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R. E. Bove
ECO 338 INTERNATIONAL ECONOMICS
FINAL EXAM
DECEMBER 17, 1999
NAME: __________________
Part I. Identify or Explain (30 Points maximum) Note! Two points after an abbreviation means that more
that interpreting the initials is expected.
Offer curve (3)
Terms of Trade(2)
Autarky (1)
Fragmegration (2)
Surrender requirement (1)
Eurocurrency market (2)
Escape clause (2)
The four major types of International Reserve Assets (2)
UNCTAD (2)
NAFTA (1)
Countertrade (2)
Mercantilism (2)
Washington Consensus (2)
Bank for International Settlements (2)
IFC (2)
Most Favored Nation treatment (2)
GATT (2)
National Treatment (2)
Basket valuation of SDR (2)
National treatment (2)
Transfer pricing (2)
Maquiladora (1)
Marginal propensity to import (2)
Foreign trade multiplier (2)
Marshall-Lerner condition for elasticity of demand for imports and exports. (2)
Maastricht Treaty (2)
Distinguish the following:
Nominal tariff rate vs. effective tariff rate (3)
Specific tariff vs. ad valorem tariff (2)
Options vs. forward transactions (2)
Vertical and horizontal integration (2)
Financial vs. Capital account in year 2000 balance of payments (2)
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Part II. Do the one of the two following problems.(15 Points)
1. (I-59) Suppose that Mexico is a small country and that it imposes a $3 tariff on pocket calculators. The
world price is $3.
a. What is the quantity imported before and after the tariff is imposed?
b. Label revenue, protective, consumption and transfer effects of the tariff and explain
which of these would be dead-weight losses and why.
c. According to the diagram, how high would the tariff have to be to be prohibitive?
d. Show on the diagram, what quota would have about the same effects as the $3 tariff.
e. Explain, using a graph, why a tariff would be less damaging to local consumers if
Mexico were a large country.
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2. Mexico is a labor abundant country compared to the United States, which is comparatively capital
abundant. Clothing production is relatively labor intensive compared to automobiles.
a. In the diagrams below, label the production-possibility (transformation) curves as to which is
the US and which is Mexico.
b. Using the indifference curves supplied and any that you wish to add (neatly),
(i) show the pre-trade production for each country using an isorevenue (price) line in
each country. And explain how the relative price of automobiles differs between the two
countries.
(ii) show a possible new isorevenue (terms of trade) line if free trade occurs between the two countries
(Don’t worry too much about quantities exactly balancing). Explain () how the relative price of autos
moves in each country and () how the diagram shows that one or both countries benefit from trade. (It is
conventional to label production points with an x and consumption points with a y.)
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Part III.(40 points +)
Select at least 40 points from essay questions (10 points each) or short answer questions (5 points each – on
next page).
Essay Questions:
E1. Do the question in Part II that you did not do.
E2. What has been the role of the US dollar in international trade since 1945. What advantages
and disadvantages does this have for the United States?
E3. The recent “Battle of Seattle” demonstrated considerable opposition to the Millennium round
of trade talks on the part of Private Voluntary Organizations in the developed countries. What are
their objections to the anticipated future course of the WTO and to what degree do representatives
of third world countries hold positions that conflict or agree with the PVOs?
E4. What were the major causes of the East Asian financial crisis of 1997-1998 and what are the
prospects for these economies now. You may wish to relate this to some of the other articles in
your readings book, but concentrate on a well reasoned short essay.
E5. Your text and the readings book have reported on the difficulties faced by China, India,
Russia and Africa in meeting the challenges of globalization. Try to compare and explain the
challenges and prospects for at least two of these countries or regions.
E6. What did the Tariff of Abominations and the Smoot-Hawley tariff have in common. What
very different traditional arguments for tariffs were used to justify them? How
and why were each of these reflected very differently in subsequent American history?
E7. (15 points) The workbook gives the following two examples:
Example A
Example B
Output per
Argentina
Brazil
Argentina
Brazil
Worker
Wheat
3
4
3
4
Autos
1
2
1
2
Total Labor
Supply
12
12
12
12
One of these illustrates Comparative advantage and one absolute advantage. For each example
draw a transformation curve (actually a straight line) for each country, identify absolute and
comparative advantage and show an exchange rate that could lead to mutually beneficial trade.
E8. Assume that the spot exchange rate is DM1.6=$1 and that yearly interest rates are 4% in the
US (2% for 180 days) and 10% (5% for 180 days) in Germany . A US investor wishes to buy a
180 day bill in Germany. If the investor uses covered interest arbitrage, what 180 day forward
rates (above or below what numbers of marks to the dollar) would be required to make the
transaction profitable? Show your reasoning.
E9. Is a strong dollar always good and a weak dollar always bad? What are the advantages and
disadvantages of an appreciating dollar? What are the advantages and disadvantages of a
depreciating dollar?
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Short Answer Questions:
S1. How did the end of the Bretton Woods system in the early 1970s affect the need for
international reserves?
S2. Explain drawing and conditionality.
S3. Explain what is meant by the Generalized System of preferences and why it has been only
of limited value for 3rd World countries.
S4. Explain the four stages of economic integration.
S5. Explain briefly what Latin American thinkers mean by the ‘Fourth Way.”
S6. If a domestic firm tries to expand into a foreign market, briefly outline the important
considerations in deciding whether to export, license production, enter a joint venture or establish
a fully-owned production facility.
S7. Indicate which of the following are credits in the US balance of payments.
a. A Japanese firm builds a plant in Kentucky.
b. An American firm borrows money from a Swiss bank for use in the US.
c. An American buys stock in a Swiss firm.
d. The US ambassador to Malawi wins a football bet against the British Ambassador.
e. A US firm buys an insurance policy from Lloyds of London.
S8. Explain the product life cycle model and its stages and how these help explain what a country
imports and exports.
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