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___________________ provide reduced barriers on trade among participating nations than on trade with nonmember nations, and is the loosest form of economic integration.
Preferential trade arrangements
A ____________________ is the form of economic integration all barriers are removed on trade among members, but each nation retains its own barriers to trade with nonmembers. It is the next higher form of economic integration.
free trade area
A _________________ allows no tariffs or other barriers on trade among members, and it harmonizes trade policies toward the rest of the world. It is the third highest form of economic integration.
A ________________ is a customs union that allows free movement of capital and labor among member nations, and the fourth highest form of economic integration.
A(n) ________________ is a group of nations with common monetary and fiscal policies in addition to the characteristics of a common market, and is the fifth and highest form of economic integration.
Which of the following statements is correct?
in a customs union, member nations apply a uniform external tariff
A customs union that allows for the free movement of labor and capital among its member nations is called a:
The static welfare effects resulting from the formulation of customs unions are measured by the extent to which it leads to ___________ and ____________.
trade creation, trade diversion
______________ occur(s) when lower-cost imports from outside the union are replaced by higher-cost imports from another union member.
______________ occurs when domestic production in a member of the customs union is replaced by lower-cost imports from another member nation.
Trade creation will ________________ for the domestic country.
Trade diversion will ______________ for the domestic country.
The formation of a customs union that leads only to trade creation and all economic resources of member nations are fully employed before and after the formation of the customs union leads to an
increase in the welfare of member and nonmember nations
A customs union is more likely to lead to net increases in welfare:
the lower are the customs union's barriers on trade with the rest of the world
Which of the following are examples of dynamic benefits of the formation of customs unions?.
increased competition, stimulus to investment, better utilization of economic resources
Suppose that apples from Japan face a 15% tariff in Germany and a 20% tariff in Italy, while Germany and Italy maintain free trade between each other. Germany and Italy are therefore part of a(n):
Free trade area
If the United States and Canada abolish all tariffs on each other’s goods and implement a common tariff on goods imported from other countries, there occurs a(n):
Suppose that the United Kingdom and Italy abolish all tariffs on each other’s goods and all restrictions on movements of factors of production between them. They also implement a common protectionist policy toward other countries. This is an example of a(n):
Canada has domestic firms that could supply its entire market for radios at a price of $50
while U.S. firms could supply radios at $40 and Mexico at $30. Suppose that Canada initially has a 50 percent tariff on imports of radios and then forms a free trade area with the United States. As a result, Canada realizes:
Trade diversion, trade creation, and potential overall welfare gains
Canada has domestic firms that could supply its entire market for radios at a price of $50
while U.S. firms could supply radios at $40 and Mexico at $30. Suppose that Canada initially has a 50 percent tariff on imports of radios and then forms a free trade area with Mexico. As a result, Canada realizes:
Trade creation, no trade diversion, and overall welfare gains
Areas set up to attract foreign investments by allowing the importation of raw and intermediate materials without paying tariffs are called:
The ____________________ was founded by the Treaty of Rome, signed in March 1957 by West Germany, France, Italy, Belgium, the Netherlands, and Luxembourg, and came into being on January 1, 1958.
European Union (EU)
Which of the following significant change with respect to the development of the European Union took place in January, 1993, as a result of the Single European Act?
Becoming a single unified market by removing the restrictions on the free flow of goods, services, and resources among its members
In September, 1993, __________________ signed the North American Free Trade Agreement (NAFTA).
the US, Canada and Mexico
Free trade access to Mexico allows the US industries to import __________________ from Mexico and maintain other operations in the US rather than risking the loss of all jobs in the industry to low-wage countries.
