國際經(jīng)濟學(xué)復(fù)習(xí)資料

BRIEFANSWERSTOSTUDYQUESTIONS(課后練習(xí)參考答案)

Chapter1

1.Interdependenceamongtoday'seconomiesreflectsthehistoricalevolutionoftheworld'seconomicand

politicalorder.SinceWorldWarII,EuropeandJapanhavereindustrialized.Whatismore,the

formationoftheEuropeanCommunityandtheOrganizationofPetroleumExportingCountries,aswellas

theriseofmultinationalcorporations,hascontributedtoclosereconomicandpoliticallinkages.

2.Proponentsofanopentradingsystemmaintainthatfreetradeleadstolowerprices,thedevelopmentof

moreefficientproductionmethods,andagreaterrangeofconsumptionchoices.Freetradepermits

resourcestomovefromtheirlowestproductivitytotheirhighestproductivity.Criticsofanopentrading

systemmaintainthatimportcompetitionmaydisplacedomesticfirmsandworkers.Itisalsoarguedthat

duringperiodsofnationalemergency,itisinthebestinterestsofanationtoprotectstrategicindustries.

3.FortheUnitedStates,growingeconomicinterdependencehasresultedinexportsandimportsincreasing

asashareofnationaloutput.Profitsofdomesticfirmsandwagesofdomesticworkersareincreasingly

beingaffectedbyforeigncompetition.Politicalandeconomiceventsplayimportantrolesforthe

operationofsomesectorsoftheAmericaneconomy,suchasenergyandagriculture.

4.Thevolumeofinternationaltradeisgovernedbyfactorsincludingthelevelofdomesticeconomicactivity

(eg,prosperityversusrecession)andrestrictionsimposedbycountriesontheirimports.

5.Thechapterdescribesthreefallaciesofinternationaltrade:

a.Tradeisazerosumactivity

b.Importsreduceemploymentandactasadragontheeconomy

c.Tariffsandquotaswillsavejobsandpromoteahigherlevelofemployment

6.Internationalcompetitivenessreferstotheextenttowhichthegoodsofafirmorindustrycancompetein

themarketplace;thiscompetitivenessdependsontherelativepricesandqualitiesofproducts.Nonation

canbecompetitivein,andthusbeanetexporterofeverything.Becauseanation'sstockofresourcesis

limited,theidealisfortheseresourcestobeusedintheirmostproductivemanner.Nationswillbenefit

fromspecializationandtradebyexportingproductshavingacomparativeadvantage.

7.ResearchersattheMcKinseyGlobalInstitutehavefoundthatglobalcompetitivenessisabitlikesports.

Yougetbetterbyplayingagainstfolkswhoarebetterthanyou.Thismeanscompaniesareexposedto

intenseglobalcompetitiontendtobemoreproductivethanthosewhoaren't.

8.Internationaltradebenefitsmostworkers,especiallythoseinexportingindustries.Inadditiontoproviding

Chapter1:TheInternationalEconomy

themjobsandincome,itallowsthemtoshopforconsumptiongoodsthatarecheapestandofthehighest

quality.However,workersinimport-competingindustriesoftenfeelthreatenedfromcompetitionofcheap

foreignlabor.

9.Amongthechallengesconfrontingtheinternationaltradingsystemaremaintainingfairstandardsforlabor

andpromotingenvironmentalquality.

10.Thethreatofinternationalterrorismtendstoslowthedegreeofglobalizationandalsomakeitbecome

costlier.Withterrorism,companiesmustpaymoretoinsureandprovidesecurityforoverseasstaffand

property.Heightenedborderinspectionscouldslowshipmentsofcargo,forcingcompaniestostockmore

inventory.Tighterimmigrationpoliciescouldreducetheliberalinflowsofskilledandblue-collarlaborers

thatpermittedcompaniestoexpandwhilekeepingwagesincheck.Moreover,agreaterpreoccupation

withpoliticalriskhascompaniesgreatlynarrowingtheirhorizonswhenmakingnewinvestments.

