Discussion Questions
Answer 2 of the 3 Questions
DQ #1
The gains from specialization and trade are based on comparative
advantage, which reflects the relative opportunity cost. When countries
specialize in producing goods and services for which they have comparative
advantages, total production in the global economy rises. Trade advocates argue
that this increase in the size of the economic pie can be used to make all
trading countries better off through international trade. Economists also use
the principle of comparative advantage to advocate free trade among countries
as a better policy. Trade is not based on absolute advantages countries have
but the relative (comparative) advantage.
- Does free trade contribute to the improvement of
economic well-being?
- Who gains and who loses from free trade among
countries, and how do the gains compare to the losses? Explain using
examples.
- Do you think the USA export and import of goods and
services are based on the principle of a comparative advantage of trade? Explain.
DQ#2
A balance of trade (trade balance) is the difference between the
monetary values of exports and imports of a country’s economic output over a
given period of time. Trade balance can be positive (favorable) when the value
of exports is greater than the value of imports. The positive trade balance is
also called trade surplus. On the other hand, if the value of imports is
greater than the value of exports, the trade balance indicates trade deficit.
Trade balance affects the Gross Domestic Product (GDP) of a
country since net export is a component of the GDP. It also affects the
exchange rate of a country’s currency.
- How does trade stimulate long term economic growth?
Explain.
- Which part of international trade creates more jobs? Is
it export or import? Why?
- Is it trade deficit or trade
surplus that contributes more to economic growth? Why?
- Why do countries impose trade restrictions on goods and
services they import from other countries? What are the pros and cons of
trade protectionism?
DQ#3
Quantity supplied and demanded for products change as the prices
of the products change. Similarly, supply and demand for foreign currency
result in changing prices of a currency. The price of a currency changes
as demand for foreign currencies changes. This price of foreign currency, in
terms of U.S. currency, is known as the foreign exchange rate. Exchange rate
simply indicates how many USA dollars it will cost us to purchase a unit of
foreign currency. This floating foreign exchange rate changes daily with the
international supply and demand for currency.
- What are the impacts of currency devaluation and
revaluation on international trade?
- What are the factors that increase and decrease the
demand for a foreign currency?
- What is the difference between pegged currency (fixed
exchange rate) and floating exchanged? What are their pros and cons of the
two forms of the exchange rates?
- What is currency war? How does it affect trade between
countries?
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