Economics (McConnell), 18th Edition

Chapter 5: The United States in the Global Economy

Key Questions

1. The following are production possibilities tables for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for the United States is alternative U.

1. Are comparative-cost conditions such that the two areas should specialize? If so, what product should each produce?
2. What is the total gain in apparel and chemical output that would result from such specialization?
3. What are the limits of the terms of trade? Suppose actual terms of trade are 1 unit of apparel for 1½ units of chemicals and that 4 units of apparel are exchanged for 6 units of chemicals. What are the gains from specialization and trade for each nation?
4. Explain why this illustration allows you to conclude that specialization according to comparative advantage results in more efficient use of world resources.

2. True or False? "U.S. exports create a demand for foreign currencies; foreign imports of U.S. goods create a supply 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 to appreciate? Other things equal, what would be the effects of that depreciation or appreciation on U.S. exports and imports?

3. Identify and state the significance of each of the following: (a) WTO; (b) EU; (c) euro; (d) NAFTA. What commonality do they share?

Chapter 05 Key Question Solutions (42.0K)