Exercises for 《International Economics》
Chapter 2 Foundations of Modern Trade Theory
1.
1)
2)
3)
4)
Concepts and Terms
Mercantilism
Absolute advantage
Comparative advantage
Transformation schedule, or Production possibilities schedule
2. True or False
1) Mercantilists view that each nation should strive to achieve trade balance, which
is to make exports equivalent to imports.
2) Adam Smith views that a nation initially establishes its wealth by means of
exchanging goods for gold and silver exported from other nations rather than the
opposite situation.
3) Adam Smith's Principle of Absolute Advantage views that both of the nations can
benefit from exporting what they make cheaper than the other one.
4) David Ricardo’s Principle of Comparative Advantage views that nations can gain
from specialization according to to their comparative advantage, even if a nation
has absolute advantage in producing all goods.
5) The transformation curve in David Ricardo’s comparative advantage model is not
straight but curved.
6) In David Ricardo’s comparative advantage model, trade leads to complete
specialization.
3. Choice
1) According to Adam Smith’s Principle of Absolute Advantage,
a.
(
)
a nation with absolute advantage in producing all products will eventually get
all the gold and silver
b.
a nation with absolute advantage will have a large amount of trade surplus
c.
both of the nations can benefit from exporting what they make cheaper than
the other one
d.
if tariff barriers can’t be used to protect their own industries, a nation will
lose its absolute advantage
2) According to David Ricardo’s Principle of Comparative Advantage,
( )
a.
trade leads to incomplete specialization
b.
a nation can benefit from exporting the products which have less absolute
cost disadvantages even if it lacks of absolute cost advantages
c.
comparing with the nation that lacks of absolute cost advantages, a nation
with absolute cost advantages can benefit more from trade
d.
Only the nations that have comparative advantages can obtain trade surplus
3) According to policy experience of Principle of Comparative Advantage, a nation
can benefit from international trade on condition that ( )
a.
it makes a large number of trade surplus
b.
it imports goods in lower opportunity cost rather than produces them
domestically
c.
it is stronger than its trading partners
d.
it has an absolute efficiency advantage than its trading partners
4) If the opportunity cost is increasing rather than constant, international trade will
lead to ( )
a.
complete specialization and decrease in production cost in each nation
b.
incomplete specialization and constant production cost of exports in each
nation
c.
incomplete specialization and increase in opportunity cost of exports in each
nation
d.
incomplete specialization and decrease in opportunity cost of exports in each
nation
5) In most textbooks, two-nation two-product model of international trade (
)
a.
can be extended to contain more nations but no more products
b.
can be extended to contain more products but no more nations
c.
can be extended to contain more nations and products. Meanwhile, bilateral
trade balance can be achieved beween any two trade partners
d.
can be extended to contain more nations and products. Meanwhile, trade
balance can be achieved in each nation (but it is not necessary to have trade
balance with each trade partner)
4. Short-answer questions
1) Illustrate Adam Smith's Principle of Absolute Advantage in international trade
with the following example. Draw the production possibilities schedule of two
nations respectively. Identify their absolute advantage. Calculate the
terms-of-trade ratio at which both of them can benefit from trading. Draw the
trading possibilities line of both nations respectively to reflect the ratio, and give
examples to illustrate the potential trade triangle.
Output per labor
Argentina Brazil
Wheat
3
2
Autos
1
2
12
12
All labor supply
2) Follow the steps of the first question. Illustrate David Ricardo’s Principle of
Comparative Advantage with the following example. Explain why both of the
nations can benefit from trading even if Brazil has absolute advantages in
producing both wheat and autos.
Output per labor
Argentina Brazil
Wheat
3
2
Autos
1
2
12
12
All labor supply
Keys
1 Key concepts and Terms
⑴A nation can accumulate its wealth by obtaining positive trade balance, that means
exports are more than imports.
⑵ Compared with others, a nation has an absolute advantage in something when unit
output costs less in producing it. For the world to benefit from specialization, each
nation must have a good that it is absolutely more efficient in producing than its
trading partner. A nation will import those goods in which it has an absolute cost
disadvantage; it will export those goods in which it has an absolute cost advantage。
⑶ If a nation can produce something domestically with less opportunity costs than
produce it in the other nation, it has comparative advantage. According to Ricardo's
comparative-advantage principle, even if a nation has an absolute cost disadvantage in
the production of both goods, a basis for mutually beneficial trade may still exist.
⑷It illustrates the combination of the most output a variety of products Expressed in
the resources allocated to the conditions set to produce a wide variety of products
yield the greatest possible combination. This schedule shows various alternative
combinations of two goods that a nation can produce when all of its factor inputs are
used in their most efficient manner. The production possibilities schedule thus
illustrates the maximum output possibilities of a nation.
2 True or False
⑴
×
3 Choice
⑴
C
⑵
B
⑵
×
⑶
√
⑶
B
⑷
C
⑷
√
⑸
×
⑹
√
⑸
D
4 Short-answer questions
⑴Absolute Advantage
Wheat: Argentina (3>2)
Autos: Brazil (2>1)
Before trading
In Argentina, 36 bushel wheat = 12 autos (3 bushel wheat = 1 auto)
In Brazil, 24 bushel wheat = 24 autos (1 bushel wheat = 1 auto)
After trading
If 2 bushel wheat = 1 auto, Argentina can specialize in producing and exporting
wheat, while Brazil autoes.
The potential trade triangle shows that 24 bushel wheat can be exchanged for 12
autos.
⑵ Now, Brazil has absolute advantages in producing both wheat and autos. However,
the advantage in producing autos seems bigger(1/2>4/3) than wheat. Meanwhile,
Argentina has comparative advantage in wheat (3/4>1/2, or 3/1>4/2).
Before trading
In Argentina, 36 bushel wheat = 12 autos (6 bushel wheat = 2 autos)
In Brazil, 48 bushel wheat = 24 autos (4 bushel wheat = 2 autos)
Take an exchange ratio between the upper and lower limits (such as 5 bushel wheat
= 2 autos). Brazil will export autos (give up producing 5 bushel wheat, rather than just
4). Argentina will export wheat (exchange 5 bushel wheat for importing 2 autos, and
no longer produce 2 autos domestically at the price of 6 bushel). Both nations can
benefit from trading.
Chapter 3 International Equilibrium
1. Concepts and Terms
1) Indifference Curve
2) Immiserizing Growth
2. True or False
1) For most of the consumers and communities, the MRT is constant with movement
along the indifference curve.
2) Generally speaking, a country can reach a higher indifference curve with
international trade than without it.
3) According to the theory of reciprocal demand proposed by Mill, the equilibrium
terms of trade between two countries depends only on the production costs of
them.
4) If the two countries involved in an international trade are of approximately the
same size, the smaller country will attain the bigger part of the gains from the
trade.
5) The commodity terms of trade of one country reflects the ratio of the prices it gets
for its exports to the prices it pays for its imports.
