International Economics – 9th Edition Instructor’s Manual

CHAPTER 1
*(Core Chapter)

INTRODUCTION
OUTLINE

1.1 Importance of International Economics

Case Study 1-1: The Dell and Other PCs Sold in the United States Are All But
American
Case Study 1-2: What Is an "American" Car?

1.2 International Trade and The Nation's Standard of Living

Case Study 1-3: Rising Importance of International Trade to the United States

1.3 The Major U.S. Trade Partners: The Gravity Model

1.4 The Subject Matter of International Economics

1.5 Purpose of International Economic Theories and Policies

1.6 Current International Economic Challenges

1.7 The Globalization Challenge

1.8 Organization and Methodology of the Book

Appendix: A1.1 Basic International Trade Data

A1.2 Sources of Additional International Data and Information

Key Terms
Interdependence Adjustment in the balance of payments
Gravity model Microeconomics
International trade theory Macroeconomics
International trade policy Open economy macroeconomics
New protectionism International finance
Foreign exchange markets Globalization
Balance of payments Anti-globalization movement

Lecture Guide

1. As the first chapter of the book, the general aim here is simply to define the field
of study of international economics and its importance in today's interdependent
world.

The material in this chapter can be covered in two classes. I would utilize one
class to cover Sections 1 to 4 and the second class to cover Sections 5 to 8. I

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International Economics – 9th Edition Instructor’s Manual

would spend most of the second class on Section 6 on the major current
international economic challenges facing the United States and the world today
and to show how international economics can suggest ways to solve them. This
should greatly enhance students' motivation.

Answer to Problems

1. a) International economic problems reported in our daily newspapers are likely to

include:
• trade controversies between the United States, Europe, Japan, and China;
• great volatility of exchange rates;
• Increasing international competition from China and fear of job losses in the
United States and other advanced countries.
• structural unemployment and slow growth in Europe, and stagnation in Japan;
• financial crises in emerging market economies;
• restructuring problems of transition economies;
• deep poverty in many developing nations in the world.

b) Can result in trade restrictions or even a trade war, which reduce the volume
and the gains from trade;
• discourage foreign trade and investments, and thus reduce the benefits from
trade;
• Can result in trade restrictions or even a trade war, which reduce the volume
and the gains from trade;
• reduces European and Japanese imports and the volume and the benefits from
trade;
• financial crises in emerging market economies could spread to the United
States;
• can lead to political instability, which will adversely affect the United States;
• can lead to political instability in these countries - which also adversely affect
the United States.

c) Can result in your paying higher prices for imported products;

• lead to great fluctuations in the price of imported products and cost of foreign
travel;
• Can lead higher prices for imported products and increases the chances that
you will have to change jobs;
• can lead you to support demands for trade protection in the United States;
• can reduce the value of your investments (such as a stocks) in the United
States;
• can lead to your paying higher taxes for the United States to respond to these
threats;

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International Economics – 9th Edition Instructor’s Manual

• can result in your paying higher taxes to help these nations.

2. a) Five industrial nations not mentioned are: Italy, France, Canada, Austria, and
Ireland.

b) See Table 1A.

c) Smaller nations, such as Ireland and Austria, are more interdependent than the
larger ones. Note that interdependence was measured by the percentage of the
value of imports and exports (line 98c and 90c, respectively in IFS) to GDP (line
99b).

Table 1A
Economic Interdependence as
Measured by Imports and Exports
as a Percentage of GDP, 2004
Imports as Exports as
Natio a percent of a percent
n GDP of GDP
Italy 25.8 26.6
Franc
e 25.7 25.9
Cana
da 34 38.2
Austri
a 46.1 51
Irelan
d 63.7 79
*Source: International Financial Statistics
(Washington, D.C., IMF, March 2006).

