Exercises: International trade and economic integration

Define exports and imports and explain what the balance of trade is. When do we say that a country has a trade deficit or a trade surplus?

Explain the difference between free trade and protectionism. Then solve: a pair of imported sneakers costs $\$50$ and the country applies a tariff of $20\ \%$, what final price do consumers pay?

The figure shows the exports and imports of an imaginary country over three years, in billions of dollars.

1. a) Calculate the trade balance for each year.
2. b) In which years was there a deficit, and in which years a surplus?

What is the exchange rate between two currencies? If $1\ \text{€} = 1.10\ \text{dollars}$, calculate how many dollars a $20\ \text{€}$ book costs and how many euros a pair of sneakers costing $110\ \text{dollars}$ costs.

A country exports goods worth $300,000$ million dollars and imports goods worth $350,000$ million.

1. a) Calculate its trade balance.
2. b) Does it have a trade deficit or a trade surplus? Explain what that sign means.

Besides tariffs, there is the import quota: a limit on the quantity of a product that can enter the country. Explain the difference between taxing an imported product with a tariff and putting a quota on it, and reason what effect each one has on the price and the available quantity.

The European Union is a customs union: inside it there are no tariffs and outside it the same common tariff applies. Explain with an example what that means for a Valencian orange traveling to Germany, as opposed to an orange from a third country entering through the port of Valencia.

Country A produces $1\ \text{kg}$ of cheese with $2$ hours of work and country B, with $4$ hours.

1. a) Which country has an absolute advantage in cheese? Justify your answer.
2. b) According to the theory of absolute advantage, what does it recommend each country do? Explain the logic of specialization.

The country Vega produces wheat with half the labor of Olma, and Olma produces wine with half the labor of Vega.

1. a) Explain what absolute advantage is and who has it for each product.
2. b) Reason why both countries can benefit if they specialize and trade with each other.

Explain what belonging to the European Single Market means for a Spanish company when selling to France compared to selling to a country outside the EU. Mention tariffs, common standards, and the free movement of goods.

An exporter from Valencia sells oranges to Germany and to a country outside the eurozone.

1. a) Explain what advantages the euro gives it when selling to Germany.
2. b) What additional problem does it face when selling to the other country? Explain what exchange rate risk is.

With one hour of work, the country Norte produces $6$ meters of cloth or $2$ liters of wine; the country Sur produces $4$ meters of cloth or $4$ liters of wine.

1. a) Who has an absolute advantage in each product?
2. b) Calculate the opportunity cost of producing one liter of wine in each country (in meters of cloth) and state who has a comparative advantage in wine.
3. c) Explain how specialization according to comparative advantage can benefit both countries.

The euro depreciates against the dollar: from $1\ \text{€} = 1.10\ \text{dollars}$ it moves to $1\ \text{€} = 1.00\ \text{dollar}$.

1. a) Explain what happens to the price American tourists pay in Spain and to the price Spaniards pay in the United States.
2. b) Analyze the effect on Spanish exports of goods and tourism, and on Spanish imports of products priced in dollars (oil).

A country has a goods trade deficit of $40,000$ million dollars and a services surplus (tourism, transport) of $25,000$ million.

1. a) Calculate the total balance of goods and services and state its sign.
2. b) Explain which sectors drive each balance in a country like Spain and what "offsetting" the goods deficit with tourism means.

A fictitious country leaves the customs union it belonged to. A strawberry-exporting firm used to sell to its neighbors with no paperwork.

1. a) List what changes for the firm (tariffs, sanitary controls, customs, delivery times).
2. b) Explain why perishable products suffer more than others from border controls and what the firm can do to adapt.

A country sells its steel abroad below the cost of production, subsidized by its government, and sinks the steel mills of competing countries.

1. a) What is "dumping" and why is it considered unfair competition?
2. b) What response do the affected countries usually give (anti-dumping duties) and what risk of trade escalation is there?

Analyze the following statement: "International trade increases the overall economic pie, but the way it is distributed can ruin entire regions."

1. a) Drawing on the comparative advantage model and the imperfect mobility of labor, justify why trade liberalization can simultaneously generate net gains at the macroeconomic level and prolonged structural unemployment in single-industry regions (for example, regions dedicated to ceramics or footwear).
2. b) Design a package of two economic policies to compensate workers harmed by import competition without resorting to protectionist barriers. Assess the budgetary difficulties of financing these policies with taxes collected from the domestic exporting sectors that have gained from trade.

During a period of strong growth, the price and wage level in Country A (a member of the eurozone) rises by 18 % more than that of its trading partners, causing a severe external deficit as its exports collapse.

1. a) Lacking its own currency, Country A cannot resort to a devaluation of the nominal exchange rate. Predict how the mechanism of «internal devaluation» operates and compare its impact on employment, consumption, and the real burden of debt (public and private) against what depreciating an independent national currency would have entailed.
2. b) An economic commentator claims: «If Country A had kept its independent national currency, it would have solved the competitiveness imbalance immediately and at no cost to the population». Reasonably refute this claim by pointing out the costs and risks brought about by a monetary devaluation (imported inflation, risk premium, and loss of credibility).