University of Washington Geography 349 Spring 2001

FIRST IN-CLASS TEST

Write your name above. Then, answer all the questions below -- except answer only one question on page 8. Possible points total 53; your score will be multiplied by 0.38 to yield your points out of the 20 this test counts toward the quarter's total. You have two hours, twenty minutes.

Questions 1-14 refer to this table of 1999 US International Transactions (in $millions) [14 points].

1	Exports of goods and services and income receipts		1,232,407
3	Exports of goods	684,358
4	Exports of services	271,884
13	Income receipts on US assets abroad	273,957
18	Imports of goods and services and income payments		-1,515,861
20	Imports of goods	-1,029,917
21	Imports of services	-191,296
30	Income payments on foreign-owned assets in the US	-287,059
35	Unilateral transfers, net		-48,025
39	Capital account transactions, net		-3,500
40	US-owned assets abroad, net change (net increase = neg. #)		-430,187
51	Private direct investment	-441,685
52	Private ownership of foreign securities	-150,901
55	Foreign-owned assets in the US, net change (net incr.= pos. #)		753,564
56	Foreign-government-owned assets	42,864
64	Private direct investment	275,533
65	Private ownership of US Treasury securities	-20,464
66	Private ownership of US private securities	331,523
70	Statistical discrepancy (sum of bold rows, with sign reversed)		11,602
71	Balance on goods	-345,559
72	Balance on services	80,588
73	Balance on goods and services	-264,971
76	Balance on current account		-331,479

1. In general, what does a negative number signify in this table (esp. in Rows 1-70)?

[Questions 2-8] In which row of this table would each of the following transactions show up (refer to a non-boldfaced row, if possible):

2. Boeing sells an airplane to Japan Air Lines?

3. A foreign student spends his parents’ money on tuition and living expenses in Seattle?

4. A British company receives dividends from its US subsidiary?

5. A US company buys a Canadian company?

6. An American buys $1000 stock in a Finnish company?

7. The Thai government buys $1 million of US government bonds?

8. General Motors’s plant in Windsor, Ontario ships body parts to a GM assembly plant in Flint, Michigan?

9. What rows yield the value for Row 71?

10. What rows yield the value for Row 72?

11. What rows yield the value for Row 73?

12. What’s the value of the “Balance on the Capital Account”?

13. What rows would you add to get the “Balance on the Capital Account”?

14. The boldfaced rows add to zero, in part because Row 70 exists to make sure of that. However, there’s a more fundamental reason why these rows add to zero — what is it?

Questions 15-18 refer to the table below [4 points].

UNITED STATES

National Income and Product Accounts, 1933-1999 (selected years)

GDP = C + I + G + X – M, where

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%
1998	8,759.9	67%	17%	17%^a	11%	13%
1999	9,299.2	67%	18%	17%^b	11%	13%

^{a, b} Federal defense = 4% GDP; Federal non-defense = 2% GDP; state & local = 11% GDP

Source: U.S. Department of Commerce, Bureau of Economic Analysis (Dec. 2000 Survey of Current Business)

15. What’s the trend in private investment in the US?

16. How would you describe the postwar trend in US government expenditures?

17. How would you describe the seeming trend in the US trade balance?

18. In which year(s) did American entities (companies, governments, households) invest more in foreign debt, stocks, land, and facilities than foreign entities invested in the US?

19. [15 points] In an essay, provide an overview of basic, neoclassical trade theory. It’s a normative theory: what goal is assumed? What are the key assumptions about resources, products, and technology? Overall, what’s the prescription for national economies? [In the course of the essay, be sure to explain the principles of absolute advantage, comparative advantage, division of the gains from trade,[1] and the theory of factor proportions. Please break your essay into appropriate paragraphs, and don't misuse its and it's.]

20. [6 points] What was the “Leontief paradox,” and why is it paradoxical? What are three potential ways to explain the paradox?

21. [10 points] Define foreign direct investment (FDI). Briefly present the eclectic theory of international business (Organization-specific, Locational, and Internalization advantages). According to this theoretical framework, when should a company export? When should a company serve a foreign market through FDI? When should a company obtain products or components from abroad through FDI in a production operation? When should a company license its technology to a foreign company?

22. Answer one of the following questions [4 points].

a) In a brief essay, characterize the relative size and trend of US, Japanese, and NIC (newly industrializing countries[2]) manufacturing, manufactured exports, and outward FDI. (I don’t expect you to recall any absolute numbers; just give an overview of the relative size and trends of these variables in/from these countries since the early 1950s.)

b) Imagine that two neighboring countries, which had closed their border to trade, suddenly open the border to trade in products (but not to labor or direct investment). If an economy can be divided into consumers, producers, and resource owners, name two parties who will immediately benefit from the trade, and two parties who will immediately suffer from the new trade flows.

c) In the product-life cycle model, what’s “local” (an immobile characteristic of particular countries), and what’s mobile across countries?

d) Describe the trap of “immiserating trade.” How might a country escape this trap? Why would this be difficult? [We haven’t discussed the last two questions in class, but you should have some ideas].

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[1] Here’s a revised formula for the share of the gains from trade that accrues to Country 1 as it exports a to Country 2 and imports b from Country 2: G₁ = (b₂/a₁)(C₂/C₁) – a₁/b₁ , where x_i refers to the amount of resources required to produce a unit of product x in country i, and C₂/C₁ refers to the number of units of country 2’s currency that equals a unit of country 1’s currency. You don’t need to describe each term in this formula, but it might help you write about what influences the division of the bilateral gains from trade.

[2] If you like, you may emphasize the world trade and investment roles of the Asian “tigers”: Hong Kong, Singapore, South Korea, and Taiwan.