Chapter2

1.Modemtradetheoryaddressesthefollowingquestions:(1)Whatconstitutesthebasisfortrade?(2)At

whattermsoftradedonationsexportandimportcertainproducts?(3)Whatarethegainsfromtradein

termsofproductionandconsumption?

2.Themercantilistsmaintainedthatgovernmentshouldstimulateexportsandrestrictimportssoasto

increaseanation'sholdingsofgold.Anationcouldonlygainattheexpenseofothernationsbecausenot

allnationscouldsimultaneouslyhaveatradesurplus.Smithmaintainedthatwithfreetrade,international

specializationofresourcesinproductionleadstoanincreaseinworldoutputwhichcanbesharedbyboth

tradingpartners.Allnationssimultaneouslycanenjoygainsfromtradeintermsofproductionand

consumption.

3.Assumethatbydevotingallofitsresourcestotheproductionofsteel,Francecanproduce40tons.By

devotingallofitsresourcestotelevisions,Francecanproduce60televisions.Comparablefiguresfor

Japanare20tonsofsteeland10televisions.Inthisexample,Francehasanabsoluteadvantageinthe

productionofsteelandtelevisions.Francehasacomparativeadvantageintelevisions.

4.Ignoringtheroleofdemand'simpactonmarketprices,SmithandRicardomaintainedthatacountry's

competitivepositionisunderlaidbycostconditions.Smith'stradetheoryisbasedonabsolutecosts,while

comparativecostsunderlieRicardo'stradetheory.

5.Theprincipleofcomparativeadvantagecanbeexplainedinopportunitycost,whichindicatestheamount

ofoneproductthatmustbesacrificedinordertoreleaseenoughresourcestobeabletoproduceonemore

Chapter1:TheInternationalEconomy

unitofanotherproduct.Theslopeoftheproductionpossibilitiescurve(i.e.,themarginalrateof

transformation)indicatesthisrateofsacrifice.Anationfacingastraight-lineproductionpossibilities

curveproducesunderconditionsofconstantcosts,whileproductionunderincreasingcostsreferstoa

bowed-out(i.e.,concave)productionpossibilitiescurve.

6.Constantopportunitycostsrefertoasituationwherethecostofeachadditionalunitofoneproductin

termsofanotherproductremainsthesame.Constantcostsoccurwhenresourcesarecompletelyadaptable

toalternativeuses.Underincreasingcostconditions,anationmustsacrificemoreandmoreofone

producttoproduceeachadditionalunitofanotherproduct.Increasingcostsoccurwhenresourcesarenot

completelyadaptabletoalternativeuses.

7.Whereanationproducesalongitsproductionpossibilitiescurveinautarkyaffectsthenation's

comparativecostsunderincreasingcostconditions.Thisisbecausetheslopeofabowed-outproduction

possibilitiescurve,whichindicatesthemarginalrateoftransformation,variesateachpointalongthecurve.

Underconditionsofconstantcosts,theproductionpossibilitiescurveisastraightline.Themarginalrate

oftransformationdoesnotchangeinresponsetomovementsalongtheproductionpossibilitiescurve.

8.Underconstantopportunitycostconditions,specializationiscomplete.Acountrycandevoteallofits

resourcestotheproductionofagoodwithoutlosingitscomparativeadvantage.Underincreasingcost

conditions,specializationtendstobepartial.Asproductioncostsrisewithexpandedproduction,thehome

countryeventuallylosesitscomparativeadvantage.

9.Productiongainsfromtraderefertotheincreasedoutputofgoodsandservicesmadepossiblebythe

internationaldivisionoflaborandspecialization.Consumptiongainsfromtraderefertotheincreased

amountofgoodsmadeavailabletoconsumersastheresultofinternationaltrade.

10.Thetradetriangleincludesanation'sexports,itsimports,andinternationaltermsoftrade.

1l.Thefreetradeargumentmaintainsthatinternationaltradepermitsinternationaldivisionoflaborand

specializationandresultsinresourcesbeingtransferredtotheirhighestproductivity.Worldoutputthus

risesaboveautarkylevels.

