Content Option for Instructors #1 The United States and the Global Economy
McConnell Brue Flynn 20e
DISCUSSION QUESTIONS
1. Describe the four major economic flows that link the U.S. with other nations. Provide a
specific example to illustrate each flow. LO1
Answer: The four major economic flows are: the flows of goods and services (trade
flows); the flows of capital equipment and labor (resource flows); the flows of
information and technology; and the financial flows (money).
2. How important is international trade to the U.S. economy? In terms of volume of exports
and imports, what country is the United States’ most important trading partner? Was the
United States the world’s leading export country in 2012? If not, which country was? Place
the following four countries in descending order in terms of exports as a percentage of GDP:
the United States, Belgium, Canada, and Japan. What key factors account for the rapid
growth of world trade since the Second World War? LO2
Answer: Exports and imports constituted 14 percent and 17 percent of GDP respectively
in 2012. These proportions have more than doubled since 1975. The United States trades
more with industrially advanced economies although the U.S. trade with Mexico is
substantial. The U.S.’s most important trading partner quantitatively is Canada, buying
19 percent of our exports and providing 14 percent of our imports in 2012. The United
States continues to be the world’s leading export country. In terms of exports as a
percentage of GDP, Belgium leads at 92%, Canada follows at 25%, then the United
States at 14%, and last is Japan at 13%.
3. What role do domestic opportunity costs play in determining a nation’s area of
comparative advantage and therefore specialization relative to that of a trading partner?
Provide a numerical example (no need for a table) to support your answer. How does
specialization and trade reduce a nation’s total cost of obtaining products? Why is
specialization sometimes incomplete, such that countries import some of the same
categories of goods that they export? LO3
Answer: A country has a comparative advantage in producing a specific good if that
nation has the lowest opportunity cost for the good. Countries with the lowest
opportunity cost will specialize in producing that good and trade it with other
nations that have a higher opportunity cost for producing the good. If nation A’s
opportunity cost of producing 1 gallon of ice cream is 5 candy bars while nation B’s
,opportunity cost of producing 1 gallon of ice cream is 7 candy bars, then nation A
should specialize in producing ice cream. Through trade and specialization, nations
are able to allocate resources more efficiently, lowering their total costs of the goods
by reducing the opportunity costs associated with the goods. So nations will have
more of both goods. Rising opportunity costs are a primary reason for incomplete
specialization because at some point the domestic opportunity cost might become
higher than the trading partner.
,4. True or False? “U.S. exports create a demand for foreign currencies; foreign imports of U.S.
goods generate supplies of foreign currencies.” Explain. Would a decline in U.S. consumer
income or a weakening of U.S. preferences for foreign products cause the dollar to depreciate or
appreciate? Other things equal, what would be the effects of that depreciation or appreciation on
U.S. exports and imports? LO4
Answer: The first part of this statement is incorrect. U.S. exports create a domestic
supply of foreign currencies, not a domestic demand for them. The second part of the
statement is accurate. The foreign demand for dollars (from US. exports) generates a
supply of foreign currencies to the United States.
A decline in U.S. incomes or a weakening of U.S. preferences for foreign goods would
reduce U.S. imports, reducing U.S. demand for foreign currencies. These currencies
would depreciate (the dollar would appreciate). Dollar appreciation means U.S. exports
would decline and U.S. imports would increase.
5. If the European euro were to decline in value (depreciate) in the foreign exchange market,
would it be easier or harder for the French to sell their wine in the United States? Suppose you
were planning a trip to Paris. How would the depreciation of the euro change the dollar price of
this trip? LO4
Answer: If the European euro declines in value, it means that Americans can receive
more euros for each dollar. Therefore, they do not need as many dollars to pay the euro
price of a bottle of French wine, so the quantity demanded would rise and it should be
easier to sell French wine in the U.S. Likewise, the euro depreciation would make it less
costly for Americans to travel in France, since the dollar would now buy more euros
(assuming that prices inside France have not risen to entirely offset the depreciation of
the euro).
6. What measures do governments use to promote exports and restrict imports? Who benefits and
who loses from protectionist policies? What is the net outcome for society? LO5
Answer: Governments promote exports by providing subsidies to export producers, which
effectively lowers their costs and enables them to sell their products at lower prices on world
markets. Subsidies enable export firms or industries to compete against other nations, but the
fact the subsidy was necessary for this competition means that the most efficient use of
resources is not taking place.
Restriction of imports can be accomplished by protective tariffs, by import quotas, and by
non-tariff barriers such as licensing requirements, unreasonable quality standards, and
unnecessary import procedures.
The benefits of protectionist policies are to the industry that has to compete on world
markets either with its exports or against imports. Even this may be a short-run benefit,
, because industries that are protected may become so inefficient and outmoded that they
are unable to stay afloat even with the protection in the long run. There may also be some
political benefits as those protected groups have a strong self interest in this protection
and are vocal opponents of free trade for their industries, whereas the benefits of free
trade are more diffuse and the benefits to any single group of voters is less noticeable.
