International Trade and Comparative Advantage

Part 1

1. Nations tend to trade among themselves because the distribution of economic resources among
them is (even uneven) ___ and the efficient production of various goods and services necessities
(the same, different) ___ technologies.
2. Comparative advantage means total world output will be greatest when each good is produced
by that nation having the (highest, lowest) ___ opportunity cost. The nations of the world tend
to specialized in the production of those goods in which they (have, do not have) ____ a
comparative advantage and then export them, and they import those goods in which they
(have, do not have) ___ a comparative advantage in production.
3. If the ration in the country X is 4 Panama hats equal to 1pound of bananas, while in the country
Y 3 Panama hats equal to 1 pound of bananas, then
a. Country X hats are relatively (expensive, inexpensive) ___ and bananas relatively expensive,
inexpensive)
b. Country Y hats are relatively (expensive, inexpensive) ___ and bananas relatively expensive,
inexpensive)
c. X has a comparative advantage and should specialize in the production of (bananas, hats)
__, and Y has a comparative advantage and should specialize in the production of (bananas,
hats) __.
d. When X and Y specialize and trade, the terms of the trade will be somewhere between (1, 2,
3, 4) ___ and (1, 2, 3, 4) ___ hats for each pound of bananas and will depend on world
demand and supply for hats and bananas.
e. When the actual terms of trade turn out to be 3 ½ hats for 1 pound of bananas, the cost of
obtaining
a. 1 Panama hat has been decreased from (2/7, 1/3) ___ to (2/7, 1/3) ___ pounds of
bananas in Y.
b. 1 pound of bananas has been decreased from (3 ½, 4) __ to (3 ½, 4) __ Panama hats in X.
f. International specialization will not be complete if the opportunity cost of producing either
goods (rises, falls) __ as the nation produces more of it.
4. The basic argument for free trade based on the principle of (bilateral negotiations, comparative
advantage) it results in (more, less) ___ efficient allocation of resources and a (lower, higher) __
standard of living.
5. The world equilibrium price is determined by the interaction of (domestic, world) __ supply and
demand, while the domestic equilibrium price is determined by (domestic, world) __ supply and
demand.
6. Excise taxes on imported products are (quotas, tariff) __, whereas limits on the maximum
amount of product that can be imported are import quotas, tariff) __. Tariffs applied to a
product not produced domestically are (protective, revenue) __ tariffs, but tariffs designed to
shield domestics producers from foreign competition are (protective, revenue) __.
7. There are three types of trade barriers, imports that are restricted through the use of licensing
requirement or bureaucratic red tape are (tariff, nontariff) __ barriers. When foreign firms
voluntarily limit their exports to another country, this would represent a voluntary (import,
export) __ restraint.
8. Nations imposed barriers to international trade to benefit the economic positions of
(consumers, domestic producers) __ even though these barriers (increase, decrease) __
economic efficiency and trade among nations and the benefits to that nation are (greater, less)
__ than the costs to it.
9. When the Philippines imposes tariff on a good on good which is imported from abroad, the price
of that good in the Philippines will (increase, decrease) __, the total purchases of the good in the
Philippines will (increase, decrease) __, the output of the Philippines, producers of the good will
(increase, decrease) __, and the output of foreign producers will (increase, decrease) __. The
ability of foreigners to buy goods and services in the Philippines will (increase, decrease) __, and
as result output and employment in the Philippines industries that sell goods and services
abroad will (increase, decrease) __.
10. Protectionism will raise the product by (increasing, decreasing) __ the imported price of the
product, (increase, decrease) __ consumer purchases of the domestically produced product, and
thus (increase, decrease) __ the demand and the price of domestically produced product.

