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(b) If there is no trade, in the United States the equilibri-
CHAPTER 17:
um price is $5,000 and the equilibrium quantity is
International Trade and 50,000 units. In Japan, the price is $1,000 and the
Comparative Advantage quantity is 50,000.
(c) The new world price will be $3,000 because, at that
1. (a) In the absence of trade, 1 barrel of wine costs 4 yards
price, world quantity demanded is 100,000 units
of cloth in England.
(70,000 plus 30,000) and world quantity supplied is
(b) In the absence of trade, 1 barrel of wine costs 2 yards also 100,000 units (40,000 plus 60,000). The price of
of cloth in Portugal. computers has fallen in the United States and risen in
(c) Japan. (Note: To arrive at the answer graphically, con-
struct world demand and supply curves. The equilib-
rium will be found at a world price of $3,000.)
F I GU R E 1
(d) Japan will export 30,000 computers.
(e) In the United States, computer production falls from
Cloth (millions yards)




Cloth (millions yards)




12 12 50,000 to 40,000, and therefore employment in the
computer industry falls. In Japan, computer produc-
10 10
tion rises from 50,000 to 60,000, with a consequent
8 8
increase in employment. Initially, American con-
6 6
sumers and Japanese computer producers (both
4 4
employers and employees) are helped by free trade,
2 2
while American computer producers and Japanese
consumers are hurt.
2 4 6 2 4 6
Wine (million barrels) Wine (million barrels)
(a) England (b) Portugal
CHAPTER 18:
The International Monetary System:
Order or Disorder?
(d) Portugal has the absolute advantage in the production
of both goods, and the comparative advantage in
1. One can use supply and demand curves for either the
wine. England has the comparative advantage in cloth.
yen or the dollar. If one chooses the market for dollars,
(e) When trade opens, England will specialize in cloth
then the exchange rate measured on the vertical axis is
and export it to Portugal, which in turn will special-
the price of a dollar in yen:
ize in wine and export it to England.
(a) Japanese imports increase and U.S. exports increase.
(f) In the international market, the price of a barrel of
So the demand for dollars rises, and the dollar there-
wine will wind up somewhere between 4 yards and
fore appreciates.
2 yards of cloth, perhaps 3. Stated another way, the
(b) Because Japanese stocks are less attractive, there is
price of 1 yard of cloth will be between 1„2 gallon of
less capital outflow from the United States to Japan to
wine and 1„4 gallon of wine.
buy stocks. The supply of dollars decreases, and the
dollar therefore appreciates.
Answers to Appendix Questions (c) With lower interest rates, American financial assets
become less attractive. So capital flows out of the
1. (a) United States (or less flows in). This increases the sup-
ply of dollars, leading to a depreciation of the dollar.
(d) The increase in foreign aid increases the supply of
F I GU R E 3
dollars and leads to a depreciation of the dollar.
(e) Because the Japanese economy booms and the U.S.
6 6 economy is in a recession, Japanese imports increase
while U.S. imports fall. Japanese demand for dollars
5 5
Price ($000)




Price ($000)




therefore increases, while US supply of dollars
4 4 decreases. So the dollar appreciates.
3 3 (f ) At any given exchange rate, higher U.S. inflation
causes an increase in imports and a decrease in
2 2
exports. This leads to consequent increases in the sup-
1 1
ply of dollars and decreases in the demand for dol-
lars. Therefore, the dollar depreciates.
0 20 40 60 80 100 0 20 40 60 80 100
3. Items (a) and (c) would lead to a depreciation of the dol-
Quantity (thousands) Quantity (thousands)
lar. Items (b) and (e) would lead to an appreciation. Item
United States Japan
(d) would have no effect on the value of the dollar
Microcomputers because it is purely a domestic transaction.




Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Appendix
404



I 5 .2Y 2 100
CHAPTER 19:
(X 2 IM) 5 300 2 (250 1 .2Y)
Exchange Rates and the Macroeconomy
(X 2 IM) 5 50 2 .2Y
1. In Figure 1, the economy begins at A, with price P0 and Y 5 150 1 .6Y 1 .2Y 2 100 1 800 1 50 2 .2Y
output Y0, resulting from aggregate demand D0 and
Y 5 900 1 .6Y
aggregate supply S0. The currency appreciation leads to a
.4Y 5 900
decrease in exports and therefore a decrease in aggregate
demand to D1. Because imported inputs become less Y 5 2.5(900)
expensive, it also leads to an increase in aggregate sup- Y 5 2,250
ply to S1. The price level will definitely fall, to P1 in the
G 2 T 5 800 2 .2(2,250)
diagram. Whether output falls or rises depends on the
G 2 T 5 800 2 450
relative strength of the aggregate demand and aggregate
supply effects, but since the aggregate demand shift is G 2 T 5 350
probably greater, output is likely to decrease, as shown
X 2 IM 5 50 2 .2(2,250)
in the diagram, to Y1.
X 2 IM 5 50 2 450
X 2 IM 5 2400
F I GU R E 1
(b)
Y 5 C 1 I 1 G 1 (X 2 IM)
D0
C 5 150 1 .75DI
S0
C 5 150 1 .75(.8)Y
S1
C 5 150 1 .6Y
D1 A
P0 I 5 300 1 .2Y 2 50(r)
Price Level




