Chapter 6 Review Sheet
Test on Thursday, October 30, 2008
Chapter 6, and parts of Chap. 37(pgs. 691-696) and Chap 38 (pgs. 711-718 and 726-727).
Please bring a #2 pencil.
1.) Know who our major trading partners are.
2.) Trade deficit
a. Top countries with which U.S. has a trade deficit.
b. August 2008 – trade deficit decreased from July. Know the trade deficit
for August 2008 and for January - December of 2007.
c. From 2001-2005, the Central Bank of China intervened in the FX
markets to prevent the Yuan from appreciating against the U.S. $. Know
how to show this on the graphs of the 2 currency markets, the Yuan and
d. Make sure you understand that if foreigners do not buy our bonds and
other financial assets, we will not have access to the supply of foreign
currency to pay for the excess of our imports over exports.
CONSEQUENCES: The value of our currency will depreciate (as it did
last year) because there is less demand for the US$, imports will be
more expensive and we’ll import less. Americans will have to save
more to purchase US Treasury bonds needed to finance our budget
deficit, and will have less disposable income available for consumption,
affecting our standard of living in the short -run. Over the past few
weeks the value of the dollar appreciated because foreigners are buying
US $ for speculative reasons and because they feel the US $ is safer than
other currencies during this current global financial crisis.
e. Know the current account and capital account sections of the Balance of
3.) Barriers to free trade – protective tariffs and import quotas.
4.) Free trade zones:
b. Economic and Monetary Union
c. World Trade Organization
5.) Foreign Exchange Markets
a. Know how to calculate the price of goods using exchange rates.
b. Know how the exchange rate determinants affect imports/exports of
goods, services and financial assets:
---change in tastes
---change in incomes (when incomes increase in the U.S., we
demand more U.S. products, and more imported products as well).
---change in relative prices (if the price level is lower in another
country compared to ours, we will import products from there,
demand more of their currency and increase its value).
---change in real interest rates
c. Imports increase the demand for the currency of the exporting country,
because exporters want to get paid in their own currency. Be able to graph
the effects of the required FX transaction on the graphs of the currencies
of the 2 countries.
c. Know how the appreciation/depreciation of a currency affects the imports
and exports of a country, and thus the trade deficit.
6.) Comparative Advantage
a. Be able to distinguish between an input problem and an output problem
to determine comparative advantage.
b. Be able to determine the limits of the terms of trade and understand
what they mean.
c. Be able to calculate gains from specialization and trade.