University of Washington, Geography 349, Autumn 2007, Test 1

University of Washington Geography 349 Autumn 2007

FIRST IN-CLASS TEST

The possible points total 43 (plus 2 possible “bonus” points); your points will be multiplied by 0.409 to yield your score out of possible 18. You have 110 minutes.

SHORT ANSWER [19 points]
1. [9 points] Briefly define each term below, sufficiently to distinguish it from the other terms.
Common market
Countervailing duty
Customs union
Dumping
Free trade area
MFN provisions
Quota
Subsidy
Tariff

2. [1 point] According to the table below, in what year(s) did U.S. entities invest more in other countries than investors in other countries invested in the U.S.?

U.S. National Income and Product Accounts, 1933-2005 (selected years)
GDP is given in billions of current dollars
C = personal consumption expenditures, as a percent of GDP
I = private domestic investment, as a percent of GDP
G = expenditures and investment by Federal, state, and local governments, as a percent of GDP
X = exports as a percent of GDP
M = imports as a percent of GDP

Year	GDP	C	I	G	X	M
1933	$56.2	82%	3%	15%	4%	3%
1945	$223.2	54	5	42	3	3
1965	$719.1	62	16	21	5	4
1973	$1,382.6	62	18	21	7	7
1987	$4,692.3	66	16	21	6	11
2000	$9,817.0	69	18	18	11	15
2005	$12,455.8	70	17	19b	11	16

U.S. INTERNATIONAL TRANSACTIONS, 2005
(all figures in millions of current U.S. dollars)
Source: Bureau of Economic Analysis, International Accounts Data, Balance of Payments Tables
http://www.bea.gov/bea/newsrelarchive/2006/trans206.xls

1 Exports of goods, services, income	1,749,892
3 Goods	894,631
4 Services (travel, royalties, private services)	380,614
12 Income receipts (on U.S. assets abroad)	474,647
18 Imports of goods, services, income	-2,455,328
20 Goods	-1,677,371
21 Services (travel, transp, royalties, private services, defense exp. abroad)	-314,604
29 Income payments (on foreign assets in U.S.)	-463,353
35 Unilateral transfers, net	-86,072
39 Capital account transactions, net	-4,351
40 U.S. assets abroad, net change	-426,801
51 US FDI abroad, net change
55 Foreign assets in U.S., net change	1,212,250
64 FDI into the US, net change	109,754
70 Statistical discrepancy	10,410
Memoranda
71 Balance on goods = (3) + (20)	-782,740
72 Balance on services = (4) + (21)	66,011
73 Balance on goods and services = (71) + (72)	-716,730
76 Balance on current account = (1) + (18) + (35) = - [ (39) + (40) + (55) + (70) ]	-791,508

3. [7 points] In the table above,
a) Which row would be directly affected if the Chinese government sold U.S. government bonds?
b) Which row would reflect the tuition payments of a Chinese student at UW?
c) Which row would reflect U.S. government interest payments on U.S. Treasury bonds owned by the Chinese government?
d) Which row would reflect your hotel and entertainment expenses in Vancouver BC (assuming that your income comes from the U.S.)?
e) Which row reflects the shipments of assembled products from a Mexican facility to the US company that owns that facility?
f) Which row reflects the California Pension Fund (CALPERS)’s purchase of a suburban Toronto shopping center?
g) What’s the significance of the equation in Row 76?

4. [1 point]
Which country is the world’s largest producer of manufactured items (by value)?
Which country has the world’s largest trade deficit in merchandise trade?

5. [2 points] The bilateral trade between which two countries is the largest bilateral trade flow in the world? Suggest three reasons why these two countries engage in such a large volume of trade.

ESSAYS   [3 essays; 24 points total]
6. [12 points] Write an essay that presents the principal components of the basic, neoclassical theory of trade. What strong assumptions underlie this basic theory: regarding the goal of economic activity, the mobility of factors and products, the mobility and stability of production technology? What are the sources of system-wide gains from trade? What influences the division of the gains from trade between two trading partners? Be sure to define and make use of the concepts of absolute versus comparative advantage, factor-proportions theory, and the formula G1 = (a1/b2)(C2/C1) - a1/b1 .

7. [12 points] Write TWO essays, on TWO of the topics below. (Tell me which you’re answering!)

a) According to the basic, neoclassical model of trade, what determines the intra-national distribution of gains and losses as a country moves from autarky to open trade? (In other words, who gains, who loses, and why?) Suggest a way to compensate the losers, and the difficulties in doing that. Why should open trade of products lead toward “factor-price equalization” (what does that mean?), even if factors of production are not mobile internationally?

b) While the product life cycle model (PLC) was developed to “explain” the Leontief paradox (which was the finding that the production of US exports were more labor-intensive than the production in US sectors facing import competition), it contradicts two assumptions of basic neoclassical trade theory. Define the PLC, and explain those two contradictions.

c) Recall the equation G₁ = (a₁/b₂) (C₂/C₁) – a₁/b₁.   Pick a country (Canada, China, or Mexico). If G₁ is the gain from exporting the product of your country’s comparative advantage (a₁) to the US, use each of the three ratios to suggest, in principle, how that country might increase its gain from trade with the US. Briefly suggest one fairly realistic policy measure your country’s government might undertake toward this goal, given your country’s actual comparative advantage(s).

d) What 2-3 countries seem to have the largest international-trade surpluses in agriculture-based trade? (A list is fine). What 2-3 countries seem to have the largest international-trade surpluses in merchandise trade? What 2-3 countries seem to have the largest international-trade surpluses in services trade? Try to make sense of these patterns by using any (combination) of the trade "theories" (frameworks or explanations) we've studied. Be clear about what theory(ies) you’re using.

e) Write an essay about two policy arguments and counter-arguments about trade: in each case, explain the argument against trade liberalization and the counter-arguments, then note where you stand (perhaps qualifying your stance -- most of us are not for or against international trade in every single incidence, but may have more concerns about the conduct of trade in certain sectors, with certain countries....). Since the basic, neoclassical theory of trade suggests that free movement of goods and services is always a benefit to the system, explain what assumptions of the theory are not being met, if in one or both cases you have concerns about trade liberalization.

BONUS POINTS
7. [2 points] Recall that Y = C + I + G + X – M. Y is national income, also called GDP (gross domestic product). We can define country’s annual savings (S) as Y – C – G. What does this definition mean in everyday language?

Note the following transformation:
Since Y =   C + I + G + X – M
and   S =   Y   – C – G   then
         S =   (C + I + G + X – M)    – C – G.
If you do the subtraction on the right side, S =   I + X – M.
If we subtract I from both sides, then        S – I =   X – M.

Even if you didn’t follow that algebra, you should be able to describe S – I = X – M in everyday language. In other words, what basic, key relationship does this express: a relationship that I’ve mentioned almost every day we’ve met since September 26th?