ECON 333 Final Exam Study Guide Key

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ECON 333
Wayne Geerling

Review Sheet – Final Exam ALLMEDIAFILES CAN BE FOUNDAT: iFNnpzeFFTUnVIaUU&usp=sharing You will find questions on the exam relating to the media shown in class & used for homework FINAL EXAM Thursday, May 8, 10.10am-12pm (111 Forum) Format: • 50 multiple choice questions • 3 skips rule still applies If you have a conflict exam organized through the central registrar, please check eLion for details of your final exam. If you require extra writing time, you should have been contacted by a TAto organize a conflict exam. Let me know if you have any queries. Step by step guide 1. Read back over lecture notes (watch media clips at the same time) 2. Redo homework sets 3.Attempt the sample exam Chapter 8 – U.S. Commercial policy (course pack, pp. 112-119) • US trade law  Antidumping laws: injury test, dumping margin, fair market value, domestic welfare effects of antidumping laws.  Antidumping law allows a special tariff to be imposed on foreign goods sold in the US at a price less than its fair value • Between 1980-2008, over 1700 cases filed with DOC and ITC o Positive outcome: injury found o Terminated/resolved: foreign firms avoided further investigation by increasing prices o Negative outcome: no dumping found • China is accused of dumping the most • EU dumps the most agricultural products  Domestic import-competing firms file a complaint with DOC and ITC, threat to a domestic industry  Role of ITC • Investigates the injury • Injury test: determine whether dumping hurts the domestic sector, ITC looks at losses in sales, mkt share, profits, productivity, capacity utilization etc.  Role of DOC • Has dumping actually occurred? Dumping margin? • Dumping margin: difference between the mkt price and the fair mkt value o Special tariff is equal to the dumping margin o MUST calculate the fair market value of the product  Fair Market Value • The price of identical goods in exporter’s market (home mkt price) • The price in third country markets • Cost of production + 10% general expense + 8% profits  Welfare effects ofAntidumping laws • Limits foreign competition (nontariff barrier) o COSTLY for a firm to be accused of dumping, tend to charge higher prices to avoid this possibility • No discretion to government o Even if the domestic users of an imported input are adversely affected, the gov’t CANNOT change the policy • Maybe the special tariff good is an input to another production process o i.e. steel industry  Countervailing duties and export subsidies  Countervailing duties: special tariff to offset the effects of any foreign government subsidy (tax on artificially cheap imports) • Petitions filed with DOC (and ITC if injury test is required)  Export subsidy: a payment by the gov’t to an exporter • Direct payments • Subsidized loans • Tax rebates  DOC investigates if there is an export subsidy • If yes, the countervailing duty is imposed  Upstream subsidies are included • If a foreign manufacturers production inputs are subsidized (duty on final good though)  Subsidies and the WTO  The WTO establishes three types of subsidies  1. Prohibited subsidies: subsidies contingent on export performance  2. Actionable: subsidies which hurts the importing country producers • Government subsidized loans, not illegal but are subject to challenge by another country  3. Non-actionable subsidies: assistance to research and development, to disadvantaged regions, for adapting environmentally cleaner technology etc. • Complaints can still be made  Unfair foreign practices  Sometimes US is accused of unfair trade practices  Section 301 of TradeAct of 1974 • Considers actions of foreign gov’ts taken in their home mkts against US firms • Apetition to the USTR (US Trade Rep) • If accepted, negotiations with foreign gov’t • If no agreement, retaliatory actions by the US gov’t close US mkts  Friedman clip on countervailing duties  He believed that instead of imposing countervailing duties on subsidized foreign goods, the United States should write a note of thanks to foreign tax payers, as U.S consumers benefit from lower prices & foreign taxpayers pay for the subsidy. • What is the escape clause?  Temporary relief for an industry injured by FAIR foreign competition  Two goals of temporary protection:  RESTRUCTURING of the domestic sector to regain efficiency  Slowing down the CONTRACTION of the domestic sector and a smooth transfer of resources to other sectors • What is TAA?  Alternative to increased trade protection  Helps worked displace by free trade be retrained in other fields  Not used very often due to high cost • Boeing vAirbus trade dispute  Complaint: by US to WTO in Oct. 2004  preliminary judgment in Sept. 2009  WTO ruling Euro gov’ts paidAirbus illegal (WTO prohibited) export subsidies  Form: preferential gov’t loans (low interest rates) called “launch aid”  support to develop new plane models  Final Judgment: Airbus required to repay gov’t aid - $20 BILLION  EU Response- COMPLAINT to WTO about US support paid to Boeing  Difference between WTO defined prohibited and actionable subsidies?  In Sept. 2010- WTO preliminary finding: Boeing received illegal subsidies as well (smaller amount of ~ $6B)  US Respone: current response b/w Boeing andAirbus for the Pentagon tanker plane contract • Given WTO ruling, should this go to more expensive Boeing bid? • Does this violate: “national treatment” (illegal # WTO rules?!)  