INTERNATIONAL FINANCE

Conceptual questions

1. “Trade restrictions limiting the sale of cheap foreign goods in United States are necessary to protect the
prosperity of Americans”. Evaluate this statement made by an American politician.

2. Can both of the following statements be true?

a) Tariffs and import quotas promote economic inefficiency and reduce the real income of a nation.
Economic analysis suggests that nations can gain buy eliminating trade restrictions.
b) Economic Analysis suggests that there is good reason to expect trade restrictions to exist in the real
world.

3. “An increased scarcity of a product benefits producers and harms consumers. In effect tariffs and other trade
restrictions increase the domestic scarcity of products by reducing the supply from abroad. Such policies
benefit domestic producers of the restricted product at the expense of domestic consumers.” Evaluate this
statement.

4. “Getting more Indians to realize that it pays to make things in India is the heart of competitiveness issue”
This is a quote from one of the magazines.
a) Would Indian be better off if more of them paid higher prices to ‘buy Indian” rather than purchase it
from abroad?
b) Would West Bengal residents be better off if they bought only goods produced in West Bengal?
Would employment in West Bengal be higher? Explain.

5. It is often alleged that Chinese producers receive subsidy from their government which allow them to sell
their products at a low cost in the Indian markets. Do you think we should erect trade barriers to keep out
cheap Chinese products if the source of their low price is government subsidies? Why or why not?

6. Tariffs not only reduce the volume of imports, they also reduce the volume of exports. Is the statement true
or false? Explain your answer.

7. Suppose that US is running a current account deficit. How would each of the following changes influence
the size of the current account deficit?
a) A recession in the US
b) A decline in the attractiveness of investment opportunities in the US
c) An improvement in investment opportunities abroad.

8. “ Foreigners are flooding our markets with goods and using the proceeds to buy up America. Unless we do
something to protect ourselves, the Japanese, Europeans and Arabs are going to own America.” Evaluate
this recent statement by an American political figure.

9. If foreigners have confidence in the US economy and therefore move to expand their investments in the
United States, how will the US current account balance be affected? How will the exchange rate value of the
dollar be affected?

10. Changes in exchange rates will automatically direct a country to current account balance under a flexible-
rate system. Is this statement true or false?