Homework #7

Globalization and Trade

1. How can there be any economic gains for a country from both importing and exporting the same good, like cars?

2. If the removal of trade barriers is so beneficial to international economic growth, why would a nation continue to restrict trade on some imported or exported products?

3. How can governments identify good candidates for infant industry protection? Can you suggest some key characteristics of good candidates? Why are industries like computers not good candidates for infant industry protection?

4. Name and define three policy tools for enacting protectionism.

5. The country of Pepperland exports steel to the Land of Submarines. Information for the

quantity demanded (Qd) and quantity supplied (Qs) in each country, in a world without

trade, are given in the tables below.

a. What would be the equilibrium price and quantity in each country in a world without

trade? How can you tell?

b. What would be the equilibrium price and quantity in each country if trade is allowed

to occur? How can you tell?

c. Sketch two supply and demand diagrams, one for each country, in the situation

before and after trade.

d. On those diagrams, show the equilibrium price and the levels of exports and imports

in the world after trade.

e. If the Land of Submarines imposes an anti-dumping import quota of 30, explain in

general terms whether it will benefit or hurt consumers and producers in each country

f. Does your general answer change if the Land of Submarines imposes an import

quota of 70?

Exchange Rates and International Finance

6. How will a stronger euro affect the economic agent from Germany’s perspective?

a. German companies export goods and services to the U.S.

b. A German tourist visiting Chile.

c. A German bank investing in a Canadian government bond.

d. U.S. companies export goods and services to Germany.

e. French companies export goods and services to Germany.

7. Suppose that political unrest in Egypt leads financial markets to anticipate

depreciation in the Egyptian pound. How will that affect the demand for pounds, supply

of pounds, and exchange rate for pounds compared to, say, U.S. dollars?

8. A central bank can allow its currency to fall indefinitely, but it cannot allow its currency to rise indefinitely. Why not?

9. What are some of the reasons a central bank is likely to care, at least to some extent, about the exchange rate?

10. a) A British pound cost $1.56 in U.S. dollars in 1996, but $1.66 in U.S. dollars in

1998. Was the pound weaker or stronger against the dollar?

b) Calculate the cost of a U.S. dollar in terms of British pounds in 1996 and 1998, did

the dollar appreciate or depreciate versus the pound?