Question 1
A.
Icecountry: The opportunity cost of producing one scooter is 2.5 lbs of food (40 lbs of food/16 scooters).
Sandland: The opportunity cost of producing one scooter is 5 lbs of food (100 lbs of food/20 scooters).
B.
Opportunity Cost of Producing Food:
Icecountry: Producing 1 lb of food costs 0.025 scooters (16 scooters/40 lbs of food).
Sandland: Producing 1 lb of food costs 0.2 scooters (20 scooters/100 lbs of food).
Sandland has the lower opportunity cost for producing food (0.2 scooters vs. 0.025 scooters for
Icecountry) and thus has a comparative advantage in producing food.
C.
When Icecountry and Sandland specialize based on their comparative advantages, the terms of trade will
likely fall between their respective opportunity costs of producing scooters. Icecountry, with its lower
opportunity cost in scooter production, should specialize in scooters, while Sandland, with its advantage
in food, should focus on food production. The mutually beneficial terms of trade for one scooter would
range between 2.5 lbs and 5 lbs of food. This range ensures that Icecountry trades each scooter for more
food than it costs them to produce (more than 2.5 lbs) and Sandland pays less for each scooter than the
food they would have used to produce it (less than 5 lbs), thus optimizing the benefits of trade for both
countries.
Question 2
In the late 1990s, when Japanese steel producers were accused of dumping steel in the U.S. market,
various groups reacted differently based on their interests. Those who would be angry about Japanese
steel dumping include American steel producers and their employees. These groups would see dumping
as a threat because selling steel below production costs can drive down domestic prices, making it
difficult for local companies to compete, which could lead to reduced profits, layoffs, or even closures of
steel mills. On the other hand, those who would benefit from this dumping include industries that rely on
steel as an input, such as construction and automobile manufacturing. Lower steel prices can significantly
reduce production costs for these industries, leading to higher profits, potentially lower retail prices, and
increased competitiveness in their respective markets. Additionally, consumers looking for cheaper
steel-based products would also stand to gain from the lowered costs.
Question 3
A. Tariffs: These are taxes imposed on imported goods, making them more expensive in the domestic
market. This can protect local industries from foreign competition by making imported goods less
attractive price-wise.
Quotas: These restrict the quantity of a certain good that can be imported into a country, limiting supply
and often keeping prices higher than they would be in a more competitive market.
Embargoes: These are official bans on trade with particular countries or the exchange of specific products.
Embargoes can be used for political, economic, or health-related reasons to completely block imports or
exports.
B.
The quota on Japanese automobile imports in the 1970s, while reducing the number of cars Japanese
firms could sell in the U.S., paradoxically led to increased profits for these companies. This phenomenon
can be explained by a shift in strategy towards selling higher-priced and higher-margin vehicles. With a
limit on the total number of cars they could sell, Japanese automakers opted to focus on their more
expensive models, which yielded a higher profit per unit sold. This shift allowed them to maximize their
revenue from the restricted quantity they were allowed to export. Additionally, the quotas reduced the
overall competition in the market, enabling the remaining players to increase their prices due to the
decreased supply and sustained demand, further boosting profitability.
Question 4
A.
B.
C.
A. Boyan's Purchase of a Swedish Automobile
When Boyan, a resident of Vidinland, purchases a brand new Swedish automobile, it will be recorded as a
current account import for Vidinland. This transaction involves Vidinland importing goods (the car) from
another country, which increases the country's import total in the current account, reflecting the outflow of
funds to pay for the imported vehicle.
B. Pete's Purchase of Wine from Vidinland
When Pete, a resident of the U.S., purchases 1,000 cases of fine wine from Vidinland, this transaction will
be noted as a current account export for Vidinland. This sale represents an export of goods from Vidinland
to the U.S., adding to the country's export total in the current account, showing an inflow of funds from
abroad.
C. U.S. Residents' Bike Tour in Vidinland
When U.S. residents Allen and Elizabeth spend money on hotels, food, and tires during their bike tour in
Vidinland, this spending is categorized as a current account export for Vidinland. The expenditures made
by tourists are counted as exports because they are essentially 'purchasing' Vidinland's services,
contributing to the inflow of foreign currency.
D. U.S. Investors Purchase Kashkaval Factories
The purchase of several kashkaval factories in Vidinland by investors from the U.S. will be recorded as a
capital account inflow for Vidinland. This transaction involves foreign investment coming into the
country, indicating an inflow of capital which increases the investment stock within the capital account.
E. Profits from Kashkaval Factories
When the U.S. investors receive very large profits from their investment in the kashkaval factories in
Vidinland, as described in part D, this will be recorded as a capital account outflow for Vidinland. The
repatriation of profits by foreign investors counts as an outflow in the capital account because it
represents a transfer of money out of the country, reducing the capital stock.