Exchange Rate and the Balance of Payment

Domestic Currency and Foreign Currency

Philippine Peso 50 = USD 1

Convert Foreign Currency to Domestic Currency = FC * DC = 1 * 50 = PHP50.00

Convert Domestic Currency into Foreign Currency = FC/DC = 1/50 = USD0.02

1. The rate of exchange for the French Frank is the amount of in (francs, dollars) __ which a U.S
citizen must pay to obtain 1 (franc, dollar) ___. If the rate of exchange for the French Franc is (5
francs, USD0.20) ___, the rate of exchange for the U.S. dollar is (5 francs, USD0.20) __.
2. Philippine Exports create a foreign (demand for, supply of) ___ dollars and generate a (demand
for, supply of) ___ foreign currencies owned by Philippine banks and available to the domestic
buyers; Philippine imports create a domestic (demand for, supply of) ___ of foreign currencies
and reduces the (demand for, supply of) ___ foreign currencies held by Philippine banks and
available to the domestic buyers;
3. The balance of payment of the nation records all payments of (domestic, foreign) ___ residents
to make and received from (domestic, foreign) ___ residents. Any transaction that erans foreign
exchange for that nation is a (debit, credit) ___, and any transaction that uses foreign exchange
is (debit, credit) ___. A denit is shown with a (+, -) ___ sign, and credit with (+, -) ___ sign.
4. If a nation has a deficit its balance of payment of trade, its export is (greater, less) ____ than its
import of goods, and if it has a deficit in its balance on goods and services, its exports of these
items are greater, less) ____ than its imports of them. The current account is equal to the
balance of goods and services (plu, minus) ___ net investment income and (plus, minus) ___ and
net transfer.
5. The capital account records the capital inflows and capital outflows of a nation. The capital
inflows are expenditures made (in that nation, abroad) ___ by residents of (that nation, other
nations) ___, and the capital outflows are expenditures made (in that nation, other nations) ___
 for real and financial assets. A nation has a capital account surplus when its capital account
inflows are (greater, less) __ than its outflows.
6. A nation may finance a current account deficit by (buying, selling) ___ assets or by (borrowed,
lending) ___ abroad.
7. The official reserves of the nation are the quantities of (foreign currencies. Domestic currencies)
___ owned by its central bank. If the nation has a deficit on its current and capital accounts, its
official reserves (increase, decrease) ___, but the surplus on the capital and current accounts its
official reserves (increase, decrease) ___ The sum of the current, capital, and official account
must be equal to (0, 1) ___.
8. A country has a balance of payments deficit if the sum of its capital and current balances is
(positive, negative) ____ ant its official reserves (increase, decrease) ____.
9. If the foreign exchange rate rates float freely and a nation has a balance of payments deficit, the
nation’s currency in the foreign exchange market will (appreciate, depreciate) ____ and foreign
currencies will (appreciate, depreciate) ___. As a result of these changes in foreign exchange
rates, the nations imports will (increase, decrease) ___ and its export will (increase, decrease)
___ and the size of its deficit will (increase, decrease) ____
10. What effect would each of the following have on the appreciation (A) or depreciation (D) of the
French Franc in the foreign exchange market.
a. The increase preference in the United States for domestic wines over wines produced in
France _____
b. A rise in the U.S. national income _____
c. An increase in the price level in France _____
d. A rise in real interest rates in the United States _____
e. The belief of speculation in France that the dollar will appreciate in the foreign market. __
11. To fix or peg the rate of exchange for the German mark when the exchange rate for the mark is
rising, the United States would (buy, sell) ___ marks in exchange for dollars, and when the
exchange rate for the mark is falling, the United States would (buy, sell) ___ marks in exchange
of dollars.
12. Under a fixed exchange rate system, a nation with balance of payments deficit might attempt to
eliminate the deficit by (taxing, subsidizing) ____ imports or by (taxing, subsidizing) ___ exports.
The nation might use exchange controls and ration foreign exchange among those who wish to
(export, import) ___ goods and services are require all those who (export, import) ___ goods
and services to sell the foreign exchange they earn to the (businesses, government) ___.

Part 2

1. Assume a U.S exporter sells USD3 million worth of wheat in Colombia. If the rate of exchange
for Colombia peso (PHP1) is USD0.20 the wheat has a total value of 150 million pesos.
a. There are two ways the importer in Colombia may pay for the wheat It might write a check
for 150 million pesos drawn on its bank in Botoga and send it to the U.S. exporter. The
American exporter would then sell the check to its bank in New Orleans and its demand
deposit would increase by USD _____ million. This New Orleans bank now sells the check
for 150 million pesos to corresponding bank ( a U.S. commercial banks that keeps an
account in the Botoga bank) The New Orleans bank’s account in the corresponding bank
 increases by ______ million (dollars, pesos)____; and the corresponding bank’s account in
B0toga bank increases by ____ million (pesos, dollars)
b. The second way for the importer to pay for the wheat is to buy from its bank in Botoga a
draft on a U.S. bank for USD3 million, pay for this draft by writing a check for 150 million
pesos drawn on the Botoga bank, and send the draft to the U.S. exporter.
The U.S. exporter would then deposit the draft in its account in the New Orleans bank, and
its demand deposit account will increase by USD_____ million.
The New Orleans bank collects the amount of the draft from the U.S. bank on which it is
drawn through Federal Reserve Banks. Its account at the Fed increases by USD___ million;
and the account of the bank on which the draft was drawn decreases by USD ____ million.
Regardless of the way used by the Colombian importer to pay for the wheat
a. he export of the wheat created a (demand for, supply of) ___ dollars and a demand for,
supply of) ___ pesos.
b. The number of dollars owned by the U.S. exporter has (increased, decreased) ___ and
the number of pesos owned by the Colombian importer has (increased, decreases)

2. The United States and Russia each produces only bearskin caps and wheat. Domestic prices are
given in the following table
Russia United States

Bearskin caps 10Ru $7 per hat

Wheat 15Ru $10 per bushel

On April 20, the Zurich exchange listed an exchange rate of $1 = 1Ru

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