3. Choice
1) The community indifference curve is used to indicate ( )
a. the percentage of population in one nation who are not willing to trade with
other nations
b. the amount of the original products which are given up just to gain one more
other product
c. the combination of the different kinds of products which can provide a
consumer with the same level of satisfaction
d. the product with comparative advantage in a nation
2) If no trade, one nation can achieve an independent economic equilibrium by
( )
a. specialized production based on the comparative advantage of the nation
b. producing autos and wheat of the same amount
c. assigning half of the labors to produce wheat, and the other half to produce the
autos
d. producing and consuming at the tangent point between the indifference curve
and the transformation curve
3) If a nation produces based on its comparative advantage, it will ( )
a. produce more goods with comparative advantage, and achieve a higher
indifference curve than when it is not involved in any trade
b. make the transformation curve move outwards
c. make the consumption at a new point on the original indifference curve
d. the prices it gets from the exports get lower compared to the prices it pays for
the imports
4) If one nation is significantly larger than the other, when they trade with each other,
( )
a. the larger nation will attain most of the gains from trade
b. the smaller nation will attain most of the gains from trade
c. the gains from trade equals will be shared equally between them
d. the trade will benefit only the larger nation
5) The precondition for a nation to experience the immiserizing growth is that ( )
a. the benefit from the extension of the transformation curve is larger than the
negative effects which are resulted from the depravation of the terms of trade
b. the capital goods are not refreshed when exhausted, and the transformation
curve moves inwards
c. the growth of the terms of trade is higher than that of labors
d. it often happens in the reality although can not be explained clearly
theoretically
Keys
1 Key concepts and Terms
⑴An indifference curve depicts the various combinations of two commodities that are
equally preferred in the eyes of the consumers—that is, yield the same level of
satisfaction (utility).
⑵ Immiserizing growth is a situation where economic growth could result in a
country being worse off than before the growth. If growth is heavily export biased it
will lead to a fall in the terms of trade of the exporting country, in rare circumstances
this fall in the terms of trade may be so large as to outweigh the gains from growth,
this situation would cause a country to be worse off after growth than before. This
result is only valid if the growing country is able to influence world prices.
2 True or False
⑴
×
3 Choice
⑴
C
⑵
D
⑵
√
⑶
A
⑶
×
⑷
B
⑷
√
⑸
A
⑸
√
Chapter 4 Trade Model Extensions and Applications
1.
1)
2)
3)
Concepts and Terms
Factor endowment
Leontief paradox
Product lift cycle theory
2. True or False
1) In the factor endowment theory, if the workers’ average capital share of one
country is more than that of other countries, then that country takes up
comparative advantage in the capital-intensive products.
2) The factor endowments theory speculates that trade will cause the decline of the
relative wage levels in labor abundant countries.
3) Leontief paradox theory refers to business can be easily happen among
industrialized countries rather than between developing countries and
industrialized countries.
4) The product life cycle theory suggests that, if any country firstly promote a kind
of new product, then this new product will experience its whole life cycle in the
country.
5) Theory of overlapping demands explains the reason that why trade usually occurs
among industrialized countries with similar lever of the average per capita
income.
3. Choice
1) In the Heckscher-Ohlin’s factor endowment theory,
(
)
a. The transformation curve is the same with the Ricardian theory, both them are
straight lines.
b. Labor is the only relevant factor of production.
c. One country’s comparative advantage depend on the ownership of labor and
capital and other specific factors of production relative to their trade partners
d. Countries with adequate labor force will take up comparative advantage in the
labor-intensive products
2) In the Heckscher-Ohlin theory, if( )，trade between the two countries will be a
win-win situation
a. Similar levels of per capita income between the two countries
b. Transformation curve shows that two countries will have different capacities
in the production of labor-intensive and capital-intensive products based on
relative resources endowment
c. Residents’ taste or preferences in one country are significantly different with
that of another country’s
residents
d. The cost of transportation is zero.
3) If a country with an abundant supply of labor force Wants have Free Trade with a
capital adequacy country，so , it will emerge ( ) trend
a. Both of the two countries’ wage levels will
increase relative to the cost of
capital
b. Both of the two countries’ wage levels will
decline relative to the cost of
capital
c. The former country’s wage will relatively increase compared with that of the
latter country
d. The former country’s wage will relatively decline compared with that of the
latter country
4) The result of the empirical research of Leontief paradox theory is (
)
a. Although the United States’ capital is adequate, the degree of labor-intensity of
exported products in the United States is even higher than that of the imported
products
b. The United States mainly trade with other industrialized countries rather than
with developing countries
c. Trade declines rather than increases the welfare of U.S. residents
d. The United States’ growth rate of long-term exports is far below than that of
its GNP
5) Leontief paradox theory include the following explanations, except ( )
a. America imposes high tariffs to the imports of labor-intensive products.
b. America actually has more labor force than its trading partners.
c. America’s exported products used intensively experienced labor force
d. America tend to export high-tech products that need to put into a large number
of science and engineering technology
6) Linder’s model of overlapping trade demands (
)
a. Helps to explain the wide range of trade between industrialized countries and
developing countries
b. Considers that manufactured products are manufactured in the home country
at first, and then exported to the countries with a similar GNP per capita
c. Are strong support for the factor endowment theory of comparative advantage
d. Explains the reason that why a country produce fully specialized and do not
produce any imported products in the domestic
4. Short-answer questions
1) Suppose the ratio of labor and capital in Mexico is higher than that of the United
States, and please don’t consider the factor that the United States has more capital
than Mexico. In addition, suppose that clothing production is labor-intensive
compared with auto production.
a. Use the framework of the factor endowment theory to prove that the
following two transformation curves which one represents the Mexico, and
which one represents the United States?
b. Suppose the two indifference curves in question a represent similar taste or
preferences, please separately draw out the two counties’ price lines before
trading, which line is steeper? What problem does this show? Which
country’s car is relatively more expensive? Suppose that the production
capacities of the two countries are known, then is this situation reasonable?
c. Please draw out the conditional lines in terms of international trade in the two
diagrams, as well as explain trade potential between Mexico and the United
States. Why must the two lines be paralleled? Why is the U.S. trade price line
steeper than that of the pre-trade? Why is the Mexico's new trade price line
flatter than that of the pre-trade? Explain how the two countries to transfer
production in accordance with the comparative advantage. Add a new
indifference curve in each of the two diagrams separately to show the new
consumption points. Determine the current volume of exports and imports in
each country. If the conditional lines in terms of international trade you have
drawn out can reach the trade balance between Mexico and the United States,
then what must be correct? In the selected price ratio, if the conclusion is that
the amount of cars the United States is willing to export is more than that of
the Mexico is expected to import, then to achieve balance, the conditional
lines in terms of international trade need to be steeper or flatter? To explain its
causes, and its connotations from the perspective of car and clothing prices.
2) In the example of question 1, if based on the factor price equalization theory, how
will the wage rate of Mexico and the United States be changed respectively?
Accordingly, how to interpret the labor inputs in the free trade? In reality, why is
it very difficult to encounter the conditions of completely equalization of factor
prices, how to apply these qualifications in the above-mentioned examples?
Keys
1 Key concepts and Terms
⑴
⑵
⑶
2 True or False
⑴
√
3 Choice
⑴
C
⑵
×
⑵
B
⑶
×
⑶
C
⑷
A
⑷
×
⑸
B
⑸
√
⑹
B
4 Short-answer questions
⑴ a. Mexican labor is relatively abundant; this means that its ratio of labor to capital
is higher than that of the U.S. Clothing is relatively labor-intensive products,
that is, the ratio of labor to capital in the production of clothing is higher than
that in the production of cars.
b. Mexico's budget line is steeper than that of the United States pre-trade. The
slope of the budget line is  Q C /  Q A . However, from a point to another point
in the budget line, the total expenditure must be maintained the same. Therefore,
 Q C *P C =  Q A *P A .This shows that  Q C /  Q A = P A / P C . Therefore, the
Mexican cars are relatively expensive (the slope is large) due to its scarcity of
resources. While as a result of capital adequacy in the United States, its cars are
cheaper.
c. The conditional lines in terms of international trade (the line where the point
C 1 lies) shows that the two countries’ values of P A / P C are equal (free trade). The
United States transfers to manufacture more cars, so that P 0 changes to P 1 ,
however Mexico shifts to
clothing production (comparative advantage).Because
P A in America is higher, P C in Mexico is higher too. Connect points P 1 and C 1 , o
the area of trade triangle must be equal. If the triangle of the United States is
greater, then the slope P A / P C will be became larger. (P A decrease or P C
increase)
⑵ Wages in Mexico will relatively rise (due to the demand for labor-intensive
clothing production is greater); the wages of the United States will drop (with the
decline of clothing production and the increase production of cars, the situation of
labor scarcity will be alleviated). Complete wage equalization is impossible to
occur, because there are a variety of restrictions such as trade barriers, imperfect
technical knowledge, markets defects in the United States and Mexico or the
limitation of technical level.