12.a.Canada*sMRTofsteelintoaluminumequals1/3tonofsteelpertonofaluminumwhileFrance'sMRT

ofsteelintoaluminumequals1x/itonsofsteelpertonofaluminum.Canadaspecializesintheproduction

ofaluminumwhileFrancespecializesintheproductionofsteel.Completespecializationoccursineach

country.Theproductiongainsfromtradeforthetwocountriestotal500tonsofaluminumand300tonsof

steel.

Chapter1:TheInternationalEconomy

b.Lowerlimit,1tonofaluminum=1/3tonofsteel;upperlimit,1tonofaluminum=1Yitonsofsteel.The

consumptiongainsfromtradeforCanadaconsistof400tonsofaluminumand200tonsofsteel;the

consumptiongainsfromtradeforFranceconsistof100tonsofaluminumand100tonsofsteel.

C.Canadafstradetriangleisboundedby500tonsofaluminum(export),500tonsofsteel(import),anda

termsoftradeequalto1tonofaluminumpertonofsteel.France'stradetriangleisboundedby500tons

ofsteel(export),500tonsofaluminum(import),andatermsoftradeequalto1tonofsteelpertonof

aluminum.

12.a.Concaveproductionpossibilitiesschedulesareexplainedbyincreasingopportunitycosts.

b.Japan'sMRTofsteelintoautosequals1/6tonofsteelperauto;SouthKorea'sMRTofsteelintoautos

equals6tonsofsteelperauto.

c.JapanspecializesintheproductionofautoswhileSouthKoreaspecializesinsteel.

d.Withpartialspecialization,Japanproduces200tonsofsteeland1300autoswhileSouthKoreaproduces

900tonsofsteeland400autos.Theproductiongainsforthetwocountriescombinedtotal400tonsof

steeland300autos.

e.Japan'sconsumptiongainsfromtradeconsistof200tonsofsteeland200autos;SouthKorea's

consumptiongainsconsistof200tonsofsteeland100autos.

Chapter3

l.Theintroductionofcommunityindifferencecurvesintothetrademodelpermitstwoquestionstobe

answered:(1)Atwhatpointonitsproductionpossibilitiescurvewillacountrychoosetolocateinthe

absenceoftrade?(2)Atwhatpointalongtheterms-of-tradelinewillacountrychooseinatrading

situation?

2.Themarginalrateoftransformationindicatestheamountofacommoditythatanationmustsacrificein

ordertoproduceonemoreunitofasecondcommodity.Themarginalrateofsubstitutionindicatesthe

amountofacommoditythatanationiswillingtosacrificeinordertoconsumeoneadditionalunitof

anothercommodityandrealizethesameleveloftotalsatisfaction.

3.Underincreasingcostconditions,theslopeofacountry'sproductionpossibilitiescurve,whichindicates

therelativecostofoneproductintermsofanotherproduct,variesateachpointalongthecurve.In

autarky,anationisinequilibriumwhenitscommunityindifferencecurveistangenttoitsproduction

possibilitiescurve.Twonationshavingidenticalproductionpossibilitiescurves,butdifferentcommunity

Chapter1:TheInternationalEconomy

indifferencecurves,wouldhavedifferentequilibriumpointsandthereforedifferentprice(cost)ratiosfor

thetwogoods.

4.Thegainsacountryenjoysfromfreetradedependontheequilibriumtermsoftrade,whichisdetermined

byworldsupplyanddemandconditions.Byrecognizingonlytheroleofsupply,Ricardowasunableto

determinetheequilibriumtermsoftrade.

5.Thelawofreciprocaldemandsuggeststhatifweknowthedomesticdemandsexpressedbybothtrading

partnersforbothproducts,theequilibriumtermsoftradecanbedefined.

6.Likedomesticmarketprices,theinternationaltermsoftradeisinfluencedbychangesinworlddemand

andsupplyconditions.Changesinfactorssuchastastesandincomeonthedemandsideandproductivity

onthesupplysidecaninducechangesinacountry'stermsoftrade.

