3121271

Running head: INTERNATIONAL TRADE AND FINANCE 1

International Trade and Finance

Name

Institution

INTERNATIONAL TRADE AND FINANCE 2

International Trade and Finance

Question 1. A Part

This is a fair criticism. This is because these laborers who work in the sweat shops

overseas are unfairly exploited by being forced to work under poor working conditions, while at

the same time being paid poorly for their efforts. In addition to this, the availability of cheap

labor overseas hurts the workers in the US who are denied jobs because it is cheaper to produce

commodities overseas than in the US.

Question 1. B Part

This is an unfair criticism. This is because the government support of the farmers is

important in ensuring that the agricultural sector in the US remains afloat. The cotton farmers,

for instance, need support on the part of the government in the form of grants, because they need

better seeds to ensure that the US is a major cotton producer in the world. This does not distort

the market because at the end of the day it benefits both the farmers and the governments.

Question 1. C Part

This is an unfair criticism. Asset bubbles and market crashes are not brought about by

banks or stock exchanges they are brought about by bad fiscal policies, and, therefore, instead of

looking at the banks as the cause of economic downturns, the emphasis should be put on the

policy makers. Banks and stock exchanges in a developing economy can offer citizens means of

increasing their personal savings, as well as enhancing their capital accumulation. In addition,

banks offer funds that people can borrow for both long-term and short-term investment.

Question 2. A Part

Increasing the money supply in the economy is the simplest way the government can use

to weaken its currency. If the money in circulation in the country is increased, then the value of


the money goes down. Therefore, this weakens the currency, and, consequently, devalues the

currency.

Question 2. B Part

My inflationary expectations for the yen are positive. “The monetary policy that Japan

adopted in 2012 has expanded the asset purchase program to 76 trillion yens, and inaddition, the

Bank of Japan has kept the funding of lending at 25 trillion” (Mandel & Barnes, 2013). As a

result, the inflation rates will most likely rise in 2013 and in future years.

Question 2. C Part

My short-term expectations of the trade balance in Japan are that there will be a

continued deficit in the balance of trade. However, this deficit is likely to become narrower as

the years progress. This is because the weakening yen has led to the increase in the exports

while, at the same time, Japan has increased its imports of energy and communication devices.

The increase in both imports and exports will lead to the reduction of the trade deficit in the long

run.

Question 2. D Part

There is an expectation of more tourism income from Japan in the next five years. This is

because of their weak currency. The weakening of the yen has made Japan an affordable

destination for most foreign tourists. “The currency has been forecasted to stay this way for a

while due to the monetary policies and the lending habits of the Bank of Japan,” and hence for

the next five years tourists will consider Japan as an affordable destination (Warnock, 2013).

Question 2. E Part

Toyota profits will increase as a result of government actions. “These actions included

the move by the government to weaken the yen” (Naughton & Trudell, 2013). This move has


increased the operating profits of Toyota, as well as the income from overseas sales. A weaker

yen implies that the profits on exports will be incremented due to the increased sales volumes.

Question 3

Currie (1981) describes money as anything that has been “generally accepted as a

medium of exchange.” The type of money used in a certain economy depends on the level of

development of that economy. Josh Sankey's use of bacon as money introduces an aspect of the

barter economy, which involves the exchange of goods and services using goods or services that

the other party would consider as useful.

Bacon cannot be regarded as a unit of account. For it to be considered one there has to be

a standard way of quoting the value of the goods you are about to purchase in terms of money.

For instance, one can say $2.99/gallon of milk, rather than 0.5 pounds of Bacon/gallon of milk.

The Gold standard can be used as a unit of account because it fixes the value of a currency in

terms of gold. The Yap stones are large, and, therefore, it is hard to quantify them, especially in

the case of small transactions.

Bacon does not qualify as money because it cannot be used as a store of value. For it to

be considered as a store of value, it must have some future worth. If it holds future value, then it

can be held by a person with the aim of using it in future purchases. Bacon has an expiry date

and, therefore, if it is not consumed within a particular time period, it will have no value at all to

the consumer. The dollar has future value and people are able to keep money away in banks for

the purpose of future transactions. The gold standard, which uses gold to value currencies

contains future value and can therefore be used as a store of value. The stone value of the Yap

can be used as a store of value because older stones are considered to have more value than the

newer stones.


Bacon qualifies as money on the account that it can be used as a medium of exchange.

Bacon qualifies as a medium of exchange in that it can be traded for other goods or services. The

main problem with this is that it can only be accepted by specific people because one cannot use

bacon in all areas due to religious or cultural beliefs. Dollars and gold standards are also used as

the media of exchange because they are universally acceptable. The stone money of Yap, on the

other hand, is useful as a medium of exchange, but the downside to the use of the stones is that

they can only be employed in large transactions and are not universally accepted. The interest

rate of bacon would be low. This is because bacon does not have a substantial store of value, and

hence, if one lends person bacon, they would not expect to get more bacon, they would get bacon

whose value has decreased due to the fact that it will expire.

Question 4. A Part

Free trade is good. It allows for the free movement of goods between countries without

the imposition of bans or restrictions. It also allows for the movement of goods to countries

where those goods do not exist. For instance, food can be transported to the countries that do not

have food. In addition, free trade will help in reducing the poverty level; this is because food will

be available to the poor people at low prices due to the lack of trade restrictions.

Question 4. B Part

Trade restrictions in one country will lead to a decrease in supply of the food to other

countries. Due to the supply reduction, prices will increase and this has a direct impact on the

welfare of the consumers. The main consumers who will feel the impact are the poorest

consumers who would benefit from low food prices. The trade restrictions will also scare

importing and exporting countries away from the world trade markets. This will lead to a

reduction in the amount of food that is available in the world markets.


Question 4. C Part

The purpose of free markets in capital labor as well as technology is self-regulation. This

implies that the markets will regulate themselves without interference from the various

governments. “The outcome of this free market paradigm is free trade between all countries, as

well as a free movement of resources between different nations” (Antweiller, Copeland &

Taylor, 1998). This allows for movement of resources to places where these resources are

required, which in turn leads to a balance between the demand and the supply.

The challenge of free trade is that there is a likelihood of anarchy. “Free markets give a

free hand for monopolies to exist, and this may have a negative effect on different countries as

they will be relying on one major producer of certain commodities” (Antweiller, Copeland &

Taylor, 1998). In addition, social ills like pollution, and overexploitation of natural resources

could occur as a result of free trade. Free trade is desirable, but in the current world we need

regulations to be formulated to safeguard civilians, and the environment from being exploited.


References

Antweiller, W., Copeland, B., &Taylor, S. (1998). Is free trade good for the environment?

(Working Paper No. 6707).

Currie, D. (1981). Macro economic analysis. India: Nirali Prakashan.

Mandel, B.R., & Barnes, G. (2013). Japanese inflation expectations, revisited. Liberty Street

Economics. Retrieved from:

http://libertystreeteconomics.newyorkfed.org/2013/04/japanese-inflation-expectations-

revisited.html.

Naughton, K., & Trudell, C. (2013). From Japan's weak Yen, Toyota gains strong advantage.

Bloomberg Business week. Retrieved from: http://www.businessweek.com/articles/2013-

03-21/from-japans-weak-yen-toyota-gains-strong-advantage.

Warnock, E. (2013). Japan logs large trade deficit. The Wall Street Journal. Retrieved from:

http://online.wsj.com/article/SB10001424127887323393804578555161995951822.html

3121271

Documents