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INTERNATIONAL ECONOMICS – PKNU, SUMMER 2012 -SOUTH KOREA
Questions to be used in the Video Presentations
Chapter 2: Foundations of Modern Trade Theory: Comparative Advantage
Video: Three Billion New Capitalists (9:22)
Summary: India and China have become rising powers in the world market. The author of Three
Billion New Capitalists, Clyde Prestowitz discusses the challenges the US faces as individuals in other
nations take advantage of the business opportunities that Free trade provides. The technology of the
world has decreased distance barriers for doing business and has driven outsourcing in many nations.
The lack of a competitive US industrial policy has encouraged other nations and lead to the
advancement of developing markets. The US faces continued growth challenges as most of its growth is
fueled by debt. Other nations like India and China face challenges relating to pollution and aging
populations. The author of Three Billion New Capitalists hopes that the nations can open their trade and
work together creating a win-win situation for all.
Why would Clyde Prestowitz say that he wants other nations to succeed when they are competing with
the US?
How has technology decreased distance barriers and increased productivity and outsourcing?
What is comparative advantage?
What were the countries mentioned in the videos and their relative advantages and disadvantages?
Why is pollution a challenge of growth in these countries?
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Video: Wal-Mart’s Success in China
Wal-Mart is becoming more popular in China as both a local shopping center and an opportunity
for international trade. Wal-Mart purchases from China reached around $18 billion in 2004 as it grew to
China’s 8th largest trading partner. This trade is good for both China and for the US. It provides Chinese
workers with jobs and the US consumers with affordable products. The wage difference has raised
concerns in the US that China is taking jobs away from the US workers. Proponents of international
trade argue that if the jobs do not go to China, they will not come back to the US. They will go to other
low wage nations. In addition, they point out that the China is large purchaser of US automobiles and
planes.
How could there be such a big wage difference between the two nations? Is this ethical?
What are the consumption gains from trade experienced by the US and China in this video?
Describe the evidence of specialization and comparative advantage that occurs in this video.
Do you think China or the US is experiencing more gains from trade? Apply the theories of reciprocal
demand and the importance of being unimportant.
The video debated the relocation of low wage jobs from the US to China. Promoters of trade pointed out
that if these jobs were not given to Chinese workers, they would not come back to the US. Where do
you think the next low wage job market will be?
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Chapter 3: Sources of Comparative Advantage
Video: Air War
In this video, Ray Suarez reports on the disagreements between the United States and Europe
and Boeing and Airbus. The disagreement surrounded subsidization of building large aircraft. The two
groups appealed to the World Trade Organization about the time that Airbus was about to launch a new
aircraft that would compete with Boeing’s 787. The companies appealed to their respective governments
with complaints that the competition would hurt their business and their ability to supply both commercial
and military aircraft. In 1992, both groups had signed an agreement to cap government support for these
manufacturers. Since that time, Airbus has grown into a major competitive force and Boeing no longer
wants to comply with the 1992 agreement. Airbus and Boeing disagree on the type of government
support permissible and what exactly constitutes a subsidy. Support by the two governments may give
one company or the other an unfair advantage.
In the video, the United States and Europe try to isolate the aircraft dispute from spilling over into the
trade of goods and services in other industries. According to Linder’s theory of overlapping demands,
why might this be an important issue?
What term is used to describe the situation when governments are actively involved in creating a
comparative advantage?
What is a subsidy? Do you think the companies in the video were receiving subsidies?
Is it good to use government policy in an attempt to give a company or industry a comparative
advantage?
Name a few issues that might increase the costs of Boeing and Airbus and decrease their
competitiveness in the market.
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Video: Cirque Du Soleil: a Truly Global Workforce
Since 1984, this circus has grown into a international company that uses the skills of performers
to create a unique experience and reach new markets. The company’s competencies are dependent on
the talent of its workers. The nature of skills in the business makes it very difficult to obtain and Cirque’s
search for that talent has ranged all over the globe. These performers are sometimes found in places
where certain skill sets are abundant like Mongolia or Hawaii. Athletic ability combined with acting skill is
a requirement for their workers. This diverse workforce has raised some specific challenges for
management. The high diversity of different cultures, communication issues, and technical issues that
go into the production have spurred the group to find unique solutions to homesickness and designs.
What is the source of Cirque’s advantage compared to other performance industries?
Is skill the skill of Cirque’s performers an example of capital or labor factor endowments?
.
Why might unskilled workers in the US support trade restrictions?