7.Ifanationistoenjoygainsfromtrade,itmustbeabletosellitsexportproductoverseasatahigherprice

thancouldbeobtaineddomestically.

8.Thecommoditytermsoftradeconsidersthedirectionofthegainsfromtradebymeasuringthe

relationshipbetweenthepricesacountrygetsforitsexportsandthepricesitpaysforitsimports,overa

giventimeperiod.

9.Thecommoditytermsoftradefacesseverallimitations:(1)theproblemofallowingfornew

commoditiesandchangesincommodityquality,(2)themethodsofvaluingexportsandimports,(3)the

methodsusedtoweighthecommoditiesintheindex,and(4)makingallowanceforchangesinproductivity.

10.Japan'stermsoftradeequal107andshowimprovement.Canada'stermsoftradeequal100anddoes

notchange.Ireland'stermsoftradeequal88andshowsdeterioration.

1l.Foralargecountry,exportbiasedgrowthleadstotwoopposingwelfareeffects:(1)worseningterms

oftrade,(2)risingnationaloutput.Ifthenegativetermsoftradeeffectmorethanoutweighsthepositive

effectofincreasedoutput,nationalwelfaredecreases,andviceversa.

12.Referringtoquestion#11,immiserizinggrowthwouldoccurifthenegativetermsoftradeeffectmore

thanoffsetsthepositiveeffectofincreasedoutput.Exportbiasedgrowththuscontributestoareductionin

domesticwelfare.

Chapter4

1.Transportationcostsaffectthelocationofindustrysincefirmsrecognizethattransportationcostsin

additiontoproductioncostsaffectprofitability.Afirmachievesitsbestlocationwhenitcanminimizeits

Chapter1:TheInternationalEconomy

totaloperatingcosts,includingproductionandtransportationcosts.Whenaddingtransportationcoststo

thepricesoftradedgoods,anation'svolumeoftradedecreases.

2.Thefactorendowmenttheorysuggeststhatacapital-abundantnationenjoysrelativelycheapcapital.

Itthusspecializesinandexportsacapital-intensivegood.Thisleadstoincreaseddemandforcapital,

whichforcesupthepriceofcapitalandthusthepriceofthecapital-intensivegood.Theoppositeoccurs

inthecapital-scarcecountry.Thebasisforfurtherspecializationandtradeceaseswhenthecapitalprices

andproductpricesineachnationequate.

3.TheHeckscher-Ohlintheoryemphasizesfactorendowmentsasthebasisfortrade,whileRicardian

theorystressestheroleoflaborproductivity.

4.TheHeckscher-Ohlintheoryreasonsthatexportsofproductsembodyinglargeamountsofrelatively

cheap,abundantfactorsmakesthosefactorslessabundantdomestically.Thisleadstohigherpricesand

thusanincreasedshareofnationalincomeforthesefactors.

5.TheLeontiefparadoxquestionedtheapplicabilityofthefactor-endowmenttheorybyconcludingthat

theUnitedStatesexportedlabor-intensivegoods.Thiswastheoppositeconclusionthatwouldbe

expectedwhenapplyingthefactorendowmenttheorytotheUnitedStates.

6.Lindermaintainsthatthefactor-endowmenttheoryisvalidfortradeinprimaryproducts,butthatthe

theoryofoverlappingdemandsbestappliestotradeinmanufacturedgoods.

7.Thereappearstobesomeempiricalsupportfortheproductlifecycletheoryintheareaof

manufacturedgoods.

8.AdamSmithrecognizedthatthedivisionoflaborislimitedbythesizeofthemarket;worldtradecan

permitlongerproductionrunsfordomesticmanufacturers,whichleadstoincreasingefficiencyand

increasingcompetitiveness.

9.Interindustrytradereferstotheexchangebetweennationsofproductsofdifferentindustries.

