Applied International Economics
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Course Introduction
Applied International Economics explores the practical aspects of international trade and finance, examining how economic theories are implemented in real-world policy and business settings. The course covers topics such as trade policy, globalization, exchange rates, international capital flows, and the impact of international organizations. Through case studies and data analysis, students learn to evaluate contemporary global economic issues, assess the effects of government regulations and agreements, and understand how economic forces shape international business decisions and policy-making.
Recommended Textbook
International Economics 12th Edition by Dominick Salvatore
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Chapter 1: Introduction
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Q1) Which of the following products are not produced at all in the United States?
A) Coffee, tea, cocoa
B) steel, copper, aluminum
C) petroleum, coal, natural gas
D) typewriters, computers, airplanes
Answer: A
Q2) What does the term "globalized world" mean?
Answer: It means we can connect instantly with any corner of the world,that we consume good from around the world,that tastes are converging,that worker can increasingly migrate for work,and that people can invest in companies anywhere in the world.
Q3) Identify some of the topics that international economics studies
Answer: The basis and gains from trade,the reasons and effects of protectionism,the flow of international payments,exchange rate systems and determination,macroeconomic policy in an open economy.
Q4) Identify some of the criticisms of the anti-globalization movement.
Answer: Increased world income inequality,child labor,environmental pollution.
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Chapter 2: The Law of Comparative Advantage
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Q1) The Mercantilists did not advocate:
A) free trade
B) stimulating the nation's exports
C) restricting the nations' imports
D) the accumulation of gold by the nation
Answer: A
Q2) If in a two-nation (A and B),two-commodity (X and Y)world,it is established that nation A has a comparative advantage in commodity X,then nation B must have:
A) an absolute advantage in commodity Y
B) an absolute disadvantage in commodity Y
C) a comparative disadvantage in commodity Y
D) a comparative advantage in commodity Y
Answer: D
Q3) Explain why Ricardo's model of trade was superior to Adam Smith's.
Answer: Smith's model was based on absolute advantage,which required each nation to have an absolute productivity advantage in order for mutually beneficial trade to occur.Ricardo's model considered relative productivity,showing that even if a nation had an absolute advantage in everything it could still benefit from trade.
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Chapter 3: The Standard Theory of International Trade
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Q1) In a concise and organized essay,explain how and why the manufacturing production of industrialized countries has decreased,even though these countries have a comparative advantage in some manufactured goods.Be sure to include all relevant factors.
Answer: Answers will vary,but should include the following factors: 1)productivity and capital stock growth (investment),which reduces the demand for labor,2)comparative advantage of other countries in labor-intensive manufactures.The conclusion should explain that capital stock and productivity growth have been more significant than international trade.
Q2) Which of the following is not true for a nation that is in equilibrium in isolation?
A) It consumes inside its production frontier
B) it reaches the highest indifference curve possible with its production frontier
C) the indifference curve is tangent to the nation's production frontier
D) MRT of X for Y equals MRS of X for Y, and they are equal to Px/Py
Answer: A
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Chapter 4: Demand and Supply, offer Curves, and the
Terms of Trade
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Q1) Draw a figure showing: (1)in Panel A a nation's demand and supply curve for A traded commodity and the nation's excess supply of the commodity, (2)in Panel C the trade partner's demand and supply curve for the same traded commodity and its excess demand for the commodity,and (3)in Panel B the supply and demand for the quantity traded of the commodity,its equilibrium price,and why a price above or below the equilibrium price will not persist.At any other price,QD QS,and P will change to P .
Q2) If the nation's taste for its import commodity increases:
A) the nation's terms of trade remain unchanged.
B) the nation's terms of trade deteriorate.
C) the partner's terms of trade deteriorate.
D) the partner's terms of trade improve.
Q3) Which of the following statements is not correct?
A) The demand for imports is given by the excess demand for the commodity
B) the supply of exports is given by the excess supply of the commodity
C) the supply curve of exports is flatter than the total domestic supply curve of the commodity
D) the supply curve for exports is more inelastic than the total domestic supply curve of the commodity.
Q4) Carefully define and explain the meaning of "equilibrium terms of trade"
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Chapter 5: Factor Endowments and the Heckscherohlin
Theory
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Q1) If the assumptions of the H-O hold,a country that is relatively capital abundant will have a production possibilities frontier that is
A) relatively flat, with a constant slope.
B) relatively steep, with a constant slope.
C) relatively flat, with an increasing slope (in absolute value).
D) relatively steep, with an increasing slope (in absolute value).