International trade and immigration are often linked. Name a few examples of this.
Draw a graph of wages of skilled and unskilled workers as the increase in trade or technology results in
more inequality of wages.
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Chapter 4: Tariffs
Video: Giant of the Sky
When Airbus released the new aircraft Europe looked at it as an example of its economic strength and
competitiveness. The struggle to get this plane out into the market has ranged from infrastructure that
was not ready to receive it to complaints between Airbus and Boeing that the other was receiving
unlawful assistance. The strategy of Airbus was uncertain but established a serious threat to Boeing.
This led to threats of a trade war since Airbus received direct subsidies and Boeing received indirect
subsidies.
What are subsidies and tariffs?
What is the purpose of subsidies and tariffs?
Why would Europe and the US subsidize their aircraft industries?
Who do subsidies and tariffs hurt?
What affect might a trade war have on the travel industries?
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Video: No Tariffs (Steel Tariffs Ended)
This video discusses the announcement of the elimination of tariffs to protect the US steel industry. Its
purchasers and foreign producers complain that the tariffs were unfair and placed US interests above
overall webbing of its competitors. They threatened their own actions against other US industries like
cotton and Oranges. The WTO found that the US tariffs were illegal and would condone retaliatory
tariffs. The election nature of the US’s presidential and other government offices provided an easy way
for foreign governments to exert pressure on the US. The political fight divided free traders and the
active players in the steel industry. Upon the suspension of tariffs, the European Union also suspended
retaliatory tariffs. The steel industry argues that other nations that were exercising retaliatory tariffs were
using other illegal and unethical practices to promote their steel and that this tariff was a tool to balance
trade for the US.
Who were the winners and losers when the US had a tariff?
Why would foreign nations oppose the tariff?
What are some of the arguments against the tariff?
How might importers of US steel avoid the tariffs?
Why might governments worry about the issues of smuggling and retaliatory tariffs?
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Chapter 7: Trade policies for the Developing Nations
Video: FDI in Sudanese oil Changes Sudanese Economy
Chinese investments in Sudanese Oil and Gas refineries has helped improve Sudan’s economy.
These two groups have reconciled their communication and cultural differences to work together in the
oil industry. Foreign direct investment has spread from the oil industry to assist other local businesses
and industries to grow. The increased money flows have grown businesses and allowed consumers to
make larger purchases like cars. US sanctions against Sudan for human rights violations have limited
the expansion of some industries, but others, like Coca-Cola factories have continued to grow. Those in
the video argue that the sanctions have hurt the businesses rather the targets of the sanctions. Peace
deals over Darfur may change these sanctions and help Sudan receive more investments. The
economic boom has helped Khartoum, but has not spread to the rest of the nation. The oil revenues are
not being used to further other necessary industries like farming. The government is under pressure to
spread the development because the political climate may drive foreign investment away.
Most developing nations mix of export goods are comprised of things like agricultural goods, raw
materials, and fuels. What are these goods called?
Developing nations often argue that the benefits and terms of international trade are disproportionately
in favor of advanced nations. How might this be true in the case of Sudan?
Describe the trade benefits and restrictions that are occurring between nations in this video.
Developing nations like Sudan (and other nations in West Africa) have often found that droughts and
agricultural subsidies in advanced nations put their farming industry at risk and jeopardize their food
supply. Describe this issue.
International commodity agreements to stabilize prices and revenues of primary products in developing
nations have not always been successful. Can you name a similar agreement applicable to this video
that has met with some success?
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Video: World Bank
Starting a business in some developing nations can be nearly impossible due to government
regulations and other barriers to entry. The World Bank acknowledges the importance of private
businesses in fighting poverty and improving economic growth. Since the 1960s and 70s, the World
bank has shifted its focus from lending to governments to encouraging entrepreneurship and
infrastructural strength. The Doing Business Project began in 2003 and keeps a score card of nations in
which it is the easiest or most difficult for doing business. This information serves to encourage nations
that are making it easy to do business, to penalize nations that make business difficult, and to serve as a
guide for nations that are seeking reform. The World Bank offers loans, grants, reform advice and
oversight for nations that wish to make reforms. Bribes and corruption have also become a large
contribution to the cost of doing business in many countries. The World Bank has helped establish
regulations and procedures to prevent and fight corruption.
What is the purpose of the World Bank?
Name some of the barriers to economic development mentioned in the video.
Why would unofficial businesses be a problem in a developing nation?
Name some of the arguments against the idea that aid promotes growth in developing nations.