Chapter 5 Tariffs
1.
1)
2)
3)
4)
Concepts and Terms
Specific tariff
Ad valorem tariff
Compoud tariff
Effective tariff rate
2.
1)
2)
3)
True or False
Levy on imported shoes, 10 percent tariff is an example of ad valorem tariff.
The protective effect of tariffs means that domestic producers increase profits.
If the tariff is sufficient to block all imports of goods, then the income effect will
be very significant.
4) If a small nation tariffs on importers, then the loss of consumer caused by tariffs
is less than the sum of domestic producers’ profit and government tariff revenue.
5) A large nation may benefit if tariffs make foreign producers export prices
significantly lower.
3. Choice
1) The part of revenue brought by tariffs to domestic producers, which is used to
compensate for their relatively lower efficiency compared to foreign producers
( )
a. redistribution effect.
b. protective effect.
c. income effect
d. consumption effect, or the consumer deadweight loss
2) The profit brought by tariffs to domestic producers is ( )
a. redistribution effect.
b. protective effect.
c. income effect
d. consumption effect, or the consumer deadweight loss
3) If a small nation levies on tariffs (small nation model), then ( )
a. price hiking rate is lower than the tariff rate
b. the loss of domestic consumers less than sum of the domestic producers
revenue and government revenue
c. instead of paying tariffs, foreign producers stop importing to this nation
d. income effect does not exist
4) If a large nation levies on tariffs (large nation model), then ( )
a. price hiking rate is higher than the tariff rate
b. price hiking rate
equals to the tariff rate
c. this nation would stop importing for domestic producers will occupy the
whole market
d. net loss of consumers may less than the benefit from trading condition
5) About effective tariff rate, namely effective rate of protection, which statement is
true ( )
a. always equals to nominal ad valorem tariff rate
b. when material inputs enter a country at a lower nominal tariff while the final
imported commodity is protected by a higher nominal tariff, the effective tariff
rate tends to be lower than nominal tariff rate
c. when material inputs enter a country at a lower nominal tariff while the final
imported commodity is protected by a higher nominal tariff, the effective tariff
rate tends to be higher than nominal tariff rate
d. when material inputs enter a country without duty, the effective tariff rate
equals to nominal tariff rate
4. Short-answer questions
1) Answer questions using graph paper:
a. Explain why this graph indicates “large nation model” and tell the difference
from “small nation model” in Q.1
b. Using graph paper, calculate the commodity price, domestic production and the
volume of imports under free trade conditions.
c. Suppose the American government levies a specific tariff of 20 dollars on
imported steel per ton, plot in graph paper about how this measure influences the
steel price, domestic steel production and the volume of steel imports, and
explain the reason that steel price hiking rate is lower than tariff rate
d. Plot kinds of effects caused by tariff in graph paper, then calculate the value of
each effect.
consumer surplus loss__________ protective effect__________
trade conditions effect__________ redistributive effect_______
domestic revenue effect___________ consumption effect_________
e. Under what condition a country would benefit from levying tariff? Does this
condition exist in the example here?
2) Suppose the American government levies 10% ad valorem tariff on imported
clothing, while levies zero tariff on cloth or other material inputs of clothing.
The cost of raw materials is 32 dollars, while the clothing price is 40 dollars, of
which 8 dollars of the price difference is the value-added production in the
process of clothing production.
a. What is the proportion of value-added production accounted for final
production? Calculate the effective rate of protection in clothing production, and
explain why it is higher than 10%.
b. Suppose the American government levies 5% tariff on material inputs of
clothing, what is the effective rate of protection now?
Why it is still higher than
10%? Use the theory about tariff escalation to explain this situation.
c. Suppose the nominal tariffs of material inputs and clothing are both 10%, now
calculate the effective rate of protection. When all products imported are levied
on a same tariff, which means the tariff escalation does not exist. What is the
relationship between nominal tariff rate and effective rate of protection?
3) Explain the meaning of tariff escalation, and how do industrialized countries use
this kind of tariff structure to limit developing countries do deep processing of
raw materials, which makes them act as the exporter of low value-added primary
products in international trade?
Keys
1 Key concepts and Terms
⑴ A specific tariff is expressed in terms of a fixed amount of money per physical unit
of the imported product.
⑵An ad valorem tariff, much like a sales tax, is expressed as a fixed percentage of the
value of the imported product.
⑶A compound tariff is a combination of specific and ad valorem tariffs.
⑷ The effective tariff is a measure that applies to a single nation. In a world of
floating exchange rates, if all nominal or effective tariff rates rose, the effect would be
offset by a change in the exchange rate.
2 True or False
⑴
⑵
⑶
⑷
⑸
√
3 Choice
⑴
B
×
⑵
A
⑶
B
×
⑷
D
√
×
⑸
C
⑹
D
4 Short-answer questions
⑴ a. Because Sworld tilts upward, so does Sd+w (This country takes an important
part in world market)
b. Price=90 dollars
Domestic supply=40 tons
Demand=220 tons
Imports= 180 tons
c. P≈105，Sd≈55，Dd≈195，Imports≈140
d. consumer surplus loss≈
3112.5 dollars
(a+b+c+d)
redistributive effect
712.5 dollars
(a)
protective effect
112.5 dollars
(b)
domestic revenue effect
2800 dollars
(c+e)
trade conditions effect
700 dollars
(e=140*5)
consumption effect
187.5 dollars
(d)
e. If e>(b+d), the country will benefit.
In this case, e=700 dollars, and b+d=300 dollars, so this country can benefit
from the tariffs that force foreign suppliers reduce their prices
⑵a.
VA=8/40×100%=20%
EP={[0.1-0.8（0）]/0.2}×100%=50%
No tariff
10% tariff
Price
40
44
Raw material
32
32
Value-added
8
12
(Value-added increased by 50%, from 8% to 12%)
b. EP={[0.1-0.8（0.05）]/0.2}×100%=0.06/0.2×100%=30%
{Value-added equals to 10.4(44-33.60),increased by 30%}
c.
EP={[0.1-0.8（0.1）]/0.2}×100%=10%
When all products imported are levied on a same tariff, the effective rate of
protection equals to nominal tariff rate.
⑶The tariff structures of industrialized nations have generally been characterized
by rising rates that give greater protection to intermediate and finished products
than to primary commodities, The industrialized nations' low tariffs on primary
commodities encourage the developing nations to expand operations in these
sectors, while the high protective rates levied on manufactured goods pose a
significant entry barrier for any developing nation wishing to compete in this area.
Chapter 6 NonTariff Trade Barriers
1.
1)
2)
3)
4)
Concepts and Terms
Import quota
Orderly marketing agreement
Domestic subsidies
Export subsidies
2. True or False
1) Different from tariffs, quotas don’t increase domestic price of import products.
2) The income effect of tariff is obtained by the Government, while the income
effect of the quota is to obtain by exporting producers, as a result, the welfare
losses caused by the quota is often greater than the tariff for the importing
country.
3) In a short term, with domestic demand increasing, price rise brought about by
tariffs is faster than that by quota.
4) Compared with tariffs and quotas, voluntary export restraints prevent the welfare
losses caused by domestic price rise.
