International Trade ❮ 173❯ Rapid Review
World price: The global equilibrium price of a good when nations engage in trade.
Domestic price: The equilibrium price of a good in a nation without trade.
Balance of payments statement: A summary of the payments received by the United States
from foreign countries and the payments sent by the United States to foreign countries.
Current account: This account shows current import and export payments of both goods
and services and investment income sent to foreign investors of United States and invest-
ment income received by U.S. citizens who invest abroad.
Capital (or financial) account: This account shows the flow of investment on real or
financial assets between a nation and foreigners.
Official reserves account: The Fed’s adjustment of a deficit or surplus in the current and
capital account by the addition or subtraction of foreign currencies so that the balance of
payments is zero.
Exchange rate: The price of one currency in terms of a second currency.
Appreciating (depreciating) currency: When the value of a currency is rising (falling)
relative to another currency, it is said to be appreciating (depreciating).
Determinants of exchange rates: External factors that increase the price of one currency
relative to another.
Revenue tariff: An excise tax levied on goods not produced in the domestic market.
Protective tariff: An excise tax levied on a good that is produced in the domestic market
so that it may be protected from foreign competition.
Import quota: A limitation on the amount of a good that can be imported into the domes-
tic market.❯ Answers and Explanations
- A—If the world price is below the domestic
price, a shortage exists in the domestic market.
The importation of foreign rice fills this shortage. - D—Higher per capita income in trading nations
increases demand for imported goods. The
Chinese consumer increases demand for U.S.
goods and services and for dollars. - C—When there is a negative balance in the
current account, this does not always mean that
there is a trade deficit. After all, there is more to
the current account than the trade of goods and
services. However, when there is a negative bal-
ance in the current account, there must be a posi-
tive balance (or surplus) in the capital account.
4. B—Protective tariffs increase the price of steel
above the free-trade equilibrium. This higher
price is a transfer of money from consumers to
domestic producers of steel.
5. C—When the Japanese economy is suffering,
demand for U.S. goods falls, decreasing U.S.
net exports and demand for dollars. The dollar
depreciates and the yen appreciates.
6. A—A quota increases the price of sugar so
consumers seek substitutes. We may see rising
demand for sugar-free gum or falling demand
for rich desserts.