3. a) Five developing nations not mentioned in the text are: Brazil, Pakistan,
Colombia, Nepal, and Tunisia.

b) See Table 1B.

c) In general, the smaller the nation, the greater is its economic interdependence.
Note that interdependence was measured by the percentage of the value of
imports and exports (line 98c and 90c, respectively in IFS) to GDP (line 99b).

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International Economics – 9th Edition Instructor’s Manual

Table 1B
Economic Interdependence as
Measured by Imports and Exports as
a Percentage of GDP, 2004
Imports as Exports as
a percent a percent
Nation of GDP of GDP
Brazil 13.4 18
Pakistan 16.7 16
Columbia 20.7 19.4
Nepal 31.7 17.3
Tunisia 49.6 46.7

*Source: International Financial Statistics

(Washington, D.C., IMF, March 2006).

4. Trade between the United States and Brazil is much larger than trade between the
United States and Argentina. Since Brazil is larger and closer than Argentina, this
trade does follow the predictions of the gravity model.

5. a) Mankiw’s Economics (4th., 2007) includes the following microeconomics

topics:
• The market forces of demand and supply;
• elasticity and its application;
• the theory of consumer choice;
• consumers, producers, and the efficiency of markets;
• the costs of production;
• firms in competitive markets;
• monopoly;
• oligopoly;
• monopolistic competition;
• markets for the factors of production;
• the demand for resources;

b) Just as the microeconomics parts of your principles text deal with individual
consumers and firms, and with the price of individual commodities and factors of
production, so do Parts One and Two of this text deal with production and
consumption of individual nations with nations with and without trade, and with
the relative price of individual commodities and factors of production.

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International Economics – 9th Edition Instructor’s Manual

c) Mankiw’s Economics (4th., 2007) includes the following microeconomics topics:

measuring a nation’s income and the cost of living;
• production and growth;
• savings investment and the financial system;
• unemployment and its natural rate;
• the monetary system, growth and inflation;
• money growth and inflation;
• open-economy macroeconomics: basic concepts;
• a macroeconomic theory of the open economy;
• aggregate demand and aggregate supply;
• the influence of monetary and fiscal policy on aggregate demand;
• the short-run trade off between inflation and unemployment
• five debates over macroeconomic policy.

d) Just as the macroeconomics parts of your principles text deal with the aggregate
level of savings, consumption, investment, and national income, the general price
level, and monetary and fiscal policies, so do Parts Three and Four of this text
deal with the aggregate amount of imports, exports, the total international flow of
resources, and the policies to affect these broad aggregates.

6. a) Consumer demand theory predicts than when the price of a commodity rises
(cet. par.), the quantity demanded of the commodity declines.

When the price of imports rises to domestic consumers, the quantity demanded of
exports can be expected to decline (if everything else remains constant).

7. a) A government can reduce a budget deficit by reducing government

expenditures and/or increasing taxes.

b) A nation can reduce or eliminate a balance of payments deficit by taxing

imports and/or subsidizing exports, by borrowing more abroad or lending less to
other nations, as well as by reducing the level of its national income.

8. a) Nations usually impose restrictions on the free international flow of goods,

services, and factors. Differences in language, customs, and laws also hamper
these international flows. In addition, international flows may involve receipts and
payments in different currencies, which may change in value in relation to one
another through time. This is to be contrasted with the interregional flow of
goods, services, and factors, which face no such restrictions as tariffs and are
conducted in terms of the same currency, usually in the same language, and under
basically the same set of customs and laws.

b) Both international and interregional economic relations involve the overcoming

of space or distance. Indeed, they both arise from the problems created by
distance. This distinguishes them from the rest of economics, which abstracts

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International Economics – 9th Edition Instructor’s Manual

from space and treats the economy as a single point in space, in which production,
exchange, and consumption take place.

9. We can deduce that nations benefit from voluntarily engaging in international

trade because if they did not gain or if they lost they could avoid those losses by
simply refusing to trade. Disagreement usually arises regarding the relative
distribution of the gains from specialization in production and trade, but this does
not mean that each nation does not gain from trade.