5) Domestic content requirements protect domestic industries by reducing the use of
foreign parts and components.
3. Choice
1) Global import quota ( )
a. Restrict the number of imported products can be imported to each exporting
country.
b. To ensure that the annual supply is equal to imported products.
c. Bring uncertainty for individual exporters to enter the domestic market
d. Used more widely in industrialized countries than selective import quotas
2) Import quotas reduce the number of imported products to the same level as the ad
valorem tariff will ( )
a. increase the price less than in the case of tariffs
b. avoid the redistribution effects of tariff
c. result in protective effect lower than the case of tariffs
d. bring in government revenue lower than in the case of tariffs
3) Assumed that one country use import quota, rather than an import tariff, to
protect domestic industries, in the long run, if consumer demands for products of
the industry increase ( )
a. prices rise is slower than of using tariffs
b. prices rise is faster than the case of using tariff
c. because the quota is not a tax, the price will not change
d. growth of domestic industries is slower the case of using tariffs
4) ( )is not a kind of non-tariff barriers
a. policy that government encourages people to "Buy American product"
b. corporate income tax
c. car components industrial standard made for the purpose of creating favorable
conditions for domestic product
d. government contract biding policy that discriminates foreign manufacturers
4. Short-answer questions
1) Consider the situation of the U.S. auto market, whose domestic automobile
market is segmented by U.S. companies, foreign enterprises set up in the United
States and its overseas market.
--Explain the meaning of domestic content requirements.
--Why does U.S. government set up domestic content requirements for the auto
industry?
--What kind of impact will domestic content requirements bring to domestic auto
companies, foreign auto companies as well as the United States car buyers?
Keys
1 Key concepts and Terms
⑴Import quota is a type of non-tariff barriers, generally set by importing country to
restrict the imports of some product.
⑵ Orderly marketing agreement is a market sharing pact signed by importing country
and its trading partners.
⑶ Domestic subsidies is a certain amount per unit of product subsidies made to
import-competing producers
⑷Export subsidies are cash subsidies or financial payment, given to exporters, made
by government, in order to reduce the price of exports and strengthen their ability to
compete in foreign markets
2 True or False
⑴
×
⑵
√
⑶
×
⑷
×
⑸
√
3 Choice
⑴
C
⑵
D
⑶
B
⑷
B
4 Short-answer questions
⑴ According to domestic content requirements, cars produced and sold in the United
States must contain a certain percentage (e.g. 30%) of the domestic auto parts. With
domestic cost increasing, the prices of motor vehicles will also rise. This kind of
impact on foreign enterprises is stronger than American Enterprise.
Chapter 7 Trade Regulations and Industrial Policies
1. Concepts and Terms
1) Smoot-Hawley Tariff Act
2) Most favored nation" (MFN) clause
2. True or False
1) Smoot-Hawley Tariff Act of 1930 is the first important result of decreasing tariff
and promoting trade liberalization in USA.
2) Most-favored-nation(MFN) clause provided the identical low-tariff treatment as
other most-favored nation.
3) Countervailing duties are intended to offset any foreign export subsidies to
promote fair trade.
4) If only one country implements economic sanction,the effect will be ideal.
3. Choice
1) The Smoot-Hawley Tariff Act of 1930 ( )
a. tend to be the turning point.
b. delegated the highest level of tariff in American history.
c. help American come to from the Great Depression
d. urge other industrial countries to reduce tariff barrier of American export
goods
2) The theoretical basis of scientific tariff is ( )
a. to get profit for the government
b. to protect infant industry from foreign competitions
c. to make both ends meet
d. to raise the price of import products at the lower producing cost than domestic
ones
3) Countervailing duties (
)
a. is the same to scientific tariff
b. is to protect domestic industries from foreign export subsidies
c. is a retorsion to foreign tariff
d. is to increase revenue to offset deficit
4) Strategic trade policy (
)
a. often use to support corporations in fiercely competitive sectors
b. often includes subsidies to high-technology and other supports
c. only implemented in a important industrialized countries at present
d. equally treated all sectors
5) When ( ) , economic sanction can make it hit
a. the sanction is only implemented by one country
b. the target is rivalry in history rather than rally
c. the powerful groups among sanction countries support governments to
implement economic sanction to targets
d. the sanction is stricter、broader and more avowed.
4. Short-answer questions
1) Supposed that Brazil corporations produce per ton steel at the cost of 400$.At the
same time, when the price is 400$,American steel corporation can provide for all
the market demand, as the following chart. Supposed that Brazil government
bestowed 50$ subsidies per ton in order to snatch the shares in American market.
Showing in the picture confirms the welfare of income and loss from all groups in
the USA. Why American government fell into dilemma when they decided how
to reply the export subsidies.
Keys
1 Key concepts and Terms
⑴
⑵
2 True or False
⑴
×
3 Choice
⑴
B
⑵
×
⑵
D
⑶
B
⑶
√
⑷
B
⑷
×
⑸
C
4 Short-answer questions
⑴ Export subsidies makes the supply curve S down to S’(350$). Consumers get the
income equal to the area of a+b+c; Domestic corporations lose the area of a, so
American corporations get the income equal to area of b+d. But American might
oppose because of considering the strategy or subsidies lessening American steel
companies’ sales.
Chapter 8 Trade Policies for the Developing Nations
Concepts and Terms
1) Buffer stock
2) Import substitution
3) GSP，generalized system of preferences
True or False
1) The indicator, is commonly used but not perfect, which is used to differentiate
from developing countries and developed countries is GDP per capita.
2) Most developing countries import the necessary primary products from developed
countries.
3) The primary products’ price-elasticity of demand and supply is 0.
4) The purpose of buffer stock is to limite the primary products price swings.
5) The purpose of GSP is to promote the development of trade among developing
countries.
Choice
1) The worsening of commodity terms of trade refers to the developing nations（ ）
a. Most of the exports go bad and can’t be proper preserved
b. In long term, the relative value of primary products has fallen compared to the
manufactured goods they import.
c. In long term, the bank loans project of the developed countries which is for
the purpose of economic development became worsening
d. In long term, the cost of transportation of export product Increased
2) The reason why the prices of primary products prone to significant fluctuate is
（ ）.
a. As income rose, the demand increased significantly
b. The price-elasticity of supply is high
c. The price-elasticity of demand is high
d. The price-elasticity of demand and supply is low
3) The reason why buffer stock is always excess and the cost of stock is（ ）.
a. Target price exceed the equilibrium level
b. Target price falling below the equilibrium level
c. The increase of demand exceed the anticipation
d. In order to keep abundant stock, we have to pay the broker more money.
4) Import substitution is a development strategy, the country which implement the
strategy will show us that（ ）.
a. Import from the developing countries instead of the developed countries
b. New products to replace imported products of traditional
c. With the using of tariff barriers, it promote the production of the
manufactured goods which were need to be imported
d. With the using of high tariff, in order to reduce the consumption of imported
goods in home
5) Export-oriented policy is a development strategy, the country which implement
the strategy will show us that（ ）.
a. Make efforts to open up new export markets of primary products
b. Calls for the developed countries to help publicize their traditional export
products
c. Using the multilateral contacts to steady the export price
d. Through helping the manufactured goods which have potential comparative
advantage, make them achieve industrialization
6) GSP（ ）.
a. Means that the industrialized countries have a choice to reduce the tariff of
the manufactured goods which imported from the developing countries
b. Used to improve the export of primary products’ terms of trade in developing
countries
c. Be consistent with the principle of reciprocity and principle of
non-discrimination in GATT
d. Used to improve the trade between the developing countries
Keys
1 Key concepts and Terms
⑴A producers' association (or international agency) is prepared to buy and sell a commodity in
large amounts. The buffer stock consists of supplies of a commodity financed and held by the
producers' association. The buffer stock manager buys from the market when supplies are
abundant and prices are falling below acceptable levels, and sells from the buffer stock when
supplies are tight and prices are high.
