Chapter 6

Topics: International trade, Bretton Woods system, International economics Pages: 5 (1458 words) Published: November 16, 2014

Gleb Sazenkov (ADE AR)

Chapter 6
1. Using the information in this chapter, label each of the following statements true, false or uncertain. Explain briefly.
a. The national income identity implies that budget deficits cause trade deficits. False. Actually, if we look at the formula of our Y we can see that we don’t have anything there that could tell us that budget deficit can cause a trade deficit.

Y = C + I + G + (X-IM/e) If we have a budget deficit, so our NX will be affected and probably they could be lower than before, but we have to say that it is not necessarily that it will cause a trade deficit. b. Opening the economy to trade tends to increase the multiplier because an increase in expenditure leads to more exports.

False. Actually, if we look at the formula Y = C + I + G + (X-IM/e), we can see that if we increase our G it does not affect anyhow on our exports, which actually depends positively on Y* (foreign income) and negatively depends on the real exchange rate, but there is nothing from government expenditure. c.

If the trade deficit is equal to zero, then the domestic demand for goods and the demand for domestic goods are equal.
True. Actually, in an open economy, according to the formula the demand for domestic goods is equal to C+I+G-(IM/e)+X, but if our trade deficit is equal to 0, we have X=IM/e, in other words our imports equals to our exports. As a result we have C+I+G, and the domestic demand for goods and the demand for domestic goods are identical.

d. A real depreciation leads to an immediate improvement in the trade balance. Uncertain. Actually, if we have a Marshall-Lender condition, we can say that our trade balance will be improved by a real depreciation. Because if our real exchange rate goes down our NX goes up, that will improve our trade balance.

But if we don’t have that condition, we can see, that if the real exchange rate goes down, our (IM/e) goes up and as a result our NX will decrease so, it will negatively affect our trade balance. e. A small open economy can reduce its trade deficit through fiscal contraction at a smaller cost in output than can a large open economy.



Gleb Sazenkov (ADE AR)

While the export ration can be larger than one – as it is in Singapore – the same cannot be true of the ratio of imports to GDP.
False. Actually, it can be, the country can have their ratio of imports to GDP be higher than 1. When do we have it? Probably, the example will be the same as in the case of exports, because normally these countries have as a goal – produce imports intro exports, so, they have high level of imports, they add some value to them, which they have as GDP, and in some time later they export them. As a result we have imports = exports (more or less) and our ratio of imports to GDP is higher than 1.

g. That a rich country like Japan has such a small ratio of imports to GDP is clear evidence of an unfair playing field for European exporters to Japan.
False. Actually, 2 main factors and causes of this fact are: 1) geography 2) size of the country. In this case we have a big importance of the first fact. Normally it is much more difficult to trade with countries with are far away from you, as a result a big distance between Europe and Japan can explain the small ratio of imports to GDP in Japan.

h. Given the definition of the exchange rate adopted in this chapter, if the dollar is the domestic currency and the euro the foreign currency, a nominal exchange rate of 0.75 means that $0.75 is worth €0.75.

False. If we have that our nominal exchange rate is equal to 0.75, it means that 1$ (domestic currency) equals to 0.75 euros (foreign currency). So, saying that 0.75 = 0.75, we are totally wrong. i.

A real appreciation means that domestic goods become less expensive relative to foreign goods. False. A real depreciation means that we have an increase in the relative price of domestic goods in terms of foreign...
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