Reference no: EM132954530

1. Only roughly 20% of US firms export, and they tend to be the largest firms in the economy. Why is productive capacity, or size, a necessary condition for the profitable exportation of goods abroad?

2. Our standard trade models suggest that world prices will converge - high-cost countries can import at lower prices, low-cost countries can export at higher prices. Does the idea of external economies of scale agree with this? Explain.

3. Use the definition of the current account to answer the following.

a) Assume the Biden Administration raises taxes on the wealthy portion of the income distribution. What is the result of this policy on the government's budget? How would the current account evolve as well as the level of debt held by the US?

b) Illustrate and describe what effects the policy from part a) would have on real interest rates and volume in bond markets. (draw the graph)

c) How would this ultimately impact private investment demand of domestic firms?

4. Suppose there are initially two closed economies, Country A and Country B. Assume A has a relative abundance of capital, while B has a relative abundance of labor.

a) Prior to opening for trade, how do the initial real wages compare across the two countries? How do the initial real interest rates compare? How do you know?

b) After opening for trade, if we assume perfect capital and labor mobility, in which direction will capital flow? In which direction will labor migrate?

c) What is the result of open borders on the real interest rate and real wage rate in Country A?

5. Suppose that a BMW costs €45,000 in Germany and that the current USD/EUR exchange rate is .80.

a) Calculate the dollar price of the BMW.

b) Now suppose the euro appreciates relative to the dollar by 5%. What is the new USD/EUR exchange rate? What is the new dollar price of a BMW?