⑵A trade and economic policy based on the premise that a country should attempt to reduce its
foreign dependency through the local production of industrialized products.
⑶It is the world's 32 developed countries on the exports of developing countries to give the
general, non-discriminatory, non-reciprocal preferential tariff , which is based on the MFN tariff
reduction as well as a duty-free preferential tariff.
2 True or False
⑴
√
3 Choice
⑴
B
⑵
D
⑵
×
⑶
A
⑶
√
⑷
C
⑷
√
⑸
D
⑹
D
⑸
×
Chapter 9 Regional Trading Arrangement
1.
1)
2)
3)
Concepts and Terms
customs union customs union
trade-creation effect
trade-diversion effect
2. True or False
1) Each member states impose the equal tariff on non-member states in free trade
area.
2) Common market allows free trade, capital and labor in the free flow of member
states.
3) Trade-creation and trade-diversion both belong to the dynamic effect of economic
integration, but not the static effect.
3. Choice
1) What is the organization that Member states carry out the favorable agreement of
free trade.( )
a. Free trade areas.
b. Customs union.
c. Common market.
d. Economic union
2) What is the organization that Member states carry out the favorable agreement of
free trade, common tariff of outside and ?( )
a. Free trade areas.
b. Customs union.
c. Common market.
d. Economic union
3) What is the organization that Member states carry out the favorable agreement of
free trade and common tariff of outside?( )
a. Free trade areas.
b. Customs union.
c. Common market.
d. Economic union
Keys
1 Key concepts and Terms
⑴A customs union is a free trade area with a common external tariff. The participant
countries set up common external trade policy, but in some cases they use different
import quotas. Common competition policy is also helpful to avoid competition
deficiency.
⑵
⑶
2 True or False
⑴
⑵
⑶
3 Choice
⑴
⑵
⑶
⑷
Chapter 10 International Factor Movements and Multinational
Enterprises
1. True or False
1) Most international trade theory assumed that the labor and capital can not flow
between countries.
2) The main purpose of Japanese auto companies establishing cross-border plant in
the United States is to obtain low-cost raw materials.
3) The main purpose of U.S. companies establishing export processing factories
bonded is to enter the consumer market in Mexico.
4) The international labor migration may be increase the wage differentials between
countries, and reduce overall economic efficiency.
2. Choice
1) MNE ( )
a. Refers to shareholders from enterprises of different countries
b. Refers to export to enterprises of different countries
c. Refers to a number of countries with manufacturing facilities of enterprises
d. General scale is smaller than the largest enterprises of home country
2) The main purpose of horizontal integration of multi-national corporations in
overseas investment is ( )
a. Products to the international market
b. In exchange for oil, copper and other raw materials
c. To achieve lower production costs
d. Operating diversify into new product areas
3) Through foreign direct investment, IBM shift personal computer parts and
components production to other countries, and then return to the US to sale, this
example belongs to ( )
a. Horizontal integration
b. for the purpose of improving the efficiency of vertical integration
c. conglomerate expansion
d. Specific operating agreement
4) International joint venture enterprises may be for the following reasons, in
addition to ( )
a. Subject to the provisions of the host government restrictions
b. More effective integration of a variety of different countries, languages and
cultures
c. Access to advanced technology and management skills
d. Implement a close coordination between Global production plants
3. Short answer questions
1) It is assumed that the U.S. business income tax rate is 50%, Saudi Arabia's
income tax rate is 30%. If a vertically integrated multinational subsidiaries which
operates the oil refining business in Saudi Arabia won the 100,000 dollars of
profits, under the existing tax laws in the United States, What the number of
income tax should MNS pay respectively to the two Governments ? If the United
States cancels the provisions of foreign tax credits, the real tax will be changed,
from which is equal to the total amount of tax allowances deduced from the
amount of the foreign tax, to the taxable income which is equal to the overseas
tax deducted from the amount of tax. What will be change of the two
Governments to pay the allowances and the total allowance?
2) Make a brief explanation of the concept of the transfer pricing manipulation. Why
the MNE have the ability to transfer pricing? Let’s back to the example of article
5, whether the United States is against foreign deferred income tax provisions,
there will exist tax motives that makes MNS increase or decrease the transfer
pricing of crude oil. The oil transports from Saudi Arabia's subsidiary to the
United States’s refining subsidiary .How it affects the total tax that has been paid,
and distorts the countries which have reported a profit? Which country will gain
the additional tax revenues from the manipulation of transfer pricing?
Keys
1 True or False
⑴
√
2 Choice
⑴
C
⑵
×
⑶
×
⑵
A
⑶
B
⑷
×
⑷
D
3 Short answer questions
⑴
tax credit
Gross profit
Saudi tax
$ 100,000
$ 30,000
no tax credit
$ 100,000
$ 30,000
Return to profit
U.S. tax
Net profit
$ 70,000
$ 20,000(50-30)
$ 50,000
$ 70,000
$ 35,000 ($ 70,000 的 50%)
$ 35,000
If we don’t have tax credit， effective tax rate will rise from 50% to 65%.
⑵Answer: The transfer pricing manipulation means to reduce the tax, the paid tariff
and avoid the restrictions of returning profits , if the intermediate products convey
from one country subsidiary to another subsidiary ,the prices will be increase or
decrease. In the example of article 5 , a subsidiary of Saudi Arabia will have the
motivation to raise the price of oil which transports to the United States, and the
lower tax rates countries will gain higher profits.
Chapter 11 The Balance of Payments
1. Concepts and Terms
1) the balance of payment
2) unilateral transfers
2. True or False
1) U.S. exports wheat to other countries should be recorded to the capital account of
U.S. balance of payments.
2) Import cars from Japan should be debited to current account of U.S. balance of
payments.
3) Japanese residents deposit money in the Bank of America to earn high interest
shall be credited to short-term capital account of the balance of payments.
4) A nation often requires the use of official reserve assets to pay the merchandise
trade deficit.
3. Choice
1) The followings which should be credited to U.S. balance of payments account
( ).
a. The United States donates food and clothing to Indian which afflicted by
drought of long-standing.
b. A British resident receives dividends on his General Motors Corporation
stock.
c. A U.S. high school student spends a semester studying in Japan.
d. Sony of Japan buys computer software from Microsoft Corporation.
2) The followings which should be debited to U.S. balance of payments account
( ).
a. A Mexican enterprise repays to the Bank of America.
b. A U.S. investor receives dividends on Japan bond fund.
c. Lloyd of London sells an insurance policy to Chrysler Corporation.
d. Japan's Toyota Motor Corporation builds a car assembly plant in Kentucky.
3) An agricultural worker immigrated to the United States sends 3000 U.S. dollars
to his relatives in Mexico, the effect to U.S. balance of payments account is ( ).
a. credited to the unilateral transfer
b. debited to the unilateral transfer
c. debited to the short-term investment account
d. owing to funds from a family member to another family member, the balance
of payments does not change.