Q2) The economist who rigorously proved the factor-price equalization theorem was
A) David Ricardo
B) Adam Smith
C) Paul Samuelson
D) Wassily Leontief
Q3) The H-O model is a general equilibrium model because it deals with:
A) production in both nations
B) consumption in both nations
C) trade between the two nations
D) all of the above
Q4) List at least four of the assumptions of the Heckscher-Ohlin theory
Q5) List three possible explanations for the Leontief paradox
Q6) Define and explain factor intensity reversal
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Chapter 6: Economies of Scale, imperfect Competition, and International Trade
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Q1) Discuss the stages of the product cycle model.
Q2) The share of transport costs will fall less heavily on the nation:
A) with the more elastic demand and supply of the traded commodity
B) with the less elastic demand and supply of the traded commodity
C) exporting agricultural products
D) with the largest domestic market
Q3) With intra-industry trade,the gains from trade
A) decrease.
B) come from reductions in cost due to comparative advantage and exchange.
C) come from increases in the variety of goods available.
D) come from the reduction of tariffs and trade.
Q4) According to the Environmental Performance Index,the highest ranking country is A) New Zealand.
B) Switzerland.
C) the United States.
D) Germany.
Q5) a)Explain why the Heckscher-Ohlin trade model needs to be extended.
b)Indicate in what important ways the Heckscher-Ohlin trade model can be extended.
c)Explain what is meant by differentiated products and intra-industry trade.
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Chapter 7: Economic Growth and International Trade
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Q1) Technical progress is usually classified into all of the following except
A) neutral
B) negative
C) labor saving
D) capital saving
Q2) Dynamic factors in trade theory refer to changes in all of the above except:
A) factor endowments
B) technology
C) tastes
D) tariff structure
Q3) What is meant by comparative static analysis?
Q4) Immiserizing growth is most likely in which of the following cases?
A) When the country is small.
B) When the demand for the nation's export good is inelastic.
C) In developed countries.
D) When growth causes the terms of trade to improve.
Q5) Use graphs to demonstrate the effect of an increase in a small country's capital stock at constant commodity prices.
Q6) What does it mean for a nation's production to be pro-trade?
Q7) What does the Rybczynski theorem postulate?
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Chapter 8: Trade Restrictions: Tariffs
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Q1) If a small nation increases the tariff on its import commodity:
A) the rent of domestic producers of the commodity increases
B) the protection cost of the tariff decreases
C) the deadweight loss decreases
D) all of the above
Q2) A small nation is one which must have all of the following characteristics except:
A) It does not affect world price by its trading.
B) It faces an infinitely elastic world supply curve for its import commodity.
C) It faces an infinitely elastic world demand curve for its export commodity.
D) It has a small geographic area.
Q3) If the tariff rate in inputs is the same as the tariff rate of finished goods the effective rate of protection will be
A) the same as the nominal rate of protection
B) zero
C) larger than the nominal rate of protection
D) maximized
Q4) Under what conditions can a tariff improve a nation's welfare?
Q5) Is there such thing as an optimum tariff for a small nation?
Q6) Explain the redistribution effects of a tariff.
Page 10
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Chapter 9: Nontariff Trade Barriers and the New Protectionism
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Q1) The WTO was established during the
A) Kennedy Round
B) Uruguay Round
C) Tokyo Round
D) Doha Round
Q2) Trade protection in the United States is usually provided to:
A) low-wage workers
B) well-organized industries with large employment
C) industries producing consumer products
D) all of the above
Q3) Summarize the Smoot-Hawley Tariff Act and its effects.
Q4) On which of the following principles does GATT rest?
A) nondiscrimination
B) elimination of nontariff barriers
C) consultation among nations in solving trade disputes
D) all of the above
Q5) What is a quota and how does it compare to the economic effects of a tariff?
Q7) What is dumping and what are its various forms? Page 11
Q6) Carefully explain the current status of the Doha Round of trade negotiations and the challenges presented.
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Chapter 10: Economic Integration: Customs Unions and Free Trade Areas
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Q1) A customs union that allows for the free movement of labor and capital among its member nations is called a:
A) preferential trade arrangement
B) free-trade area
C) common market
D) all of the above
Q2) The benefit that Mexico is likely to receive from NAFTA:
A) greater export-led growth
B) encouraging the return of flight capital
C) more rapid structural change
D) all of the above
Q3) Which of the following is not a trading bloc or agreement including some South American countries?
A) MERCOSUR
B) ASEAN
C) FTAA
D) CACM
Q4) What is the theory of the second best?
Q5) What is trade diversion?
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Chapter 11: International Trade and Economic Development
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Q1) In most developing countries,import substitution policies have resulted in
A) optimal use of excess supplies of labor.
