STudying for econ exam ... please help?

Question

1. Why are some benefits of international trade?

2. What is the idea of comparative advantage?

3. How do exports and imports affect the economy?

4. What are the determinants of exchange rates in the short-run? In the long-run?

5. What is purchasing power parity theory?

6. Why do we have a current account deficit, and what does it imply?

7. Why don’t flexible exchange rates end the current account deficit?

8. Why do we have a capital/financial account surplus and what does it imply?

9. What is the ‘twin deficit problem’? The ‘tri-lemma’?

10. What are the advantages of floating exchange rates? Fixed exchange rates?

11. How does a strong currency affect the domestic economy?

Answer 1

1. Why are some benefits of international trade?

A: Trade reduces prices because it increases competition.

2. What is the idea of comparative advantage?

A: No idea

3. How do exports and imports affect the economy?

A: They add or subtract wealth for an economy

4. What are the determinants of exchange rates in the short-run? In the long-run?

A: Short: Nothing - Long: Economic Policy

5. What is purchasing power parity theory?

A: The Big Mac Index

6. Why do we have a current account deficit, and what does it imply?

A: An account Deficit is a result of Govt. Policy. Spending more than it receives in taxes.

7. Why don’t flexible exchange rates end the current account deficit?

A: Exchange rates don't pay for Govt. Spending Programs.

8. Why do we have a capital/financial account surplus and what does it imply?

A: Unknown

9. What is the ‘twin deficit problem’? The ‘tri-lemma’?

A:  Account Deficit and Trade Deficit

10. What are the advantages of floating exchange rates? Fixed exchange rates?

A: Fixed means that no matter the market forces your exchange rate is set by government decree.  Floating means the Market dictates the exchange rate.

11. How does a strong currency affect the domestic economy?

A: A strong currency increases your purchasing power parity over foreign produced goods. As such, a strong currency usually leads towards a trade imbalance of more imports than exports.