Case could DRAMATICALLY impact future gov’t aid to airplane producers Husted & Melvin, chapter 8, pp. 181-192 ***************************************************************************** Chapter 11 – Balance of Payments (course pack, pp. 121-129) • Components of BOP: CurrentAccount (CA), FinancialAccount, CapitalAccount • The Balance of Payments: records of a country’s trade in goods, services and financial assets with the rest of the world o Debit: what we receive, LEAVING THE COUNTRY  Any imports (losing foreign exchange)  Debits are recorded as a negative value o Credit: what we give back in return  Any exports (earning foreign exchange)  Credits are recorded as a positive value o Double-entry bookkeeping o BOP always sum to ZERO (even though individual components cant be in deficit/surplus) • Why is a trade deficit a bad thing for the economy? o Can lead to higher prices, products aren’t competitive • Classifying Transactions: IPOD o 400 parts o Final assembly  in China o Value added: $3, Price: $150 o Increases the bilateral trade deficit w/ China by that amount  Final stage of production determines where good is exported from o Simply looking at the US bilateral trade deficit w/ China (2012: $315B, deficit for over 20 years, MISLEADING • Current account = net exports (X) o Merchandise trade: tangible commodities  Credit Export of goods  Debit Import of goods o Services: trade in the services of the factors of production (includes tourism, royalties, transport cost, insurance premiums)  Credit Export of services  Debit Import of services o Investment income: payment for the services of physical capital (ROI)  Credit Income earned by US residents  DebitIncome paid to foreign residents o Unilateral transfers: Foreign aid, gifts, retirement pensions, interest paid to foreigners holding US Gov. debt  Credit RECEIVED by US gov’t  Debit Paid to foreign gov’ts • Credit: earns foreign exchange, debit: lose foreign exchange • The Balance of Trade o The balance of merch trade: (Value of exports of goods) MINUS (Value of imports of goods)  2012 $741B  Balance of trade deficit: imp > exp • The balance of services: value of export services + value of import services, 2012 +$207B  Balance of trade surplus: exp > imp o The balance of goods&services: (value of exports of goods and services) MINUS (value of imports of goods and services)  2012 $534B • CAdeficit (trade deficit): we have to borrow to finance the deficit. o National income is less than national expenditure • CAsurplus: we lend the surplus o Our income is more than our expenditure • Why is China buying more U.S. debt clip? o 2006, Chinese lent US half o Now in 2008, US had to finance a lot more treasuries to finance their ballooning budget deficit  China bought 3x more, even though it’s a smaller percentage of the overall deficit (since it increased so much) o China has a lot of USD from all its exports, needs a place to keep this money and watch it grow • The CAindicates… o Surplus: a country is a net LENDER to the rest of the world o Deficit: a country is a net BORROWER with the rest of the world o BOP is always in balance o Larger US current acct deficit matched by large financial acct surpluses o Foreign investment in US securities, HIGH • Financial account (FA) : country’s trade in financial assets: foreign direct investment, financial flows, official reserve transactions o The record of a country’s trade in financial assets o Direct investment: private financial transactions that result in the ownership of 10% or more of a business firm  Credit sales of US businesses, real estate, etc. to foreigners  Debit purchase of plants, real estate, etc abroad o Capital flows  Security purchases: private-sector net purchases of equity (stock) and debt securities  Bank& liability claims: loans, deposits abroad, claims on affiliated foreign banks. Liabilities: deposits, certificates of deposit, liabilities to affiliated foreign banks  Credit sale of bonds and stocks TO foreigners, cash payments, deposits opened by foreigners in USD  Debit purchase of bonds and stocks abroad, cash payments FROM foreigners, deposits opened by US residents in a foreign currency o Official Transactions: changes in the US official reserve assets, changes in foreign official reserve assets in US  Debit a decrease in YS official international reserves (held overseas)  Credit an increase in US official international reserves (held overseas) o Debit is foreign reserves OUT o Credit is foreign reserves IN • We ignore the capital account (very small for US) o Used interchangeably with financial acct o CA includes…  Transactions involving debt forgiveness OR  Financial assets accompanying migrant workers as they enter or leave the country • National income accounting identity: Y=C+I+G+X o When nations have a CAsurplus there will be a financial acct deficit o Any $ not spent on consumption by consumers or gov’t in national saving: rearrange • National saving: S=Y-C-G = I+X, so X = S-I o Taxpayers pay T, governments receive T o S= (Y-T-C) + (T-G) o National saving= private + public o Twin Deficits: government budget deficit trade deficit  Tendency for two to occur at the same time, (Budget deficitCA deficit) 1980s and late 1990s  Problem: ignores private saving: Y-T-C • Recall CA= X • Another way to think of savings: S = private saving + public saving or S = (Y-T-C) + (T-G) • If S>I: CAsurplus and FAdeficit, money flowing OUT of the US • If S
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