Q1.Describe developing countries and how they differ from industrialmarket economies. How can international trade aid development? Inwhat ways does international economy impose problems on developingcountries?
Developingcountries are the countries with low material wealth, low standard ofliving, and Human Development Index (HDI) compared to othercountries. International trade has both positive and negative effectin developing countries. It can either promote economic developmentor retard it. Actually, it is the major boon for developingcountries. For instance, it allows these countries to focus onproducing goods to export to the rich countries. As a result, thesecountries make lots of money that they would not make when producingdomestic goods only. On the other hand, international trade isharmful. In most cases, rich countries exploit cheap labor fromdeveloping countries rather than help them diversify their economies.
Q2.How can two countries both be better off as a result of trade? Howcan tariffs protect U.S jobs? Do tariffs leads to a net increase injobs? Explain. Who are the winners and losers from traderestrictions? Given that trade restrictions impose losses on aneconomy, why are trade restrictions so common?
Aftertwo countries trade together, they are both are better off thanbefore the exchange. The buyer has net gain in consumer surplus whilethe seller has a net gain in producer surplus. Tariffs protect U.Sjobs because it helps in protecting the domestic jobs by raisingprices on goods and services. Tariffs leads to net increase in jobsbecause citizen end up buying cheap domestic goods meaning theproduction of these goods is high hence, the rate of employment.During such situation, the domestic industries are the winners whileforeign industries are the losers. However, trade restrictions arecommon because there benefits are more noticeable and the costs theyimpose are invisible.
Q3.Why can’t all the balance of payments accounts be in surplus? Whatfactors determine the demand for British pounds in foreign exchangemarkets? How are exchange rates determined under a flexible exchangerate?
Allthe balance of payments cannot be surplus because a nation has toinvest money, recognise the need for investment and expenditure, aswell as borrow money. At other times, the economies fluctuate hence,the balance of accounts cannot be surplus due to the limited natureof money. The major factor that determines the demand for Britishpounds in foreign exchange markets is the amount of export that itgenerates. The demand for foreign exports helps to calculate thedemand for the pound. The higher the demand, the more the people arewilling to pay in British pound. The exchange rates are determinedunder flexible exchange rate by the financial indicators or nation’sbalance of payment.
Q4.What is foreign aid and what is the goal of foreign aid? Does foreignaid promote economic development? Explain briefly.
Foreignaid is any kind of help that is given by one country to anothercountry. There are two major goals for foreign aid. Firstly,countries give foreign aid for humanitarian reasons. In mostcircumstance, it is given to countries that are less fortunate.Secondly, other countries give foreign aid for pragmatic purposes.For example, some countries think that whenever they assist othercountries, they empower themselves. However, foreign aid does notpromote economic development because it does not count on the GrossDomestic Product (GDP).
Q5.How did the Bretton Woods System operate? What caused its collapse?Some think the current system of managed but floating rates is toounstable. What would generate the instability?
TheBretton Wood Agreement system operated by pegging different worldcurrencies to the U.S dollars and price of gold through the USD(McEachern,2012).That is, the USD should be a fixed price within a certain range, andits price should not be lower than the price of gold substituted bydollars. However, some nation’s currencies retained their valueclose to USD since they were tied to USD stabilised by gold. As aresult, all world currencies were stabilised in a variability range,and correspondingly stabilizing inflation and deflation.Unfortunately, Bretton Wood ended after gold rush during Nixon’spresidency era. Nixon released the USD from gold standardstabilisation back to their normal currencies.
McEachern,W. A. (2012). ECON Macro 3 (3rd ed.). Mason, OH: South-Western.