Intraindustrytradereferstotwo-waytradeinasimilarproduct.Amongthedeterminantsofintraindustry

tradeare:(a)overlappingdemandsegmentsintradingcountries,(b)theextenttowhichdomesticproducers

ignore"minority"consumertastes,and(c)economiesofscaleassociatedwithdifferentiatedgoods.

10.Industrialpolicyreferstoagovernmentalstrategyintendedtorevitalize,improve,and/ordevelopan

industry.Governmentalpoliciesintendedtofosteranindustry'sdevelopmentincludeloanguarantees,

researchanddevelopmentsubsidies,lowinterestrateloans,tradeprotection,andthelike.Creating

comparativeadvantagerequiresthegovernmenttoidentifyindustrieswiththehighestgrowthprospects.

Chapter1:TheInternationalEconomy

Problemsofindustrialpolicyinclude:(a)identifyinggrowthorientedindustries;(b)governmentpolicy

makersmaybeundulyinfluencedbytheirvotingconstituents.

11.Environmentalregulationsimposedondomesticproducersleadtohigherproductioncostsanda

decreaseincompetitiveness.Suchregulationisanegativedeterminantontradeperformance.Nations

thatimposemorestringentandcostlyenvironmentalregulationsontheirproducers,relativetothoseabroad,

tendtolessentheirinternationalcompetitiveness.

12.Tradeinbusinessservicesisgovernedbyfactorssuchas:(a)employeeskillsandcompensation

levels,(b)afirm'sabilitytoorganizeitsemployeesinaproductivemanner,(c)availabilityofcapital

equipment,and(d)potentialforeconomiesofscalemadepossiblebyamarket'ssize.

13.a.Sweden—P=$15,Q=600;Norway—P=$30,Q=600.Swedenhasthecomparative

advantageincalculators.

b.P=$22.50and600calculatorsaretradedatthatprice.Sweden―Qs=900,Qd=300;Norway—Qs=300,

Qd=900.

c.Sweden一P=$20;Norway—P=$25.Sweden—Qs=800,Qd=400,Exports=400;Norway—Qs=

4(X),Qd=800,Imports=400.

d.Pricesdonotequalize.Lessspecializationoccurs.Asmallertradevolumeoccurs.

Chapter5

1.Aspecifictariffisexpressedasafixedamountofmoneyperunitoftheimportedproduct.Anad

valoremtariffisafixedpercentageofthevalueoftheimportedproductasitentersthecountry.A

compoundtariffcombinesaspecifictariffandanadvaloremtariff.

2.Twocommonlyusedvaluationconceptsusedbycustomsappraisersarethefree-on-boardtechnique

andthecost-insurance-freighttechnique.

3.Whenmaterialinputsorintermediateproductsenteracountryatalowdutywhilethefinalimported

productisprotectedbyahighduty,thenominaltariffrateonthefinalproductoverstatestheeffectiverate

ofprotection.Theoppositealsoapplies.

4.Developingcountrieshavearguedthatindustrialcountriesallowrawmaterialstobeimportedatlow

nominaltariffrateswhilemaintaininghighnominaltariffratesonfinishedproducts.

5.Consumersurplus(producersurplus)referstothedifferencebetweentheamountactuallypaidbythe

buyer(receivedbytheproducer)andthemaximum(minimum)thatthebuyer(producer)wouldhavebeen

Chapter1:TheInternationalEconomy

willingtopay(receive)fortheproduct.Byinfluencingmarketprices,traderestrictionsinfluence

consumerandproducersurplus.

6.Atariffdetractsfromthenation'swelfareviaitsconsumptioneffectandprotectiveeffect.

7.Ingeneral,thesizeofthewelfareresponsestotariffsisdeterminedbytheimpactofthetariffson

domesticpricesandtheresponseofdomesticproducersandconsumerstothesepricechanges.

8.Givenalarge-countrymodel,acountrywhichimposesatariffonimportsfindsitstermsoftrade

improving.Shouldthefavorableterms-of-tradeeffectmorethanoffsetthedeadweightlossesresulting

fromthetariff,nationalwelfareimproves.

