Flow Mechanism

1. Discuss ways to use to support one’s currency if there is a financial/capital account deficit. What problems are there? What are the implications for monetary policy and freedom of capital movements?

2. There are two countries trading. The one (A) has its prices increasing by 25%, while the other (B) devalues by 25%, while their wages go up 25%. Talk on the issues of standard of living in the two countries, as well as competitiveness. Would your answers differ, if everything is as above, except that in the case of country B there is no 25% devaluation but a 25% productivity increase and a commensurate price decrease?

3. Expound on economies of scale is one of the causes of international trade. Does it relate with the Hechscher-Ohlin view? Furthermore, how does the evidence support this theory of trade? Apply the theory to two cases, as a minimum.

4. Another theory of international trade is that nation’s trade based on demand rather than cost/supply. Discuss this theory, apply it to at least two cases and mention its chief advocates. Is it supported by the empirical evidence?

5. Analyze the causes of productivity and its alteration. Ascertain you include the diverse inputs. How does it relate to competitiveness?

6. Define and describe the basic sub-accounts of the balance of payments.

7. Why do nations trade based on the concept of comparative advantage? Explain what products and which countries would be involved. Give two goods/services of five nations in which their factor endowments enable them to attain a lower cost.

8. Discuss three pros and three cons in international trade of

a) the unfettered price system and

b) government intervention.

9. Describe the relative price effect of the price specie flow mechanism.

10. Analyze the income effect of the price specie flow mechanism.

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