Unit 7 Review Problems
1. Mexico represents a small part of the world orange market.
a. Draw a diagram depicting the equilibrium in the Mexican orange market without international trade. Identify the equilibrium price, equilibrium quantity, consumer surplus, and producer surplus.
b. Suppose that the world orange price is below the Mexican price before trade and that the Mexican orange market is now opened to trade. Identify the new equilibrium price, quantity consumed, quantity produced domestically, and quantity imported. Also show the change in the surplus of domestic consumers and producers. Has total surplus increased or decreased?
2. Suppose that Congress imposes a tariff on imported autos to protect the US auto industry from foreign competition. Assuming that the United States is a price taker in the world auto market, show on a diagram: the change in the quantity of imports, the loss to US consumers, the gain to US manufacturers, government revenue, and the deadweight loss associated with the tariff. The loss to consumers can be decomposed into three pieces: a transfer to domestic producer, a transfer to the government, and a deadweight loss. Use your diagram to identify these three pieces.
3. The countries of Alpha and Beta produce diamonds and pearls. The production possibilities schedule below describes their potential output in tons per year:
Points of PPC / Alpha / BetaDiamonds / Pearls / Diamonds / Pearls
A / 150 / 0 / 90 / 0
B / 100 / 25 / 60 / 60
C / 50 / 50 / 30 / 120
D / 0 / 75 / 0 / 180
a. What is the opportunity cost of diamonds for each country?
b. What is the opportunity cost of pearls for each country?
c. In which good does Alpha have a comparative advantage?
d. In which good does Beta have a comparative advantage?
e. Suppose Alpha is producing and consuming at Point B on its PPC and Beta is producing and consuming at point C on its PPC. Explain why both nations would benefit if they specialize.
f. Draw a graph, and use it to explain how Alpha agrees to trade 50 tons of diamonds to Beta and Alpha receives 50 tons of pearls in exchange.
4. How would the following transactions be categorized in the US balance of payments accounts? Would they be entered in the current account (as a payment to or from a foreigner) or the financial account (as a sale to or purchase of assets from a foreigner)? How will the balance of payments on the current and financial accounts change?
a. A French importer buys a case of California wine for $500.
b. An American who works for a French company deposits her paycheck, drawn on a Paris bank, into her San Francisco bank.
c. An American buys a bond from a Japanese company for $10,000.
d. An American charity sends $100,000 to Africa to help local resident sbuy food after a harvest shortfall.
5. Use the information below on Mexico’s 1999 international transactions.
Merchandise Imports / $141,975Merchandise Exports / $136,391
Services Exports / $16,644
Services Imports / $31,526
Income receipts / $4,952
Income payments / $18,035
Unilateral transfers / $6,313
a. What is the balance of trade?
b. What is the current account?
c. Did Mexico become larger international net debtor during 1999?
6. Tell whether each of the economic actors in the following list would be suppliers or demanders in the foreign exchange market for US dollars:
a. An American tourist in Europe
b. A Japanese firm exporting to the United States
c. A British investor who wants to buy US stocks
d. A Brazilian tourist in the United States
e. A German firm importing from the United States
f. A US investor who wants to buy real estate in Australia
7. Explain whether each of the following changes would tend to appreciate or depreciate the US dollar, using supply and demand curves for the foreign exchange market to illustrate your answers:
a. Higher interest rates in Japan
b. Faster economic growth in Germany
c. A higher US rate of inflation
d. A tight US monetary policy
e. An expansionary fiscal policy
8. For each of the following situations, indicate the direction of the shift in the supply curve or the demand curve for dollars, the factor causing the change and the resulting movement of the equilibrium exchange rate for the dollar in terms of foreign currency:
a. American made cars become more popular overseas
b. The United States experiences a recession, while other nations enjoy economic growth
c. Inflation rates accelerate in the United States, while inflation rates remain constant in other nations
d. Real interest rates in the United States rise, while real interest rates abroad remain constant.
e. The Japanese put quotas and high tariffs on all imports from the United States
f. Tourism from the United States increase sharply because of a fare war among airlines.
9. Suppose the United States and Japan are the only two trading countries in the world. What will happen to the value of the US dollar if the following occur, other things equal?
a. Japan relaxes some of its import restrictions
b. The United States imposes some import tariffs on Japanese goods.
c. Interest rates in the United States rise dramatically
d. A report indicates that Japanese cars are much safer than previously thought, especially compared with American cars.