9.Economistsgenerallycontendthatmostargumentsfortraderestrictionscannotwithstandsearching

analysis.Theinfantindustryandnationalsecurityargumentsmayhavesomevalidity,buttheymustbe

highlyqualified.

10.Byincreasingthepriceoftradegoods,tariffslowerthevolumeoftrade.Fortheworldasawhole,

thereisnofavorableterms-of-tradeeffecttooffsetthetradevolumeeffect.

11.Termsoftradeimprove,whiletradevolumedeclines.

12.Effectivetariffrateequals21percent.

13.OurtrademodelpredictsthatbyforcingupthepriceofoilintheUnitedStates,domesticproduction

wouldbeencouraged,whiledomesticconsumptionwouldbediscouraged.

14.Abondedwarehouseisastoragefacilityforimportedgoods;itallowsimportedgoodstobeputinto

storagewithoutthepaymentofduties.Goodsmaybelatersoldoverseasdutyfreeorwithdrawnfor

domesticsaleuponpaymentofimportduties.Aforeigntradezoneisasitewhereforeignmerchandise

canbeimportedwithnoimportduty;merchandiseinthezonecanbestoredorusedinthemanufacturingof

finalproducts.

15.a.P=$250;Q=25.Consumersurplus=$3125;producersurplus=$3125.

b.Qs=10,Qd=40,Imports=30.Consumersurplus=$8000;producersurplus=$500.

c.P=$200,Qs=20,Qd=30,Imports=10.$3500.Consumptioneffect=$500,protectiveeffect=

$500,redistributioneffect=$1500,revenueeffect=$1000.Deadweightwelfareloss=$1000.

16.a.$400,12tons,2tons,1()tons.

b-1.SUS+Fshiftsupwardbytheamountofthetariff,$250.

b-2.$600,10tons,4tons,6tons.

b-3.$2200,$200,$200,$600,$1200,$400.

Chapter1:TheInternationalEconomy

b-4.$350,improve,increase,$300.

b-5.TheUnitedStatessuffersawelfarelossof$100sincethewelfarereductionoftheconsumptionand

protectiveeffects($400)exceedsthewelfaregainoftheterms-of-tradeeffect($300).

Chapter11

1.Thebalanceofpaymentsisarecordofthemonetarytransactionsbetweenresidentsofonecountry

andtherestoftheworldthatoccuroverthecourseofaone-yearperiod.

2.Thereceiptofdollarsfromforeignersresultsfromthefollowingtransactions:(1)merchandise

exports,(2)transportation-travelreceipts,(3)incomereceivedfromforeigninvestmentsabroad,(4)gifts

receivedfromforeignresidents,(5)aidreceivedfromforeigngovernments,and(6)investmentsintheU.S.

byoverseasresidents.Thepaymentofdollarstoforeignerswouldsuggesttheoppositefortheabove

transactions.

3.Becausethebalance-of-paymentsstatementutilizesadouble-entrybookingsystem,inwhicheach

creditentryisbalancedbyadebitentry,theoverallbalanceofpaymentsmustnumericallybalance.

4.Balance-of-paymentstransactionsaregroupedintotwocategories:(1)thecurrentaccountwhich

referstothemonetaryvalueofinternationalflowsassociatedwithflowsingoods,services,income,and

unilateraltransfers;and(2)thecapitalaccountwhichincludesallinternationalpurchasesandsalesof

assets.

5.Officialreserveassetsconsistofgold,SpecialDrawingRights,reservepositionsintheInternational

MonetaryFund,andconvertiblecurrencies.

6.Amerchandisetradesurplussuggeststhatthehomecountryisanetexporterofmerchandise.A

goodsandservicessurplussuggeststhatthehomecountrytransfersmorerealresources(goodsandservices)

toothercountriesthanitreceivesfromthem.Acurrentaccountsurplusmeansanexcessofexportsover

importsofgoods,services,income,andunilateraltransfers.

7.Ifthesurplusbalanceontheserviceaccountexceedsthedeficitbalanceonthemerchandise(goods)

account,thegoodsandservicesbalancewillbeinsurplus.