How does economic growth affect the poor?
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Chapter 8: Regional Trading Arrangements
Video: US Farmers and CAFTA
Producers of agricultural products in the US debated the Central American Free Trade Agreement. The
agreement changes affects the farmers differently based their products. Dairy and hog farmers were
looking forward to the liberalization of trade because it would increase their opportunities for export.
Removing tariffs on pork products would increase create more markets for their hogs. Those in
opposition include the sugar beet farmers. Unlike other agricultural products, sugar production is not
subsidized in the US, however, the US does limit sugar imports. This allows the sugar farmer to demand
a higher price. CAFTA opens the door to more competition for these farmers due to foreign subsidies.
The sugar farming industry argues that it is at a disadvantage compared to subsided producers in other
nations. Promoters of CAFTA argue that the sugar beet industry is exaggerating the effect simply to
protect its profits. Others state that these regional trade agreements are harmful to the US because they
contribute have been a key contributor to the trade deficit.
What is the difference between regional trade agreements and multilateral trade agreements?
What type of economic integration is the Central American Free Trade agreement? Benelux? and the
European Union?
What are some of the reasons for regional economic integration and trading arrangements?
Describe the static welfare effects of economic interdependence.
Describe the dynamic welfare effects of economic interdependence.
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Video: Uruguay Head of a New Economic Zone
Uruguay has become a central point in the MERCOSUR agreement. Producers in Uruguay
understand that they must diversify by adding other products to their current high volumes of meat and
wool. Automobile sales have increased since the implementation of the agreement. While its size puts it
at a disadvantage compared to other nations in the arrangement, the nation sees an opportunity for itself
as the location of trade negotiations.
What nations are members of the MERCOSUR agreement?
Uruguay has both economic and political reasons for integration. Discuss.
Describe some of the reasons that it is difficult to form a regional trading arrangement.
Opponents of MERCOSUR have argued that its diversion effects cause dangerous inefficiency in their
markets. Why?
How is it possible for companies in a free trade area to realize significant cost economies?
.
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Chapter 10: The Balance of Payments
Video: Work Trade with Great Britain and Brazil
In this video, a discussion of the 200th year of trade between Britain and Brazil shows that trade
between the two has become strained. Britain fell from being one of Brazil’s top five trading partners to
being 36th. Britain hopes to reverse this direction by holding trade delegations. British companies go to
form relationships with Brazilian businesses. The diversity of the delegates indicates the wide range of
opportunities in the Brazilian market.
What were some of the reasons stated in the video for Brazil to be a good place to do business?
Britain was not pleased with its trade balance with Brazil. How did this low amout of trade affect the
balance of payments?
What is the Foreign exchange reason that exporting to Brazil has become a hot topic for British
businesses?
Is this trade better for Brazil or for the UK?
What happens to the current account if the capital and financial account register a deficit?
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Video: British Business Opportunities in India
British businesses and producers are looking to India as a possible export market. The demand for
British goods has been strong as British businesspersons in India would like to purchase familiar
products from the UK. India’s locals also consider British goods to be quality, making them an excellent
prospect for British business sales. India has a booming retail sector and the infrastructure has improved
greatly in the twenty first century. Despite India’s demands, British opportunities are negated by high
levels of bureaucracy.
How has the increase in British joint business ventures in India helped to introduce new products into
the market?
What are advantages for the UK firms?
What is the balance of payments?
How will trade with India affect the balance of payments in the UK?
How will trade with the UK affect India’s capital account?
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Chapter 11: Foreign Exchange
Video: Oil Futures Market Keeps Eye on Middle East Crisis
Volatility in oil prices is dramatically affected by supply and demand in the markets. This video
gives an introduction to the futures market, hedging, and the NYMEX. The prices are somewhat affected
by investors and speculators in the short-term, however the main drivers are supply and demand.
Traders and investors have to be familiar with the internal workings of the business and geopolitics of
the trades. The video suggests that the price of oil is a composite driven by speculation, geopolitics, risk,
and supply and demand.
How is the foreign exchange market different from the commodities market and stock markets?
How is the foreign exchange market similar to the commodities and stock markets?
What is the exchange rate?
Explain the difference between a bid rate and an offer rate (bid, and ask price).
How do investors and traders make a profit in the futures, stock, and foreign exchange markets?