The formation of the EU resulted in:
trade creation in industrial products and trade diversion in agricultural products
The United States benefits from NAFTA include:
A)Increased competition in product markets
B)Increased competition in resource markets C)Lower prices in commodities imported from Mexico and their substitutes produced in the US
The benefit that Mexico is likely to receive from NAFTA:
greater export-led growth,encouraging the return of flight capital c. more rapid structural change
NAFTA is a:
Free trade area
The European Union has achieved all of the following features of an economic union except:
Adopted a common fiscal policy for member nations
Which is a stumbling block to successful economic integration among groups of developing nations?
benefits are not evenly distributed among nations b. many developing nations are not willing to relinquish part of their newly-acquired sovereignty to a supranational community body, as required for successful economic integration c. the complementary nature of their economies and competition for the same world markets for their agricultural exports
The formation of a free trade area among the countries of Eastern Europe is advocated in order to:
retain the traditional trade links that can be justified on market principles
Equal rates of factor growth and technological progress in the production of two commodities is:
If only the supply of labor increases in a nation, the nation’s production frontier shifts:
more along the axis measuring the L-intensive commodity
_____________ is the view that exports were the leading sector propelling the economies of the recently settled regions into rapid growth and development during the 19th century.
The engine of growth
When a nation’s terms of trade deteriorates to the point where the nation is worse off after growth than before, the nation has experienced:
Immizerising growth refers to a:
a decrease in the welfare of a nation with growth
Endogenous growth theory:
Advocates international trade because of the resulting increase of economic growth and
development of participating nations
Assume in base year 1990, the commodity or net barter terms of trade is equal to 100, and we find that, for the 2004 fiscal year, the US price index for exports has fallen 7 percent and the price index for imports has risen by 5 percent. What is the value of the U.S. commodity or net barter terms of trade?
The commodity terms of trade is N = [P(X)/P(M)] 100; see p. 203. Set both prices at 100, so the initial ratio is 100. Then reduce P(X) to 93, and increase P(M) to 105, so the new ratio N (after multiplying by 100) is 88.6.
Assume in base year 1995, the commodity or net barter terms of trade is equal to 100, and we find that, for the 2004 fiscal year, the US price index for exports has risen 8 percent and the price index for imports has fallen by 4 percent. What is the value of the U.S. net barter terms of trade?
The new ratio N is [108/96]100 = 112.5.
Assume in base year 1990, the index for the volume of exports is equal to 100, and we find that, for the 2004 fiscal year, the US price index for exports has fallen 6 percent, the price index for imports has risen by 9 percent, and the index for the volume of exports is 108 after 2004. What is the value of the U.S. income terms of trade?
The income terms of trade is I = [P(X)/P(M)]Q(X); see p. 205. Thus, after the change, the new scaled ratio is [94/109]108 = 93.1.
Assume in base year 1990, the index for the volume of exports is equal to 100, and we find that, for the 2004 fiscal year, the US price index for exports has risen 3 percent, the price index for imports has fallen by 4 percent, and the index for the volume of exports is 95 after 2004. What is the value of the U.S. income terms of trade?
The new scaled ratio I is [103/96]95 = 101.9.
Which terms of trade concept emphasizes a nation’s capacity to import?
Income terms of trade
If the price of a nation's exports and imports both rise, the nation's commodity terms of trade:
improve, deteriorate, or remain unchanged
The nation's commodity terms of trade times the quantity index of its export sector gives the nation's
income terms of trade
When a nation's commodity terms of trade deteriorates and its income terms of trade improve, the nation's welfare:
Which of the following is one of the most serious problems facing developing countries today?
The conditions of stark poverty prevailing in many countries, the unsustainable foreign debt of some of the poorest developing countries, the remaining trade protectionism of developed countries against developing countries exports
According to traditional trade theory, a developing nation should export the commodity:
of its comparative advantage, that it can produce relatively more efficiently, intensive in the nation's relatively abundant factor
Some people argue that, in some cases, trade may not be an engine of growth for today's developing nations because:
the income elasticity for many of their exports is less than 1 b. the development of synthetic substitutes in developed nations
c. technical advances reduced the raw-material content of many products
Developing nations often experience wildly fluctuating export prices for their primary products because of:
inelastic and unstable demand and supply
Many/most empirical studies have found that, in general, the export instability faced by developing nations was:
not very large and did not seriously interfere with development
Which of the following is one of the three main advantages of an import-substitution industrialization strategy?