4) The capital account of international balance of payments includes the followings,
in addition to ( ).
a. foreign direct investment
b. buying and selling government bonds
c. foreign companies’ bank loans
d. dividends and interest income on foreign investment
5) The outflow of official reserve assets should be recorded to ( ).
a. the credit of the current account
b. the debit of the balance of merchandise trade
c. the credit of the capital account
d. the credit of the unilateral transfer
4. Short Answer Questions
The following transactions will affect which account of U.S. balance of payments
and the funds inflow the debit or the credit?
a. A U.S. resident pays 100,000 U.S. dollars to buy a Honda Motor produced by
Japan.
b. A Japanese company spends 2 million U.S. dollars to set up an electronic
factory in California.
c. An American student abroad spends 300 U.S. dollars in a Tokyo restaurant.
d. The students of Willamette University donate 500 U.S. dollars to Honduras
which suffered from hurricanes.
e. To earn higher interest than the Bank of Tokyo, Japanese residents deposit
25,000 U.S. dollars in the Bank of America.
f. A German subsidiary hands over 600,000 U.S. dollars of profits to the Chicago
headquarters.
g. A U.S. resident spends 30,000 U.S. dollars to buy 30-year bonds issued by a
Mexican telecommunications company.
Keys
1 Key concepts and Terms
⑴The balance of payment is a record of the economic transactions between the
residents of one country and the rest of the world. Nations keep record of their
balance of payments over the course of a 1-year period; the United States and some
other nations also keep such a record on a quarterly basis.
⑵Unilateral transfers refer to one-way transactions; these items include transfers of
goods and services (gifts in kind) or financial assets (money gifts) between the United
States and the rest of the world.
2 True or False
⑴
×
3 Choice
⑴
D
⑵
C
⑵
√
⑶
B
⑶
√
⑷
D
⑷
×
⑸
C
4 Short Answer Questions
a. Current account, import; Debits
b. Capital account, long-term, direct; Credits
c. Current account, services import; Debits
d. Current account, unilateral transfer; Debits
e. Capital account, short-term; Credits
f. Current account, service income; Credits
g. Capital account, long-term, portfolio assets; Debits
Chapter 12 Foreign Exchange
1.
1)
2)
3)
4)
5)
Concepts and Terms
Appreciation
Depreciation
Hedging
Covered/uncovered interest arbitrage
Speculation
2. True or False
1) Suppose the U.S. inflation rate is higher than that of Japan, the U.S. dollars will
be discount in the forward market.
2) Suppose the interest rate of Germany is higher than that of the United States, the
mark will be discount in the forward market.
3) Put option holders are entitled to a specific price in the future to sell foreign
exchange.
4) Destabilizing speculation in foreign exchange rates will lead to more violent
fluctuations.
3. Choice
1) The fact that the mark depreciated against the dollar may due to (
)
a. Lower prices on German goods for the Americans
b. Lower prices on American goods for the German
c. Lower prices on German goods for the German
d. Lower prices on American goods for the Americans
2) The increasing demand for Japanese car in Canada will lead to ( )
a. The reduction of the supply of Japanese yen to Canada.
b. The increase of the supply of Japanese yen to Canada.
c. The reduction of the demand for the Japanese yen in Canadian
d. The increase of the demand for the Japanese yen in Canadian
3) Suppose the interest rate in English is 2%, and 8%in Germany, the covered
interest arbitrage will ( )
a. make the mark to sell discount in the forward market
b. make the mark to sell premium in the forward market
c. supply a risk-free profits for the currency traders
d. make the interest rate in English tend to be the same as that of Germany
4) The difference between the forward contracts and the futures contracts is (
)
a. capital will flow into the United States
b. the U.S. dollar will depreciate
c. the U.S. dollar will appreciate
d. the U.S. dollar will remain unchanged versus other foreign currencies
5) Speculators on the foreign exchange market following a variety of acts, except
( ).
a. trying to make a profit from the forward expectations through the
transactions
b. taking on the risk when speculating
c. trying to buy the currency at low prices, then sell high
d. buying and selling a currency at a low price to earn the risk-free profits
4. Short Answer Questions
1) Suppose an American importer agreed to buy 100 boxes of wine from a French
export company three months later (in payment of Francs). How does the
importer should be hedging through forward market to avoid the risk of exchange
rate fluctuations for three months? Is the importer concerned about the depreciation
of the dollar or appreciation?
2) Suppose the spot rate is 1.6mark = $1, 120 RMB =$1 and 80 RMB =1 mark. How
can an American who held the dollars gain the risk-free profit through the
three-point arbitrage? If the mark and the Japanese yen remained constant,
calculate the equilibrium exchange rate of the yen against the mark through
arbitrage trading.
Keys
1 Key concepts and Terms
⑴A currency has appreciated when less of it is needed to buy a foreign currency.
⑵One country’s currency has depreciated when more of it is needed to buy a unit of a
foreign currency.
⑶Hedging involves making use of forward contracts or options to minimize exchange
rate risk in international transactions.
⑷Covered interest arbitrage:Investing funds in a foreign financial center involves an
exchange-rate risk.Because investors typically desire to avoid this risk,interest
arbi-trage is usually covered.
Uncovered interest arbitrage occurs when an investor does not obtain
exchange-market cover to protect investment proceeds from foreign-currency
fluctuations.
⑸Speculation differs from arbitrage, in that it involves the purchase or sale of a
currency in the expectation that its value will change in the future.
2 True or False
⑴
√
3 Choice
⑴
⑵
A
D
⑵
√
⑶
A
⑶
√
⑷
C
⑷
√
⑸
D
4 Short Answer Questions
⑴ U.S. importers will buy the francs in the forward market. This will enable him to
avoid the risk of depreciation of the dollar. However, it is on behalf of the potential
benefits brought by the U.S. dollar appreciation during a three-month period.
⑵ One can exchange 1.6 German mark with $1, and then exchange 128 yen with 1.6
marks (80 yen / mark), and finally exchange $1.07 with 128 yen (120 yen /
dollar),which gives him 7 cents "no cost" profits. The possibility can be eliminated by
using arbitrage. Stable exchange rate would be 120 yen = 1.6 marks, or 75 yen = 1
marks.
Chapter 13 Exchange-Rate Determination
1.
1)
2)
3)
Concepts and Terms
Purchasing-power-parity approach
Low of one price
Overshooting
2. True or False
1) If the economic growth in the United States faster than in the United Kingdom,
the U.S. dollar will appreciate versus the pound.
2) If the inflation in the United States higher than in the United Kingdom, the U.S.
dollar will depreciate versus the pound.
3) If the real interest rate in the United Kingdom is higher than in the United States,
the U.S. dollar will appreciate versus the pound.
4) Fundamental analysis is another name for the technical analysis method in
predicting the exchange rate.
5) Fundamental analysis uses an econometric model of the global economy
forecasting exchange rate movements.
3. Choice
1) According to Balance of Payments, if the economic growth in the United States
faster than in Europe, it will lead to ( )
a. the U.S. trade deficit rise, the U.S. dollar appreciate
b. the U.S. trade deficit drop, the U.S. dollar appreciate
c. the U.S. trade deficit rise, the U.S. dollar depreciate
d. the U.S. trade deficit drop, the U.S. dollar depreciate
2) If the nominal interest rate rises by 3% in the United States, and inflation
expectation also rise 5%, then ( )
a. capital will flow into the United States
b. the U.S. dollar will depreciate
c. the U.S. dollar will appreciate
d. the U.S. dollar will remain unchanged versus other foreign currencies
3) According to relative purchasing power parity theory, if the inflation in the
United Kingdom is 10%, and 4% in the United States, then ( )
a. the U.S. dollar will appreciate 4% versus the pound
b. the U.S. dollar will depreciate 4% versus the pound
c. the U.S. dollar will appreciate 6% versus the pound
d. the U.S. dollar will depreciate 6% versus the pound
4) According to the monetary approach, a country's trade balance deficit is due to
( )
a. domestic interest rate higher than the foreign
b. domestic interest rate lower than the foreign
c. domestic money supply greater than demand for money
d. domestic money supply less than demand for money
5) According to asset-markets approach, exchange rate is decided by ( )
a. the relative GDP growth rate between countries
b. balance of merchandise trade in all countries
c. investors balancing portfolio of financial assets in different currencies
d. government using import tariffs and quotas
6) When is asset-markets approach the most effective? (
)
a.