McConnell Brue Flynn 20e
DISCUSSION QUESTIONS
1. Describe the four major economic flows that link the U.S. with other nations. Provide a
specific example to illustrate each flow. LO1
Answer: The four major economic flows are: the flows of goods and services (trade
flows); the flows of capital equipment and labor (resource flows); the flows of
information and technology; and the financial flows (money).
2. How important is international trade to the U.S. economy? In terms of volume of exports
and imports, what country is the United States’ most important trading partner? Was the
United States the world’s leading export country in 2012? If not, which country was? Place
the following four countries in descending order in terms of exports as a percentage of GDP:
the United States, Belgium, Canada, and Japan. What key factors account for the rapid
growth of world trade since the Second World War? LO2
Answer: Exports and imports constituted 14 percent and 17 percent of GDP respectively
in 2012. These proportions have more than doubled since 1975. The United States trades
more with industrially advanced economies although the U.S. trade with Mexico is
substantial. The U.S.’s most important trading partner quantitatively is Canada, buying
19 percent of our exports and providing 14 percent of our imports in 2012. The United
States continues to be the world’s leading export country. In terms of exports as a
percentage of GDP, Belgium leads at 92%, Canada follows at 25%, then the United
States at 14%, and last is Japan at 13%.
3. What role do domestic opportunity costs play in determining a nation’s area of
comparative advantage and therefore specialization relative to that of a trading partner?
Provide a numerical example (no need for a table) to support your answer. How does
specialization and trade reduce a nation’s total cost of obtaining products? Why is
specialization sometimes incomplete, such that countries import some of the same
categories of goods that they export? LO3
Answer: A country has a comparative advantage in producing a specific good if that
nation has the lowest opportunity cost for the good. Countries with the lowest
opportunity cost will specialize in producing that good and trade it with other
nations that have a higher opportunity cost for producing the good. If nation A’s
opportunity cost of producing 1 gallon of ice cream is 5 candy bars while nation B’s
,opportunity cost of producing 1 gallon of ice cream is 7 candy bars, then nation A
should specialize in producing ice cream. Through trade and specialization, nations
are able to allocate resources more efficiently, lowering their total costs of the goods
by reducing the opportunity costs associated with the goods. So nations will have
more of both goods. Rising opportunity costs are a primary reason for incomplete
specialization because at some point the domestic opportunity cost might become
higher than the trading partner.
,4. True or False? “U.S. exports create a demand for foreign currencies; foreign imports of U.S.
goods generate supplies of foreign currencies.” Explain. Would a decline in U.S. consumer
income or a weakening of U.S. preferences for foreign products cause the dollar to depreciate or
appreciate? Other things equal, what would be the effects of that depreciation or appreciation on
U.S. exports and imports? LO4
Answer: The first part of this statement is incorrect. U.S. exports create a domestic
supply of foreign currencies, not a domestic demand for them. The second part of the
statement is accurate. The foreign demand for dollars (from US. exports) generates a
supply of foreign currencies to the United States.
A decline in U.S. incomes or a weakening of U.S. preferences for foreign goods would
reduce U.S. imports, reducing U.S. demand for foreign currencies. These currencies
would depreciate (the dollar would appreciate). Dollar appreciation means U.S. exports
would decline and U.S. imports would increase.
5. If the European euro were to decline in value (depreciate) in the foreign exchange market,
would it be easier or harder for the French to sell their wine in the United States? Suppose you
were planning a trip to Paris. How would the depreciation of the euro change the dollar price of
this trip? LO4
Answer: If the European euro declines in value, it means that Americans can receive
more euros for each dollar. Therefore, they do not need as many dollars to pay the euro
price of a bottle of French wine, so the quantity demanded would rise and it should be
easier to sell French wine in the U.S. Likewise, the euro depreciation would make it less
costly for Americans to travel in France, since the dollar would now buy more euros
(assuming that prices inside France have not risen to entirely offset the depreciation of
the euro).
6. What measures do governments use to promote exports and restrict imports? Who benefits and
who loses from protectionist policies? What is the net outcome for society? LO5
Answer: Governments promote exports by providing subsidies to export producers, which
effectively lowers their costs and enables them to sell their products at lower prices on world
markets. Subsidies enable export firms or industries to compete against other nations, but the
fact the subsidy was necessary for this competition means that the most efficient use of
resources is not taking place.
Restriction of imports can be accomplished by protective tariffs, by import quotas, and by
non-tariff barriers such as licensing requirements, unreasonable quality standards, and
unnecessary import procedures.
The benefits of protectionist policies are to the industry that has to compete on world
markets either with its exports or against imports. Even this may be a short-run benefit,
, because industries that are protected may become so inefficient and outmoded that they
are unable to stay afloat even with the protection in the long run. There may also be some
political benefits as those protected groups have a strong self interest in this protection
and are vocal opponents of free trade for their industries, whereas the benefits of free
trade are more diffuse and the benefits to any single group of voters is less noticeable.