B) industries that are over-capitalized.
C) rapid economic growth.
D) more rapid growth than export-oriented policies.
Q2) The following is not an example of an international commodity agreement.
A) marketing boards
B) buffer stocks
C) export controls
D) purchase contracts
Q3) The policy of import substitution was most vigorously followed by:
A) large developing nations during the 1970's
B) large developing nations during the 1960's
C) small developing nations during the 1970's
D) small developing nations during the 1960's
Q4) Why did developing nations that switched from a policy of import substitution to a policy of export promotion generally grow faster during the past decade?
Q5) List four of the Millennium Development Goals.
Q6) What is the difference between import substitution and export orientation?
Q7) List the current problems facing developing countries?
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Chapter 12: International Resource Movements and Multinational Corporations
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Q1) Two-way international capital flows can be explained by the desire to:
A) earn higher yields abroad
B) avoid tariffs
C) diversify risks
D) all of the above
Q2) Discuss the motives for international labor migration.
Q3) Labor in developing countries generally
A) opposes an inflow of foreign direct investments from abroad
B) favors an inflow of foreign direct investments from abroad
C) is indifferent to foreign direct investments from abroad
D) we cannot say without additional information
Q4) The reason the residents of a nation do not borrow from other nations and themselves undertake real investments in their own nation is that:
A) multinationals want to retain control over their own technology
B) banks do not want to lend to foreigners
C) vertical integration is not possible for foreigners
D) multinationals want to avoid horizontal integration
Q5) Explain how international capital transfers impact employment in the receiving and investing nation.
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Chapter 13: Balance of Payments
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Q1) The financial account of the U.S.includes:
A) the change in U.S. assets abroad and foreign assets in the U.S.
B) the change in U.S. assets abroad and foreign assets in the U.S., other than official reserve assets
C) all financial assets
D) all but current account transactions
Q2) A French investor sells $200,000 worth of stock in a U.S.company and puts the proceeds into a bank in the United States.In the U.S.balance of payments,the sale of stock is recorded as a ______ to the ________ account; the bank deposit is recorded as a a ______ to the ________ account.
A) credit, financial; debit, financial.
B) debit, financial; credit, financial.
C) credit, financial; debit, current.
D) debit, financial; debit, current.
Q3) When the U.S.ships food aid to a developing nation,the U.S.debits:
A) secondary income
B) services
C) financial account
D) official reserves
Q4) What is meant by autonomous transactions?
Page 16
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Chapter 14: Foreign Exchange Markets and Exchange Rates
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Q1) Which is not a function of the foreign exchange market?
A) to transfer funds from one nation to another
B) to finance trade
C) to diversify risks
D) to provide the facilities for hedging
Q2) What is the principle function of foreign exchange markets?
Q3) Most activity in the foreign exchange market consists of
A) spot transactions and foreign exchange swaps
B) currency swaps.
C) options.
D) futures.
Q4) If the three-month FR=$1/ 1,and a speculator anticipates that SR=$1.02/ 1 in three months,he can earn a profit by:
A) selling euros forward
B) purchasing euros forward
C) selling dollars forward
D) purchasing dollars forward
Q5) How does covered interest arbitrage create efficiency in foreign exchange markets?
Q6) Discuss the reasons for the existence and growth of Eurocurrency markets
Page 17
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Chapter 15: Exchange Rate Determination
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Q1) Which is correct with respect to the absolute purchasing power parity theory?
A) It postulates that the exchange rate between two currencies is equal to the ratio of the price levels in the two nations
B) it does not take into consideration transportation costs or other obstructions to the flow of international trade
C) can be very misleading
D) all of the above
Q2) If a nation's money GDP is 100 and the velocity of circulation of money is 4,the quantity demanded of money in the nation is:
A) 20
B) 25
C) 50
D) 100
Q3) Explain the fundamental difference between modern exchange rate theories and traditional exchange rate theories.
Q4) Explain absolute and relative purchasing power parity (PPP).
Q5) What is the empirical evidence for the monetary and portfolio balance model of exchange rate determination?
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Chapter 16: The Price Adjustment Mechanism With Flexible and Fixed Exchange Rates
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Q1) A nation's demand curve for foreign exchange is derived from the:
A) foreign demand curve for the nations' exports
B) nation's supply curve of exports
C) domestic demand curve for imports and the foreign supply curve for the nation's imports
D) foreign demand curve and the domestic supply curve for the nation's exports
Q2) Under the gold standard:
A) each nations defines the price of gold in terms of its currency and then stands ready to buy and sell any amount of gold at that price
B) there is a fixed relationship between any two currencies called the mint parity
C) the exchange rate is determined by demand and supply between the gold points and is prevented from moving outside the gold points by gold shipments
D) all of the above
Q3) What are the necessary elasticity conditions for a stable foreign exchange market?
