International Econ

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ECON 340 – INTERNATIONAL ECONOMICS

Spring 2018

Final Examination Questions

I will choose 5 of the following 10 questions for your final exam. The final is 10:30am – 12:30pm on

Monday, April 30, 2018. We will meet in Lewis 206, our regular classroom. Each of the five questions

will be worth 10 points. Your answers should be comprehensive and demonstrate a richness of

knowledge and a depth of understanding, in order to earn 10 points.

1. Define the following terms:

a. Opportunity Cost

b. Comparative Advantage

c. Autarky

d. Tariff

e. Producer Surplus

f. Consumer Surplus

g. Free trade area

h. Exchange rate risk

i. Currency depreciation

j. The forward market for currencies

2. When a country engages in international trade, what is expected to happen to the price of

imported goods compared to autarky? What is expected to happen to the price of exported

goods compared to autarky? Use the supply and demand model to explain your answers.

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3. Use the table below for Question 4:

Output per Hour Worked

Brazil China

Lumber 30 10

T-Shirts 60 40

a. Which country has absolute advantage in the production of lumber? Which country has

absolute advantage in the production of t-shirts? How do you know?

b. Under autarky, what are the relative prices of lumber and t-shirts in each country?

c. Which country has comparative advantage in lumber? Which country has comparative

advantage in t-shirts? How do you know?

d. If Brazil and China trade, which good would you expect each country to produce?

e. What are the upper and lower bounds for the terms of trade between Brazil and China for

lumber?

4. Give two reasons why a country might impose a tariff on imported goods. Discuss the tradeoffs

that nations make when imposing tariffs – who is benefits and who loses? What are some

reasons for the widespread use of tariffs despite their overall implications for national welfare?

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5. Use the table below for Question 7:

Supply and Demand for Tangerines, France

Price ($/bushel) Quantity Supplied Quantity Demanded

0 0 45 1 4 40 2 8 35 3 12 30 4 16 25 5 20 20 6 24 15 7 28 10 8 32 5 9 36 0

a. Draw the supply and demand schedules for tangerines in France.

b. Give the autarky price and quantity of tangerines in France.

c. Assume that Germany can supply tangerines to France for $3/bushel, and Italy can

supply tangerines to France for $2/bushel. Under free trade, from whom will

France purchase tangerines? What will be the quantity of tangerines produced in

France, the total quantity purchased, and the volume of imports?

d. Calculate the increase in consumer surplus under free trade, compared to autarky.

e. Now suppose that levies a $2 per bushel tariff on tangerines. Now who does France

buy tangerines from? What is the quantity produced, consumed, and imported?

f. How much revenue will be collected from the tariff?

g. Calculate the deadweight loss that results from the tariff.

6. True or false? The US could reduce its current account deficit by importing more products from

Europe and South America.

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7. Complete the following table: (2 points per line)

International Transaction

Current (C)

or

Financial (F)

Debit (-)

or

Credit (+)

a. A US investment firm buys a controlling interest

in an German business

b. A grandmother in Florida sends a cash gift to

her grandchildren in Turkey

c. A Japanese firm builds a factory in the US

d. US government sends foreign aid to Bangladesh

e. A Japanese firm receives income from a factory

that it previously built in the US state of

Alabama

f. A US investor buys a 3-year European treasury

note

g. US Imports food products from Mexico

h. China’s central bank buys US treasury bonds

i. British tourists spend dollars in New York while

on vacation.

j. A European investor is paid a dividend on

Google stock that she purchased a few years

ago

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8. Suppose the interest rate in the US is 4%, while the interest rate in France is 3%.

a. If the dollar/euro exchange rate is $1.19/euro, and the forward rate is also $1.19/euro,

then where does the wise investor choose to invest? Why?

b. If the spot and forward exchange rates are equal, as in Part a, what will happen to the

forward rate as investors respond to the difference in interest rates between the US and

France? Use a supply and demand model to answer the question.

c. What if the forward rate is $1.21/euro? Where should a wise investor invest then?

9. Suppose that the current exchange rate between dollars and British pounds is $1.49 / pound.

a. What is the exchange rate expressed in pounds / $?

b. Draw a market diagram illustrating how the exchange rate will change if US consumers

decide to boycott British products.

c. Under the boycott in Part b, do you expect the dollar to appreciate or depreciate against

the pound?

10. Suppose that initially, the dollar/yen exchange rate is $0.05391 in New York, and $0.05562 in

Mexico City.

a. Explain how a currency arbitrager could exploit this difference in exchange rates to

make a profit. Give a numerical example based on a $1 million transaction.

b. Use supply and demand diagrams for the currency markets in New York and Mexico City

to demonstrate and discuss how the exchange rates would evolve in response to

currency arbitrage. What is a likely equilibrium exchange rate in each market?