The market for the industrial product already exists, as evidenced by imports of the commodity, so that risks are reduced in setting up an industry to replace imports. It is easier for developing nations to protect their domestic market against foreign competition than to force developed nations to lower trade barriers against their manufactured exports. Foreign firms are induced to establish so-called tariff factories to overcome the tariff wall of developing nations
Which of the following is one of the three main disadvantages of an import-substitution industrialization strategy?
Domestic industries grow accustomed to protection from foreign competition and have no incentive to become more efficient -Import substitution lead to inefficient industries due to the smallness of the domestic market in many developing nations -Simpler manufactured imports are replaced by domestic production, import substitution becomes more difficult and costly as capital-intensive and technological advanced imports have to be replaced by domestic production
International trade and specialization can contribute to the economic growth of today’s developing nations in which of the following ways?
-Trade can lead to the full utilization of otherwise underemployed domestic resources
-By expanding the size of the market, trade makes possible division of labor and economies of
-International trade is the vehicle for the transmission of new ideas, new technology, and new
managerial and other skills
Which of the following is one of the advantages of export-oriented industrialization?
It over comes the smallness of the domestic market and allows a developing nation to take
advantage of economies of scale
-Production of manufactured goods for export requires and stimulates efficiency throughout
-The expansion of manufactured exports is not limited by the growth of the domestic market
Which of the following is one of the disadvantages of export-oriented industrialization?
It may be very difficult for developing nations to set up export industries because of the competition from the more established and efficient industries in developed nations
-Developed nations often provide a high level of effective protection for their industries producing simple labor-intensive commodities in which developing nations already have or can soon acquire a comparative advantage
Those nations that liberalized trade during the past decade
grew faster than those that did not
At which international trade gathering was there a successful reduction in trade restrictions and protectionism, averting a revival of inward-looking policies in developing countries?
The New International Economic Order (NIEO) called for which of the following?
-The renegotiation of the international debt of developing countries and the reduction in interest payments
-The establishment of international commodity agreements
-Preferential access in developed nations’ markets to all the manufactured exports of
Which of the following is not part of the demand for a NIEO?
preferential access for the manufactured exports of developed nations
Which of the following countries is characterized by rapid growth in gross domestic product in industrial production and manufactured exports?
HongKong, Korea, Singapore
______________ attempt to stabilize and increase the prices and earnings of the primary exports of developing nations.
International commodity agreements
What type of international commodity agreement involves the purchase of the commodity when its price falls below an agreed minimum price, and the sale of the commodity when its price rises above the established maximum price?
What type of international commodity agreement seeks to regulate the quantity of the commodity exported by each nation?
Which of the following long-term multilateral agreements stipulates the minimum price at which importing nations agree to buy and a maximum price at which exporting nations agree to sell specified amounts of the commodity?
A nation’s balance of payments is crucial in the development of:
fiscal policy, monetary policy, trade Policy
Which of the following is false?
a credit transaction is entered with a negative sign
refer to an increase in foreign assets in the nation
-refer to a reduction in the nation's assets abroad
-lead to a payment from foreigners
Which of the following is an example of a capital inflow into the US?
An increase of U.S. assets held by foreign investors
Which of the following is an example of a capital outflow for the US?
An increase in US holdings of foreign assets
If a US firm exports $7,000 of goods which are to be paid for within six months, using double-entry bookkeeping, what entries should be made in the US balance of payments?
Goods export– credit of $7,000; Capital account– debit of $7,000
If a US resident purchases a foreign stock for $750 and pays for it by increasing foreign bank balances in the US, what entries would be made in the US balance of payments?
Capital account–debit of $900; Capital account–credit of $900
____________ are balance of payments transactions involving the receipt of payments from foreigners.
____________ are balance of payments transactions involving payments to foreigners.
____________ is an example of a credit transaction in the balance of payments.
Exports of goods and services
-Unilateral transfers from foreigners
When a U.S. firm exports goods to be paid in three months the U.S. debits:
When a U.S. firm imports a good from England and pays for it by drawing on its pound sterling balances in a London Bank, the U.S. debits its current account and credits its:
The capital account of the U.S. includes:
the change in U.S. assets abroad and foreign assets in the U.S., other than official reserve assets
Which of the following is classified as a credit in the US balance of payments?