Analyze the reasons for a stable exchange rate
b.
Analyze the reasons for government changing money supply
c.
Analyze the reasons for long-term exchange rate fluctuations
d.
Analyze the reasons for short-term exchange rate fluctuations
7) The emergence of exchange rate overshooting is due to (
a.
domestic prices rapidly adjusted to demand changes
b.
military spending in global conflict
c.
non-flexible short-term demand for exports
d.
flexible short-term demand for exports
)
Keys
1 Key concepts and Terms
⑴
⑵
⑶
2 True or False
⑴
×
3 Choice
⑴
C
⑵
B
⑵
√
⑶
C
⑶
×
⑷
D
⑷
×
⑸
C
⑹
D
⑸
×
⑺
D
Chapter
14
Balance-of-Payments
Adjustments
Under
Fixed
Exchange Rates
1. Concepts and Terms
1) gold standard
2) Foreign trade multiplier
2. True or False
1) Under gold standard, BOP deficits decrease domestic price level by decreasing
money supply.
2) Under gold standard, higher interest rate and capital inflow of a country will help
to adjust BOP deficits automatically.
3) The fear to domestic unemployment makes the government refuse to comply with
the rules of the game.
4) In the income-determination model, an increase in national income will enlarge
foreign trade deficits.
5) Income adjustment model implies that a country needs to decrease its GDP to
adjust its foreign trade deficits.
6) Monetary approach believes that the fundamental reason that leads to BOP
deficits is domestic excess supply of money to demand.
3. Choice
1) Under the historical gold standard, during the surplus nations receive
international reserve ,they will experience ( )
a. appreciation in exchange rate
b. depreciation in exchange rate
c. an increase in money supply and price, and a decrease in surplus.
d. a decrease in money supply and price, and an increase in surplus
2) Under the historical gold standard, if the UK experiences foreign trade deficits,
with gold flowing out and money supply increasing, the UK will ( )
a. lower its rate, and short-term capital flows in.
b. lower its rate, and short-term capital flows out.
c. higher its rate, and short-term capital flows in.
d. higher its rate, and short-term capital flows out.
3) The reason that make the government which is experiencing BOP deficits
reluctant to comply with the rules of the game is ( )
a. they are afraid of inflation.
b. they don’t have international reserve.
c. to prevent the exchange rate from fluctuating.
d. to avoid potential depression and high unemployment.
4) According to the income adjustment approach, if a country’s foreign trade
deficit is 100$, marginal propensity to import is 0.05, it should ( )
a. reduce income for 2000$.
b. reduce income for 500$.
c. increase income for 2000$.
d. increase income for 500$.
5) According to monetary approach of BOP, the reason that cause a nation to
experience BOP deficits is ( )
a. higher domestic interest rate than abroad.
b. lower domestic interest rate than abroad.
c. more money demand than supply in domestic.
d. more money supply than demand in domestic.
Keys
1 Key concepts and Terms
⑴ a monetary system in which each member nation's money supply consisted of gold
or paper money backed by gold, where each member nation defined the official price
of gold in terms of its national currency and was prepared to buy and sell gold at that
price; free import and export of gold was permitted by member nations.
⑵ when an increase in exports sets off a chain reaction that results in greater levels of
spending so that domestic income increases by some multiple of the export increase.
It equals the reciprocal of the sum of the marginal propensities to save and to import.
2 True or False
⑴
√
3 Choice
⑴
C
⑵
C
⑵
√
⑶
√
⑶
D
⑷
A
⑷
×
⑸
D
⑸
√
⑹
√
Chapter 15 Exchange-Rate Adjustments and the Balance of
Payments
1.
1)
2)
3)
4)
Concepts and Terms
devaluation
revaluation
Marshall-Lerner condition
J-curve effect
2. True or False
1) If a nation adopts a floating rate, the international competition of the enterprises
depends on the proportion of inputs.
2) J-curve effect shows that the deficit may be increased by the devaluation initially
and will be reduced gradually in two or four years.
3) Absorption approach emphasized that devaluation will be successful at full
employment nations.
4) If an economy is operating at full employment, ought to put the fiscal policy
reducing into practice then make a devaluation be able to improve that the
country trade deficit.
5) Monetary approach emphasized that the government reaches the purpose cutting
a trade deficit only when the currency supply expanded with currency
devaluation.
3. Choice
1) If all inputs of Microsoft company are from Amarica and priced in dollar, dollar
appreciate will( )
a. improve the international competitiveness of Microsoft company
b. reduce the international competitiveness of Microsoft company
c. do not effect the international competitiveness of Microsoft company
d. improve or reduce the international competitiveness of Microsoft company
depending on demand elasticity
2) If the U.S. demand for imports is non-flexible, the depreciation of the dollar
will ( )
a. the outflow of dollars for purchasing imports reduce significantly.
b. the outflow of dollars for purchasing imports reduce slightly.
c. the outflow of dollars for purchasing imports decrease
d. the outflow of dollars for purchasing imports have no variation
3) According to the Marshall-Lerner condition, devaluation will improve English
trade balance when ( )
a. English demand for imports is elastic, and the others’ demand for English
exports is also elastic
b. English demand for imports is elastic, and the others’ demand for English
exports is not elastic
c. English demand for imports is not elastic, but the others’ demand for English
exports is elastic
d. both English demand for imports and the others’ demand for English exports
are not elastic
4) Which condition below will make the J-curve effect can more obvious (
)
a. identify and estimate new suppliers is very difficulty
b. short-term supply elasticity and demand elasticity are both very high
c. there is very little inventory in import sector
d. enterprises can adjust production to increase orders quickly
5) According to the Absorption approach , devaluation will only improve the trade
balance if domestic economy is ( )
a. balance of payments surplus and full employment
b. balance of payments surplus and underemployment
c. balance of payments deficit and full employment
d. balance of payments deficit and underemployment
Keys
1 Key concepts and Terms
⑴
⑵
⑶
⑷
2 True or False
⑴
⑵
√
√
3 Choice
⑴
B
⑵
C
⑶
A
⑶
×
⑷
A
⑷
√
⑸
D
⑸
×
Chapter 16 Exchange-Rate Systems
1.
1)
2)
3)
4)
Concepts and Terms
Par value
Special drawing right
Floating exchange rates
Exchange controls
2. True or False
1) Bretton Woods system required members to adopt floating exchange rate
2) During the time of implementing Bretton Woods system, the us dollar is the key
currency.
3) “Dirty float” refers that government uses exchange-stabilization fund to affect
rate fluctuations under floating exchange rates .
4) “Multiple exchange rates” refers that currency qualifies different value in
different times of the year under floating exchange rates.
3. Choice
1) Bretton Woods system didn’t require (
)
a. Par value
b. Floating exchange rates
c. Key currency
d. Official exchange rate
2) Key currency in the 1990s (
)
a. Only consists of special drawing right announced by IMF
b. Only consists of currency of par value
c. Voted by the United Nations
d. Included relatively stable monetary value, such as the dollar and the German
mark, and had been widely accepted as a mean of international trade
3) Compared with the fixed exchange rates, floating exchange rates (
)
a. Improve the importance of exchange-stabilization fund
b. Reduce the high cost of using domestic policy measures to redress the
underlying imbalance of the international payments
c. Reduce the necessity of hedging in the forward market
d. Need more countries to establish par value
4) Compared with the floating exchange rates, managed floating system (
)
a. Contains of government restrictions on short-term exchange rate fluctuations
b. Require IMF to prevent dirty float
c. Improve the stability of the exchange rate
d. Restore adjustable pegged exchange rates which is similar to Bretton Woods
system
5) The main purposes of some countries adopting dual exchange (
)
a. Trade between two countries in different exchange rates
b. Implement fixed exchange rate in the commerce trade ,while implement
floating exchange rate in the capital trade
c. Differentiate between regional alliance countries and the non-regional alliance
countries
d. Implement one exchange rates when importing, while implement another more
favourable exchange rates when exporting
Keys
1 Key concepts and Terms
⑴Establish a par value against one or more key currencies.
