Chapter 1:

International Economics is Different

Multiple Choice Questions

  1. Sovereign nations:
  2. Are subject to laws passed by the United Nations.
  3. Must be concerned with the interests of foreigners when developing economic policy.
  4. Often ignore the interests of foreigners.
  5. Must coordinate their monetary policy with the World Bank.

ANSWER: C

  1. Outsourcing of services to foreign countries:
  2. Cost the U.S. economy an estimated 5 million jobs by 2005.
  3. Mainly impacts workers in business services such as data entry and software development.
  4. Is a serious concern for workers in high-wage manufacturing industries.
  5. Will have a serious negative impact on all service sector jobs in the United States.

ANSWER: B

  1. Globalization:
  2. Is the process of intensifying the connections between national economies through international trade, foreign direct investments by multinational firms, and international financial investments.
  3. Has been proven to worsen working conditions and increase poverty in poor countries.
  4. Requires governments to weaken labor and environmental regulations in order to remain competitive.
  5. Is coordinated by the International Labor Organization to ensure respect for the four core labor standards.

ANSWER: A

  1. The long-run solution to eliminating child labor is to:
  2. Boycott companies whose products are produced using child labor.
  3. Impose trade sanctions against countries that violate child labor standards.
  4. Stimulate economic growth and rising incomes in poor countries.
  5. There is no long-run solution as demand for cheap labor will always exist.

ANSWER: C

  1. In early 2002, the national moneys of 12 European countries disappeared. They were replaced by one new money, the euro. The benefits to those countries included all of the following EXCEPT:
  2. It is convenient – there is no need to change money when crossing national borders.
  3. It is less risky – there is no need to worry about the changing value of one country’s money relative to another country’s money.
  4. It is economical – travel and trade are made easier due to a decrease in transaction costs.
  5. It strengthens domestic policy – using an international money gives a country’s Central Bank a greater ability to influence national prices, production, and jobs.

ANSWER: D

  1. The Chinese government’s intervention in the foreign exchange market - buying U.S. dollars and selling yuan – had the effect of:
  2. Weakening the U.S dollar and increasing the U.S. trade deficit with China.
  3. Strengthening the U.S dollar and increasing the U.S. trade deficit with China.
  4. Strengthening the yuan and increasing the U.S. trade deficit with China.
  5. Strengthening the yuan and decreasing the U.S. trade deficit with China.

ANSWER: B

  1. On July 21st, 2005, the Chinese government changed the value of the yuan from 8.28 yuan per U.S. dollar to 8.11 yuan per U.S. dollar. This implies a ______dollar and a ______yuan.
  2. Weaker; weaker
  3. Weaker; stronger
  4. Stronger; stronger
  5. Stronger; weaker

ANSWER: B

  1. Since the early 2000s, a variety of services has been subject to outsourcing in the United States EXCEPT for:
  2. Data entry.
  3. Telephone call centers.
  4. Software development.
  5. Haircuts.

ANSWER: D

  1. Since the late nineties, to keep the exchange rate of the yuan to the U.S. dollar fixed, the Chinese government:
  2. Has been trying to hold predominantly euros and British pounds as foreign assets.
  3. Has been buying dollars and selling Yuan.
  4. Has been trying not to sell its domestic currency (Yuan).
  5. Has been keeping a trade deficit with many countries including Australia, Russia, Japan, and Brazil.

ANSWER: B

  1. The exchange rate policy of a “crawling peg” adopted by the Chinese government since 2005 means that the government:
  2. Allowed small daily changes which over time resulted in a slow, tightly controlled trend.
  3. Vehemently defended the yuan by selling U.S. dollars.
  4. Held a balanced portfolio of assets including a variety of foreign currencies.
  5. Tried to unwind the trade surplus with the U.S.

ANSWER: A

  1. Outsourcing is the process of:
  2. Shifting business activities abroad.
  3. Allowing foreign workers on temporary visas.
  4. Eliminating business activities that require foreign labor.
  5. Paying foreign workers lower wages compared to domestic workers.