Which of the following are included in the current account?
Currently produced goods and services
If the US government sells military hardware to the U.K., the transaction would be recorded on the US balance of payments as a:
Current account credit
In which of the following is a statistical discrepancy likely to occur?
Short term private capital flows
The balance of payments is the sum of which of the following?
Current account balance + capital account balance + statistical discrepancy
Which of the following is a definition of a deficit in the balance of payments?
The excess of debits over credits in the current and capital accounts
Which of the following is consistent with a surplus in the balance of payments?
The excess of credits over debits in the current account and The excess of credits over debits in the capital account
In the balance of payments, the statistical discrepancy is used to:
Ensure that the sum of all debits matches the sum of all credits
Accommodating items are:
transactions in official reserve assets, the items below the line, needed to balance international transactions
Which of the following is false?
a net debit balance in the current and capital accounts measures the surplus in the nation's balance of payments
_____________ are international transactions that take place for business or profit motives and independent of balance-of-payments considerations.
Which of the following does the international investment position consider?
The total amount of a nation's assets abroad at the end of the year
-The distribution of a nation's assets abroad at the end of the year
-The foreign assets in the nation at the end of the year
____________ indicates the international investment position of a country at a given point in time.
The balance of international indebtedness
The sharp deterioration of the US trade balance on goods after the 1970’s was due in large part to which of the following?
-The sharp rise in the price of imported petroleum products during the 1970s
-The high international value of the dollar in the 1980s
-The more rapid growth of the United States than Europe and Japan during the 1990s
In 2002, the largest U.S. bilateral trade deficit was with:
Which of the following must be considered when examining a nation's balance of payments?
Too much attention is placed on the balance of goods, and on focusing on short-term data.
Which of the following statements is correct with regard to the United Stated becoming a net debtor nation
-it allowed the United States to grow faster
-it helped finance some of the U.S. budget deficits
-it created the risk that foreigners may suddenly withdraw their investments in the U.S.
Individuals, firms, and banks buy and sell foreign currencies in the:
foreign exchange market
What is the principal function of the foreign exchange market?
To facilitate the exchange of one currency for another currency
Which of the following activities generates an increase in the US demand for foreign currency?
-American tourists visit Japan
-a US firm imports goods from Europe
-An individual in the US buys bonds from France
Which of the following generates an increase in a nation’s supply of foreign currencies?
An American firm exports goods to Canada
A television costs 600 Canadian dollars (CAD) in Canada and 500 US dollars (USD) in the US. The exchange rate between the Canadian dollar and the US dollar is:
1.2 CAD per 1 USD
An exchange rate is defined as:
the domestic currency price of foreign currency (or the inverse)
________ was the common currency adopted a majority of the member nations in the EU.
If the US dollar price of the Japanese yen changes from $1 per 100 yen to $1.50 per 100 yen, the dollar is said to have _____________ and the yen has ______________.
A foreign currency is said to have appreciated against the dollar when:
the dollar price of the currency has increased
A weighted average of the exchange rates between the domestic currency and the currencies of the nation’s most important trade partners is called:
the effective exchange rate
The exchange rate between any two currencies is kept the same in different monetary centers by ____________.
The act of purchasing currency in one market at a lower price for immediate resale in another market at a higher price in order to make a profit is called:
A depreciation of the dollar refers to a(n):
Increase in the dollar price of foreign currency
A transaction that calls for the payment and receipt of the foreign exchange within two business days from the transaction date is a:
A ______________ involves an agreement today to buy or sell a specified amount of a foreign currency, for delivery at a specified future date, at a rate agreed upon today.
A currency that is selling at a forward rate greater than the spot rate is said to be trading at a(n):
Assume there is an increase in the American demand for Japanese cameras. This results in:
An increase in the demand for yen
Suppose the exchange rate of the British pound is $1.75 per pound while the exchange value of the Swiss franc is $0.667 cents per franc. The cross exchange rate between the pound and the franc is:
2.624 francs per pound
If monetary authorities permit free market forces to determine an exchange rate, the resulting exchange rate system is called:
a flexible (or floating) exchange rate system.