10. International trade results in lower prices for consumers but harms domestic
producers of products, which compete with imports. Often those domestic
producers that stand to lose a great deal from imports band together to pressure
the government to restrict imports. Since consumers are many and unorganized
and each individually stands to lose only very little from the import restrictions,
governments often give in to the demands of producers and impose some import
restrictions. These topics are discussed in detail in Chapter 9.

11. A nation can subsidize exports of the commodity to other nations until it drives
the competing nation's industry out of business, after which it can raise its price
and benefit from its newly acquired monopoly power.

Some economists and politicians in the United States have accused Japan of doing
just that (i.e., of engaging in strategic trade and industrial policy at the expense of
U.S. industries), but this is a very complex and controversial aspect of trade
policy and will be examined in detail in Chapter 9.

12. a) When the value of the U.S. dollar falls in relation to the currencies of other
nations, imports become more expensive for Americans and so they would
purchase a smaller quantity of imports.

b) When the value of the U.S. dollar falls in relation to the currencies of other
nations, U.S. exports become chapter for foreigners and so they would purchase a
greater quantity of U.S. exports.

Multiple-Choice Questions

1. Which of the following products are not produced at all in the United States?

*a. Coffee, tea, cocoa

b. steel, copper, aluminum
c. petroleum, coal, natural gas
d. typewriters, computers, airplanes

2. International trade is most important to the standard of living of:

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International Economics – 9th Edition Instructor’s Manual

a. the United States

*b. Switzerland
c. Germany
d. England

3. Over time, the economic interdependence of nations has:

*a. grown
b. diminished
c. remained unchanged
d. cannot say

4. A rough measure of the degree of economic interdependence of a nation is given by:

a. the size of the nations' population

b. the percentage of its population to its GDP
*c. the percentage of a nation's imports and exports to its GDP
d. all of the above

5. Economic interdependence is greater for:

*a. small nations

b. large nations
c. developed nations
d. developing nations

6. The gravity model of international trade predicts that trade between two nations is
larger

a. the larger the two nations

b. the closer the nations
c. the more open are the two nations
*d. all of the above

7. International economics deals with:

a. the flow of goods, services, and payments among nations

b. policies directed at regulating the flow of goods, services, and payments
c. the effects of policies on the welfare of the nation
*d. all of the above

8. International trade theory refers to:

*a. the microeconomic aspects of international trade

b. the macroeconomic aspects of international trade

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International Economics – 9th Edition Instructor’s Manual

c. open economy macroeconomics or international finance

d. all of the above

9. Which of the following is not the subject matter of international finance?

a. foreign exchange markets

b. the balance of payments
*c. the basis and the gains from trade
d. policies to adjust balance of payments disequilibria

10. Economic theory:

a. seeks to explain economic events

b. seeks to predict economic events
c. abstracts from the many detail that surrounds an economic event
*d. all of the above

11. Which of the following is not an assumption generally made in the study of
international economics?

a. two nations
b. two commodities
*c. perfect international mobility of factors
d. two factors of production

12. In the study of international economics:

a. international trade policies are examined before the bases for trade
b. adjustment policies are discussed before the balance of payments
c. the case of many nations is discussed before the two-nations case
*d. none of the above

13. International trade is similar to interregional trade in that both must overcome:

*a. distance and space

b. trade restrictions
c. differences in currencies
d. differences in monetary systems

14. The opening or expansion of international trade usually affects all members of
society:

a. positively
b. negatively
*c. most positively but some negatively
d. most negatively but some positively

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15. An increase in the dollar price of a foreign currency usually:

a. benefit U.S. importers

*b. benefits U.S. exporters
c. benefit both U.S. importers and U.S. exporters
d. harms both U.S. importers and U.S. exporters

16. Which of the following statements with regard to international economics is true?

a. It is a relatively new field

*b. it is a relatively old field
c. most of its contributors were not economists
d. none of the above

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