I 5 300 1 .2Y 2 50(8)
I 5 .2Y 2 100
(X 2 IM) 5 250 2 (.2Y)
P1
(X 2 IM) 5 250 2 .2Y
D0
S0 Y 5 150 1 .6Y 1 .2Y 2 100 1 800 1 250 2 .2Y
S1 Y 5 1,100 1 .6Y
D1
.4Y 5 1,100
Y1 Y0
Y 5 2.5(1,100)
GDP
Y 5 2,750
G 2 T 5 800 2 .2(2,750)
G 2 T 5 800 2 55
3. (a)
G 2 T 5 250
Y 5 C 1 I 1 G 1 (X 2 IM)
X 2 IM 5 250 2 .2(2,750)
C 5 150 1 .75DI
X 2 IM 5 250 2 550
C 5 150 1 .75(.8)Y
X 2 IM 5 2300
C 5 150 1 .6Y
I 5 300 1 .2Y 2 50(r)
I 5 300 1 .2Y 2 50(8)




Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:




Glossary

Absolute advantage One country is said without any increase in consumer in- Capital gain A capital gain is the differ-
to have an absolute advantage over an- comes. It is represented on a graph as a ence between the price at which an asset
other in the production of a particular shift of the entire consumption function. is sold and the price at which it was
good if it can produce that good using (p. 189) bought. (p. 122)
smaller quantities of resources than can
Balance of payments deficit The balance Central bank A central bank is a bank
the other country. (p. 343)
of payments deficit is the amount by for banks. The United States™ central
Abstraction Abstraction means ignoring which the quantity supplied of a country™s bank is the Federal Reserve System. (p. 263)
many details so as to focus on the most currency (per year) exceeds the quantity
Central bank independence Central bank
important elements of a problem. (p. 8) demanded. Balance of payments deficits
independence refers to the central bank™s
arise whenever the exchange rate is
Aggregate demand Aggregate demand ability to make decisions without political
pegged at an artificially high level. (p. 369)
is the total amount that all consumers, interference. (p. 264)
business firms, and government agen- Balance of payments surplus The bal-
Closed economy A closed economy is
cies spend on final goods and services. ance of payments surplus is the amount
one that does not trade with other nations
(p. 154) by which the quantity demanded of a
in either goods or assets. (pp. 24, 385)
country™s currency (per year) exceeds the
Aggregate demand curve The aggregate
quantity supplied. Balance of payments Commodity money Commodity money
demand curve shows the quantity of
surpluses arise whenever the exchange is an object in use as a medium of ex-
domestic product that is demanded at
rate is pegged at an artificially low level. change, but that also has a substantial
each possible value of the price level.
(p. 369) value in alternative (nonmonetary) uses.
(pp. 86, 180)
(p. 245)
Balance sheet A balance sheet is an ac-
Aggregate supply curve The aggregate
counting statement listing the values of Comparative advantage One country is
supply curve shows, for each possible
all assets on the left side and the values of said to have a comparative advantage
price level, the quantity of goods and
all liabilities and net worth on the right over another in the production of a
services that all the nation™s businesses
side. (p. 252) particular good relative to other goods if
are willing to produce during a specified
it produces that good less inefficiently
period of time, holding all other determi- Barter Barter is a system of exchange in
as compared with the other country.
nants of aggregate quantity supplied which people directly trade one good for
(pp. 49, 343)
constant. (pp. 86, 200) another, without using money as an in-
termediate step. (p. 243) Consumer expenditure Consumer ex-
Aggregation Aggregation means com-
penditure (C) is the total amount spent
bining many individual markets into one Budget deficit The budget deficit is the
by consumers on newly produced goods
overall market. (p. 84) amount by which the government™s ex-
and services (excluding purchases of new
penditures exceed its receipts during a
Allocation of resources Allocation of re- homes, which are considered investment
specified period of time, usually a year. If
sources refers to the society™s decisions goods). (p. 154)
receipts exceed expenditures, it is called a
on how to divide up its scarce input re-
budget surplus instead. (pp. 303, 387) Consumer Price Index (CPI) The Con-
sources among the different outputs pro-
sumer Price Index (CPI) is measured by
duced in the economy and among the Budget surplus The budget surplus is
pricing the items on a list representative
different firms or other organizations that the amount by which the government™s
of a typical urban household budget.
produce those outputs. (p. 47) receipts exceed its expenditures during a
(p. 128)
specified period of time, usually a year. If
Appreciate A nation™s currency is said to
expenditures exceed receipts, it is called a Consumption function The consump-

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