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Video: Starbucks: Building Relationships with Coffee Growers
Starbucks also faces risk in price fluctuation in their coffee beans. The specialized requirements
of their product limits the number of suppliers, so Starbucks has chosen to manage the risk of its prices
and suppliers by building good relationships. The price of coffee beans is set on the floor of the
commodities exchange. The recent over supply of coffee beans has lowered the price of coffee beans,
making it an unprofitable crop for farmers. Starbucks, understanding that the market forces could put
their suppliers out of business and potentially jeopardize their own business began offering different
prices and programs to the coffee growers. The company believes that their fair trade prices and
partnership with farmers will increase the sustainability of their supply of specialty coffee beans. Using
long-term prices and future contracts, Starbucks guarantees its costs for future sales and the growers
can control their risk.
On what market is the coffee sold?
Is Starbucks offering a significantly different price than the actual price of coffee or is the coffee
Starbucks buys more expensive due to the increased demand by the company?
How might the price of coffee be affected by a change in the exchange rate?
How does the foreign exchange market play a role in Starbucks purchases and sales of coffee?
Define arbitrage.
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Chapter 12: Exchange-Rate Determination
Video: The Currency Report - U.S. and China's Exchange Rate Saga – Bloomberg
http://www.youtube.com/watch?v=HowZUck5Yy8&feature=related
In 2009, China and the US were going through talks about their currency holdings, exchange rates, and
valuations. The reporters claim that China’s large holdings of Dollars make it dependent on the strength
of the Dollar. China’s $800 billion comprised almost half of its foreign reserves in dollars. China may
have raise the discussion because it allows the nation to bring its political power to the world’s attention.
Due to the political and monetary policy actions of the US, holders of the Dollar worry that its value will
decrease. This along with the large stake that China has in the strength of the Dollar has China
concerned with the US deficit.
Why would China possibly not want the Dollar to lose its reserve currency status.
What is China likely to do in this situation?
In this dependence of foreign holdings of the dollar a long term or a short term determinant of the
exchange rate?
What are the usual conditions for a nations currency to appreciate in the long term?
What are the two factors that investors consider when deciding between domestic and foreign
investments according to the asset market approach to exchange rate determination?
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Video: Buick in China
When General Motors began making automobiles in China, it had the opportunity to position its brands
in that market differently than those in the use because there was no prior knowledge or expectations of
the brand. The strategy of making high end cars and then marketing a smaller “cool” car has worked
well. The strategy has translated into good profits for GM.
Why might GM prefer to manufacture its automobiles in China rather than in import them from the US?
GM’s local manufacturing strategy has gained an advantage over other automobile manufacturers that
export into the Chinese market. Why?
Demand for imports and exports may play a key role in the exchange rate in the long term. What other
factor has a greater role in the exchange rate in the short term?
What is purchasing power parity?
What is the real interest rate?
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Chapter 13: Mechanisms of Internal Adjustment
Video: Job Threat
Technology, economic difficulty, and the changing nature of labor demand have brought about a
large job reallocation between the US and China. This prompted Frank Levy and Richard Murnane to
develop the idea that jobs are in two different categories. Those that can be replaced by technology or
workers overseas using technology, and those that create value by face-to-face interaction. As the US
adjusts the number of jobs is anticipated to grow, but the mix of jobs should be dramatically different.
These two experts argue that as technology becomes more sophisticated, the need for movements of
jobs and capital to other nations may be dramatically decreased or altered.
Is this reallocation of jobs dependent on the economic recovery of the United States or do you think it
goes deeper to the current account adjustments of the US trade deficit?
How to trade surpluses and deficits affect incomes?
What are some jobs and services that would be very difficult to outsource?
How might technology remove some of the need for outsourcing?
Can you think of a problem with the theory of Frank Levy and Richard Murnane in relation to Global
business strategies to address pressures for cost control and customization to local tastes?
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Video: Passing the Torch?
China’s economy will become twice the size of the US economy in half a century. America was
once a central power for finance, culture, military, economy, and politics. As other nations develop,
experts point out that these factors may change and other nations will become centers in their own
rights. The US has faced many challenges lately in its monetary system, wars, cost pressures, and
markets. This in addition to the economic development of other nations has contributed to the rise of
new powers and centers in the world. The US is not accustomed to the competition and is trying to keep
up with other nations growth by its innovation and technology. The success of Haier is a good example
of other nations exceeding the US even in technology and innovation. Haier now provides the US with
manufacturing jobs by building factories in the US. The video calls this globalization in reverse since the
US used to sending jobs to China and China is now sending jobs to the US.
What is the current account?
The US runs a current account deficit with China. What two options does the US have to adjust its
current account?