Q4) Explain why currency pass-through is not likely to be complete.
Q5) Explain the meaning of the J-curve effect and exactly why a J-curve is expected to exist.
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Chapter 17: The Income Adjustment Mechanism and Synthesis of
Automatic Adjustments
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Q1) One disadvantage facing a freely flexible exchange rate system is that is can cause A) overshooting
B) competitive devaluations
C) hedging
D) loss of monetary policy control
Q2) According to the absorption approach,under what conditions will a competitive devaluation fail to reduce a balance of payments deficit?
Q3) When considering the impact of foreign repercussions relative to a scenario without such repercussions,for a small nation the foreign trade multiplier will be A)larger
B) smaller
C) exactly the same
D) any of the above
Q4) In an open economy,the marginal propensity to consumer is 0.75,and the marginal propensity to import is 0.15.Calculate the change in equilibrium GDP if exports fall by $50 billion.
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Chapter 18: Open Economy Macroeconomics: Adjustment Policies
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Q1) In a world of perfectly elastic international capital flows and fixed exchange rates:
A) fiscal policy is completely ineffective
B) monetary policy is completely ineffective
C) both fiscal and monetary policies are completely ineffective
D) both fiscal and monetary policies are effective
Q2) What is meant by a three market balance equilibrium?
Q3) To correct a balance of payments deficit and inflation a nation requires:
A) contractionary fiscal policy and easy monetary policy
B) contractionary fiscal policy and tight monetary policy
C) expansionary fiscal policy and tight monetary policy
D) any of the above depending on the level of inflation and the size of the initial deficit
Q4) Can a nation reach both internal and external balance under fixed exchange rates using only monetary policy? Explain.
Q5) The most important economic objective of industrial nations is:
A) external balance
B) internal balance
C) a reasonable rate of growth
D) an equitable distribution of income
21
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Chapter
Aggregate Demand and Aggregate Supply
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Q1) What conditions lead to the stagflation of the 1970s?
Q2) How does an increase in government expenditure impact aggregate demand?
Q3) Output in the short run exceeds the natural level of output if expected prices
A) exceed actual prices
B) are lower than actual prices
C) are equal to actual prices
D) any of the above
Q4) An increase in the money supply with constant prices leads to a
A) leftward shift in the LM curve
B) movement along a given aggregate demand curve
C) rightward shift in the aggregate demand curve
D) rightward shift in the IS curve
Q5) A nation's output in the short-run can
A) exceed its natural level
B) fall short of its natural level
C) equal to its natural level
D) any of the above
Page 22
Q6) Suppose that the economy is in long-run equilibrium,and people in other countries suddenly decide to purchase fewer US goods.Explain the short-run effects on the US economy under both fixed and flexible exchange rates.
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Coordination
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Q1) Flexible exchange rates:
A) enhance the effectiveness of fiscal policy
B) reduce the effectiveness of fiscal policy
C) enhance the effectiveness of monetary policy
D) reduce the effectiveness of monetary policy
Q2) The policy of intervention in the foreign exchange market to smooth out short-run fluctuations in exchange rates is called:
A) crawling peg
B) adjustable peg
C) leaning against the wind
D) managed float
Q3) Carefully explain the costs and benefits of a flexible exchange rate regime.
Q4) International macroeconomic policy coordination has become more useful and essential in recent decades because:
A) the interdependence among countries has increased
B) the volume of trade has grown more rapidly than GNP
C) of the large increase in international capital flows
D) all of the above
Q5) What is a currency board?
Page 24
Q6) Carefully explain the costs and benefits of a flexible exchange rate regime.
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Chapter
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Q1) Which of the following statements about the gold standard is not true?
A) London was the undisputed center of international trade and finance
B) International trade and international capital flows were mostly unrestricted
C) International liquid capital flows were mostly stabilizing
D) Countries were able to return to pre-war parities after World War I.
Q2) The present international monetary system is a:
A) gold standard
B) flexible exchange rate system
C) managed exchange rate system
D) a target zone system
Q3) The International Monetary Fund was initially established to manage
A) the Gold Standard
B) the Gold-Exchange Standard
C) the euro-dollar exchange rate
D)the Dollarization initiative
Q4) What are the most serious economic problems facing the world today?
Q5) What is IMF conditionality?
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Q6) Explain why the establishment of a freely-flexible exchange rate system is unlikely today.