⑵It’s a basket established by the IMF which consists of five currencies.
⑶The price of currency is established daily by an unrestricted market.
⑷In order to implement monetary policy, government usually adopts some policies
and measures to limit foreign exchange trading and international settlement.
2 True or False
⑴
×
3 Choice
⑴
B
⑵
D
⑵
√
⑶
√
⑶
B
⑷
A
⑷
×
⑸
B
Chapter 17 Macroeconomic Policy In an Open Economy
1.
1)
2)
3)
4)
5)
Concepts and Terms
Internal Balance
External Balance
Overall Balance
the Smithsonian Agreement
Louvre Accord
2. True or False
1) Internal balance refers to trade balance among countries of regional economic
community.
2) A nation achieves external balance when it realizes neither BOP deficits nor BOP
surpluses.
3) Currency depreciation can help a country solve the problem of economic
depression and BOP deficits.
4) The Smithsonian Agreement of 1971 was a coordinated attempt by the major
industrial nations to realign the interest rate.
5) The Group of Seven is an organization of developing countries set up by Latin
American.
6) The Plaza Accord of 1985 was an agreement by major industrial countries on
realign the fixed rate of exchange system of Bretton Woods Agreements.
3. Choice
1) A significant sign of a country without internal balance is ( )
a. Sustained dificit of BOP
b. Depriciation of home currency on the foreign-exchange market
c. Capital inflows from other countries
d. High unemployment and recession in the nation
2) The major objective of Expenditure-switching policies is ( )
a. Diverting domestic spending to more poductive projects
b. Cutting the sustained BOP deficit
c. Reducing the pressure of domestic inflationary
d. Lowering domestic interset rate
3) Which following option belongs to Expenditure-switching policies? ( )
a. Increase in home currency supply
b. Increase in domestic government spending
c. Depreciation of currency
d. Lower income tax rates to restore economic prosperity
4) Which policy can help a country’s economic recovery and BOP’s reduction? ( )
a. Reduction of domestic currency exchange rate
b. Increase in domestic currency exchange rate
c. Increase home currency supply
d. Decrease home currency supply
5) Under floating exchange rate system, assumes high degree of capital mobility, the
best way to promote a nation’s economic recovery is ( )
a. Increase home currency supply
b. Increase government spending
c. Decrease home currency supply
d. Decrease government spending
6) Which policy match can help a country’s economic recovery and BOP’s reduction?
( )
a. Decrease currency supply, appreciate the currency.
b. Decrease currency supply, depreciate the currency.
c. Increase currency supply, appreciate the currency.
d. Increase currency supply, depreciate the currency.
Keys
1 Key concepts and Terms
⑴ Internal Balance is a state in which a country maintains a fully employed and little
or no inflation.
⑵When the current account is neither so deeply in deficit that the home nation is
incapable of repaying its foreign debts in the future nor so strongly in surplus that
foreign nations cannot repay their debts to it.
⑶Overall Balance is a state in which a country achieves both internal Balance and
external Balance.
⑷ The Smithsonian Agreement of 1971 was a coordinated attempt by the major
industrial nations to realign the exchange values of their currencies using currency
devaluations and revaluations.
⑸ The Louvre Accord was signed by the then G6(France,West Germany,Japanm
Canada,the United States and the Uniter Kingdom) on Feburary 22,1987 in
Paris,France. The goal of the Louvre Accord was to stabilize the international
currency markets and halt the continued decline of the US Dollar caused by the Plaza
Accord.
2 True or False
⑴
×
3 Choice
⑴
D
⑵
B
⑵
√
⑶
√
⑶
C
⑷
A
⑷
×
⑸
A
⑸
×
⑹
D
⑹
×
Chapter 18 International Banking: Reserves, Debt, and Risk
1. True or False
1) Most international trade theory assumed that the labor and capital can not flow
between countries.
2) The main purpose of Japanese auto companies establishing cross-border plant in
the United States is to obtain low-cost raw materials.
3) The main purpose of U.S. companies establishing export processing factories
bonded is to enter the consumer market in Mexico.
4) The international labor migration may be increase the wage differentials between
countries, and reduce overall economic efficiency.
2. Choice
1) MNE ( )
a. Refers to shareholders from enterprises of different countries
b. Refers to export to enterprises of different countries
c. Refers to a number of countries with manufacturing facilities of enterprises
d. General scale is smaller than the largest enterprises of home country
2) The main purpose of horizontal integration of multi-national corporations in
overseas investment is ( )
a. Products to the international market
b. In exchange for oil, copper and other raw materials
c. To achieve lower production costs
d. Operating diversify into new product areas
3) Through foreign direct investment, IBM shift personal computer parts and
components production to other countries, and then return to the US to sale, this
example belongs to ( )
a. Horizontal integration
b. for the purpose of improving the efficiency of vertical integration
c. conglomerate expansion
d. Specific operating agreement
4) International joint venture enterprises may be for the following reasons, in
addition to ( )
a. Subject to the provisions of the host government restrictions
b. More effective integration of a variety of different countries, languages and
cultures
c. Access to advanced technology and management skills
d. Implement a close coordination between Global production plants
3. Short answer questions
1) It is assumed that the U.S. business income tax rate is 50%, Saudi Arabia's
income tax rate is 30%. If a vertically integrated multinational subsidiaries which
operates the oil refining business in Saudi Arabia won the 100,000 dollars of
profits, under the existing tax laws in the United States, What the number of
income tax should MNS pay respectively to the two Governments ? If the United
States cancels the provisions of foreign tax credits, the real tax will be changed,
from which is equal to the total amount of tax allowances deduced from the
amount of the foreign tax, to the taxable income which is equal to the overseas
tax deducted from the amount of tax. What will be change of the two
Governments to pay the allowances and the total allowance?
2) Make a brief explanation of the concept of the transfer pricing manipulation. Why
the MNE have the ability to transfer pricing? Let’s back to the example of article
5, whether the United States is against foreign deferred income tax provisions,
there will exist tax motives that makes MNS increase or decrease the transfer
pricing of crude oil. The oil transports from Saudi Arabia's subsidiary to the
United States’s refining subsidiary .How it affects the total tax that has been paid,
and distorts the countries which have reported a profit? Which country will gain
the additional tax revenues from the manipulation of transfer pricing?
Keys
1 True or False
⑴
√
2 Choice
⑴
C
⑵
×
⑵
A
⑶
×
⑶
B
⑷
×
⑷
D
3 Short answer questions
⑴Answer:
tax credit
Gross profit
Saudi tax
Return to profit
$ 100,000
$ 30,000
$ 70,000
no tax credit
$ 100,000
$ 30,000
$ 70,000
U.S. tax
Net profit
$ 20,000(50-30)
$ 50,000
$ 35,000 ($ 70,000 的 50%)
$ 35,000
If we don’t have tax credit， effective tax rate will rise from 50% to 65%.
⑵Answer: The transfer pricing manipulation means to reduce the tax, the paid tariff
and avoid the restrictions of returning profits , if the intermediate products convey
from one country subsidiary to another subsidiary ,the prices will be increase or
decrease. In the example of article 5, a subsidiary of Saudi Arabia will have the
motivation to raise the price of oil which transports to the United States, and the
lower tax rates countries will gain higher profits.