What are the disadvantages of the automatic approach to current account adjustment mechanisms?
How is the rise of other nations an example of US successes, failures, and use of comparative
advantage?
Do companies like Haier rely on economies of scale or on skills and technology for the success of their
factories?
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Chapter 14: Exchange-Rate Adjustments and the Balance of Payments
Video: China: Changing the Yuan/Dollar
China’s government used to pet its currency to the dollar at a constant rate of 8.28 to $1. This
video discusses the announcement when China began to raise its currency and float it against a basket
of currencies. Other nations had complained that China’s exchange rate was allowing its business to
undercut the prices of competitors. Nariman Behravesh from Global Insight and Peter Morici from the
University of Maryland debate the merits of this policy stating that, while this is a step in the right
direction, the 2% change is not enough to satisfy competing nations. The purpose of China’s
purposefully low Yuan was to promote its exports; the exchange rate effectively acted like a 33%
subsidy to exporters. The purpose of China’s change is also debated as a political tool or a tool to
temper speculative inflows of money. Strengthening the Yuan gives workers more purchasing power
and will have an effect on the inflation rate in the US.
Which currency appreciated and which currency depreciated in the video?
If China appreciates its currency, what happens to the price of exports? What happens to a Chinese
firm’s cost of input materials for their products?
What will happen to the volumes of exports and imports as the Dollar depreciates relative to the Yuan?
What does China’s long policy of keeping its currency valued lower than the real value indicate about
the demand elasticity it experiences?
What would a partial pass through effect mean when applied to the appreciation of the Yuan relative to
the Dollar?
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Video: General Motors Chief Joins Euro Debate
General Motors investment in a United Kingdom subsidiary made the adoption of the Euro an
important issue to the company. Some have argued that the UK’s refusal to adopt the Euro will lead to a
loss of investments and trade for the nation. General Motors argues that the nation’s economy is more
important than the currency valuation of the British pound. Other car companies like Ford would favor
the adoption of the Euro.
Why are currency valuations important to these automobile manufacturers?
In the video, some car companies were worried that the UK would experience an unfavorable balance of
trade if it did not adopt the Euro. According to the Marshall-Lerner condition, what must happen for a
trade balance to be improved if the UK has a trade deficit?
This video has shown that currency stability is important to the cost and profits of firms. How have
countries like Japan offset the effect of currency swings on their ability to compete?
Why would GM believe that the stability and growth of the economy were more important, while Ford
believes that exchange rate stability is important?
According to the J curve effect, what would happen to exports from the UK if the Pound depreciated
relative to the Euro?
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Chapter 15: Exchange-Rate Systems and Currency Crises
Video: The International Monetary Fund: Economic Aid in South Korea and Uganda
The late 1990s experienced a financial collapse and nations like South Korea and Uganda
experienced monetary crisis. This video gives an overview of the beginning and purpose of the
International Monetary Fund. Horst Kohler, a managing director of the IMF discusses the role of
protectionism and nationalism in financial crisis. It gives both preventive and post crisis financial and
advice assistance. Some argue that the policies that the IMF requires for a nation to acquire assistance
create new challenges in economies that are already under financial stress. The case of South Korea is
presented as an example of IMF monetary assistance and Uganda as a case of IMF poverty assistance.
Governance of a nation is a key to successful poverty prevention program – IMF assistance to a nation
with a corrupt government does not reach those it is intended to help. It has also been argued that the
IMF’s financial safety net has contributed to a moral hazard problem.
What are the two primary goals of the IMF?
What is a Moral Hazard problem?
Why do you think the protesters in the video argued that the policy requirements for nations that receive
monetary assistance are damaging to the poor in those nations?
What are the two ways for a nation to offset a deprecation in the home currency’s exchange value?
Can you name some examples of IMF assistance and governance working together to make a
successful recovery?
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Video: Iceland Financial Crisis
Iceland faced bankruptcy as its banks credit lines were eliminated. In order to rescue the
economy, the nation forced bank mergers and instituted new policies to protect individuals’ deposits.
Funding local companies advance to international expansion left Iceland’s banks faced a dilemma.
Increasing international debt rose to over five times the nations annual output and set the nation up for
crisis when credit opportunities began to decline around the world.
Name some of the general factors associated with economic crisis.
Which of the above did the video mention Iceland experiencing in their crisis?
What are some common responses of governments to financial crisis?
What is a speculative attack?
What are the policy implications for the flexibility of exchange rates in developing nations and nations
with higher inflation than trading partners?