8.Thebalanceofinternationalindebtednessindicatestheinternationalinvestmentpositionofacountry

atonemomentintime.Thebalanceofpaymentsindicatesalloftheinternationalmonetarytransactionsof

acountryoveraone-yearperiod.

9.a-debit;b-credit;c-credit;d-debit;e-debit;f-debit;g-credit;h-debit;i-debit.

10.a.Merchandisetradebalance,$75billiondeficit.Servicesbalance,$60billion

Chapter1:TheInternationalEconomy

surplus.Goodsandservicesbalance,$15billiondeficit.Investmentincomebalance,$5billionsurplus.

Unilateraltransfersbalance,$20billiondeficit.Currentaccountbalance,$30billiondeficit.

b.Currentaccount.ThecurrentaccountdeficitimpliesthattheUnitedStatesisanet-demanderoffunds

fromtherestoftheworld.

11.Netdebtornationoftheamount$25billion.

Chapter12

1.Theforeignexchangemarketreferstotheorganizationalsettingwithinwhichindividuals,firms,and

banksbuyandsellforeigncurrencies.ThetwolargestforeignexchangemarketsarelocatedinNewYork

andLondon.

2.Thespotmarketpermitsthebuyingandsellingofforeignexchangeforimmediatedelivery.Future

contractsaremadebythosewhowillmakeorreceiveforeignexchangepaymentsintheweeksormonths

ahead.

3.Thesupplyanddemandforforeignexchangeisderivedfromthecredit(debit)itemsonthebalance

ofpayments,suchasexportsorinvestmentflows.

4.Exchange-ratequotationsthroughouttheworldarebroughtintoharmonyviaexchangearbitrage.

5.Tradersandinvestorsoftenparticipateintheforwardmarkettoprotecttheirexpectedprofitsfrom

theriskofexchangeratefluctuations.Speculatorsalsoparticipateintheforwardmarket.

6.Therelationbetweenthespotrateandtheforwardrateismaintainedviatheprocessofcovered

interestarbitrage.

7.Exchangemarketspeculatorsdeliberatelyassumeforeignexchangeriskwiththehopeofprofiting

fromexchangeratefluctuationsovertime.Mostspeculationisconductedintheforwardmarket.

8.Stabilizingspeculationreferstothepurchaseofaforeigncurrencywiththedomesticcurrencywhen

thereoccursafallintheforeignexchangerate.Theanticipationisthattheexchangeratewillsoonrise

andthusgenerateaprofit.Stabilizingspeculationmoderatesafall(rise)intheexchangerate.

Destabilizingspeculationreinforcesfluctuationsinexchangerates.

9.Thedollarappreciatesagainstthepound;thepounddepreciatesagainstthedollar.Thedollar

depreciatesagainstthepound;thepoundappreciatesagainstthedollar.

10.ArbitragerswillbuypoundsinNewYork,at$1.69perpound,andsellpoundsinLondon,at$1.71

perpound,thusmakingaprofitof2centsoneachpound.AspoundsareboughtinNewYork,theirprices

rises;aspoundsaresoldinLondon,theirpricefalls.Whenthedollarpriceofthepoundequalizesinthe

Chapter1:TheInternationalEconomy

financialcenters,theprofitabilityofarbitrageceasesandthepracticestops.

11.a.$1.50perpound.30poundsarepurchasedatacostof$45.

b.Excesssupply,20pounds.Dollarpriceofthepounddecreases,decrease,increase.

c.Excessdemand,20pounds.Dollarpriceofthepoundincreases,increase,decrease.

12.a.TheU.S.importercancoverherforeignexchangeriskbypurchasing20,000poundsfor

three-monthdeliveryattoday*sthree-monthforwardrateof$1.75perpound.Theimporteriswillingto

pay5centsmoreperpound(or$1000moreforthe20,000pounds)thantoday'sspotratetoguardagainst

thepossibilitythatthespotrateinthreemonthswillexceed$1.70perpound.Inthreemonths,whenher

paymentsaredue,theimporterwillpay$35,000