and uses subsidies to finance the export of surplus produce
One historical example of movement toward a complete economic union is the EC Masstricht Summit of 1991
The North American Free Trade Agreement calls for eventual free trade among Canada, Mexico, and the United States
Trade between Eastern European nations and Western nations frequently includes all of the following features except exports and imports financed by payment in hard currencies such as U.S. dollars of Swiss francs

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