Assume the market for the Euro, with price $/Euro, is in equilibrium, and then the demand for Euros increases (see Fig. 11.3). In order to maintain a fixed exchange rate at the original exchange rate, central bank monetary authorities must:
supply additional Euros
If growth increased in the in the European Monetary Union (EMU) but not in the United States, the dollar would:
A faster price increase in the United States than in the European Monetary Union (EMU) will lead to
a dollar depreciation
An increase in the interest rate in the United States but not in the European Monetary Union would lead to
a decrease in the demand for euros and an increase in the supply of euros
The expectation that the U.S. dollar will appreciate in the future would lead to
a dollar appreciation today
A nation's currency will depreciate if the nation's economy experiences which of the following?
-An increase in the price level
-Expectations of depreciation
Which of the following would occur if the price level in the US increases relative to the UK, and before this increase the dollar was in an exchange rate equilibrium with the sterling?
The United States will import more British goods and services
-The US will now demand more pounds
-The UK will supply less pounds to the US
Which of the following would occur if labor productivity in the UK increased relative to that in the US, and before this increase the dollar was in an exchange rate equilibrium with the sterling?
The United States will now demand more pounds
Which of the following would occur if the interest rate in the United States fell relative to that in the UK, and before this increase the dollar was in an exchange rate equilibrium with the sterling?
The UK will supply fewer pounds to the US
Under a system of floating exchange rates, relatively low productivity and high inflation rates in the United States result in a(n):
Increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar
According to the law of one price, in order for commodity arbitrage to equalize the price of homogeneous traded commodities, it is necessary that which of the following do not exist?
Which of the following states that the equilibrium exchange rate is equal to the ratio of price levels in the two nations?
The absolute purchasing-power parity theory
Which of the following states that the percentage change in the exchange rate is equal to the difference in the percentage change in the price level in the two countries?
The relative purchasing-power parity theory
If the price for a Big Mac in the US is $2.00 and the price for a Big Mac in the UK is ₤3, what is the absolute purchasing-power parity equilibrium exchange rate between the dollar and the pound sterling, expressed as the price of the pound in terms of the dollar?
.667. $/pound equals $2.00/3 pounds, i.e., 0.677 $/pounds.
According to the relative purchasing-power parity theory, what is the percentage change in the exchange rate if the price for one unit of corn in the US is $10 in 2003 and $12 in 2004, and in the UK, ₤15 in 2003 and ₤20 in 2004?
Which approach to exchange rate determination stresses the role of trade in the determination of exchange rates?
The elasticities approach to exchange rates
The trade or elasticities approach is more useful in explaining exchange rates during which time frame?
Which of the following approaches to exchange rate determination postulates that the exchange rate is determined in the process of equilibrating the total demand and supply of the national currency in each nation?
The monetary model of exchange rates
According to the monetary model, an increase in the nation’s supply of money leads to:
depreciation of the domestic currency
Expectations in which of the following should immediately lead to actual, equal percentage changes in exchange rates, according to the monetary approach to exchange rates?
-Expectations of changes in growth rates
-Expectations of changes in inflation rates
-Expectations of changes in exchange rates
Monetary model has not been very successful in forecasting exchange rates, especially in the short run, due to which of the following reasons?
Exchange rates are strongly affected by new information that is characteristically
Expectations of exchange market participants often become self-fulfilling
If the rate of inflation is suddenly expected to be 8% higher than previously anticipated in the US than in the UK, the dollar should immediately depreciate by what percent with respect to the pound in order to keep prices equal in the US and the UK?
From which of the following does one determinants of a nation's demand for foreign exchange arise?
From speculators when they expect the foreign currency to appreciate
From which of the following does a nation's supply of foreign exchange arise?
-From the in flow of foreign investment
-From the sale of foreign currency by the speculators when the expect the foreign currency to depreciate
-From the exportation of goods and services to other nations
The _______ exchange rate is the __________ exchange rate adjusted for inflation in the two nations.
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