ANSWER: A

  1. In recent years, the European Union:
  2. Attempted a geographic expansion to include Turkey.
  3. Adopted a formal constitution in which was decided that all countries should pay their debt in their own currencies.
  4. Made progress on the formation of a monetary union, and on an expansion of the European Union, but could not adopt a formal constitution due to the negative vote of France in 2005.
  5. Made significant progress on the formation of a monetary union, a formal constitution, and on accepting some eastern European countries as members.

ANSWER: C

True/False Questions

  1. Child labor virtually vanishes in a developing economy when income per capita reaches about $8,400.

ANSWER: TRUE

  1. It has been estimated that worldwide approximately 100 million children under the age of 15 work full-time and at least that number work part-time.

ANSWER: TRUE

  1. While Britain, Denmark, and Sweden do not use the euro, the European Central Bank makes monetary policy for the entire EU.

ANSWER: FALSE

  1. While there are many countries interested in joining the EU, it is unlikely that the EU will be enlarged because there seems little desire on the part of member countries to have a larger union.

ANSWER: FALSE

  1. The World Trade Organization, the International Monetary Fund, the United Nations, and the World Bank control the international economy by imposing binding rules that control international trade and exchange markets.

ANSWER: FALSE

  1. The four core labor standards agreed upon in the International Labor Organization were that all countries should: respect collective bargaining, ban forced labor, ban child labor, and ban discrimination in the workplace.

ANSWER: TRUE

  1. Labor may be internationally mobile, but capital and land do not migrate from one country to another.

ANSWER: FALSE

  1. Politicians do not erect barriers to trade with other countries because they are also concerned with the well-being of foreigners.

ANSWER: FALSE

  1. Firms are always trying to lower the costs they incur in their production activities, and that is the main reason for them to shift jobs abroad.

ANSWER: TRUE

  1. India and China are among the main providers of outsourcing services.

ANSWER: TRUE

  1. Turkey is scheduled to join the European Union in 2009.

ANSWER: FALSE

  1. Each country has to abide by the decisions of the International Monetary Fund and the World Bank because they are the only recognized international organizations who manage the global economy.

ANSWER: FALSE

Essay Questions

  1. One of the basic requirements for a country to join the European Union is the capacity and willingness to adopt and to implement EU rules and standards. Why would a country agree to make changes to its national laws and regulations to conform to outside requirements?

POSSIBLE RESPONSE: It is true that being a member of the European Union comes at a cost: every member has in some respect to cede national sovereignty and to abide by the laws and regulations of the European Union. However, for these countries there are benefits to being members of this Union that significantly exceed this cost.

First, these rules and regulations are not imposed by a third party, but designed by the members of the Union themselves. So, each country has the opportunity, to a greater or lesser extent, to take part in the design of these laws and regulations.

Second, giving up national sovereignty might be popular in countries where national policies have been disastrous. This is particularly true for countries which did not have a well controlled monetary policy and oversupplied their own currencies until inflation made these national currencies nearly worthless. These countries might indeed be gaining by ceding their monetary sovereignty to the European Central Bank.

Finally, even though each member is subjected to the same rules and regulations, each country is gaining because all other members abide by those laws and policies. Probably most importantly, this ensures a free trade among members, and free movement of factors of production (labor and capital). This openness gives a chance for a greater economic prosperity for all members of the Union.

  1. Discuss the economic consequences of outsourcing or offshoring of services, and explain who is gaining and who is losing from the process of outsourcing. Why is outsourcing such a debatable issue?

POSSIBLE RESPONSE: Outsourcing is the process of shifting economic activities abroad. This process is triggered by the desire of firms to lower the cost of labor in the production process. Overall, it is believed that outsourcing, similarly to international trade, promotes global economic efficiency. It helps firms lower their cost of production, and allows them to bring goods to the final consumer at lower prices. The main fear from outsourcing comes from workers in occupations that are subject to outsourcing: call centers, data entry, and software development.