Download QUESTIONS FOR DISCUSSION

QUESTIONS FOR DISCUSSION
1.
Suppose a lawyer can type faster than any secretary. Should the lawyer do her
own typing? Can you demonstrate the validity of your answer?
No, the lawyer should not do her own typing because the secretaries
have a comparative advantage in typing, i.e., their opportunity cost of
typing is lower than that of the lawyer. Students can use an example,
such as the one in Table 17.3 after appropriate modifications, to
demonstrate this.
2.
Can you identify three services Americans import? How about three exported
services?
Imports: Travel, insurance, entertainment (among many others).
Exports: Tourism, insurance services, and software (among others).
3.
If a nation exported much of its output but imported little, would it be better or
worse off? How about the reverse; that is, exporting little but importing a lot?
Given that AD = C + I + G + (X - M), the larger X is and the smaller M is,
the larger AD will be. The larger AD is, the higher the level of
employment. If full-employment is the goal, then the economy is better
off with large exports and small imports. The opposite is true for the
reverse situation.
4.
Suppose we refused to sell goods to any country that reduced or halted its exports
to us. Who would benefit and who would lose from such retaliation? Can you
suggest alternative ways to ensure import supplies?
Domestic firms and their workers in the exporting industries would lose
sales and revenue while those in the importing industries would benefit
from reduced competition. Consumers would lose in the sense that the
reduced supply would result in higher prices. Instead of reacting in this
way, we could open our markets to imports from other sources and
continue to export to all markets. Every country can gain from trade
based on the specialization that comparative advantage fosters.
5.
Domestic producers often base their claim for import protection on the fact that
workers in country X are paid substandard wages. Is this a valid argument for
protection?
Rarely, since it is terms of trade and not actual cost that determines the
relative prices of imports and exports.
6.
How would each of these events affect the supply or demand for Japanese yen?
a.
Stronger U.S. economic growth?
b.
A decline in Japanese interest rates?
c.
Higher inflation in the USA?
a.
A stronger U.S. economy will result in U.S. consumers wanting to
purchase more Japanese made products. As a result, the demand for the
Japanese yen will increase. Although the U.S. consumer does not pay for
Japanese made products directly with yen, the importers must settle by
paying the Japanese manufacturers with yen.
7.
b.
A decline in the Japanese interest rates will make investment in
Japanese financial instruments less attractive and, as a result, there will
be less demand for Japanese yen used to purchase Japanese financial
instruments. At the same time, Japanese will want to move some of their
investments into U.S. financial instruments, whose interest rates are
assumed to have not changed, resulting in an increase in the supply of
Japanese yen in the U.S.
c.
Higher inflation in the USA will result in making U.S. dollardenominated investments less attractive. Some investors will begin to
invest more in Japanese yen-denominated investments and the demand
for Japanese yen will increase.
Is a stronger dollar a good or bad for America? Explain.
A strong dollar is a two edged sword. When the dollar is strong, it takes
fewer dollars to purchase other foreign currencies. As a result, the cost
of imports decline and U.S. consumers of foreign goods and services see
an improvement in their purchasing power. At the same time, a
stronger U.S. dollar means that it takes more of a foreign currency to
purchase one U.S. dollar. Consequently, a strong dollar results in the
foreign price of U.S. exports increasing, and U.S. exports decline.
8.
Who won and who lost from the steel tariffs (see Headline, p. 398)?
The U.S. steel industry (producers and workers) won in the sense that it
would be better able to compete with imported steel. On the other hand,
users of steel, for example the automobile parts industry and the home
appliance industry were hurt by the tariff because they now had to pay
higher prices for steel. By extension, the buyers of those products were
also hurt as the price of autos and home appliances increased. If other
steel-producing countries impose retaliatory tariffs on some U.S.
industries, then those industries would be hurt by reduced demand for
their products. International relations with Russia were also a victim of
the tariffs.
9.
Could government-induced currency depreciations act as barriers to trade?
Should they pursue such a policy?
When a government depreciates its currency, as did China in the
Headline on page 397, the end result is that the price of that nations
exports decline and the cost of imports increase. While this is initially
good for China, it could trigger various trade sanctions by China’s
trading partners.