Rn pineal Evidence on the Heckscher Ohlin Model

Since the factor-proportions theory of trade is one of the most influential ideas in international economics, it has been the subject of extensive empirical testing. Tests on U.S. Data. Until recently, and to some extent even now, the United States has been a special case among countries. The United States was until a few years ago much wealthier than other countries, and U.S. workers visibly worked with more capital per person than their counterparts in other countries. Even now, although some...

Mie Interwar Years 19181939

Governments effectively suspended the gold standard during World War I and financed part of their massive military expenditures by printing money. Further, labor forces and productive capacity had been reduced sharply through war losses. As a result, price levels were higher everywhere at the war's conclusion in 1918. Several countries experienced runaway inflation as their governments attempted to aid the reconstruction process through public expenditures. These governments financed their...

Croeconomic Policy Goals in an Open Economy

In open economies, policymakers are motivated by the goals of internal and external balance, Simply defined, internal balance requires the full employment of a country's resources and domestic price level stability. External balance is attained when a country's current account is neither so deeply in deficit that the country may be unable to repay its foreign debts in the future nor so strongly in surplus that foreigners are put in that position. In practice, neither of these definitions...

The International Gold Standard and the Great Depression

One of the most striking features of the decade-long Great Depression that started in 1929 was its global nature. Rather than being confined to the United States and its main trading partners, the downturn spread rapidly and forcefully to Europe, Latin America, and elsewhere. What explains the Great Depression's nearly universal scope Recent scholarship shows that the international gold standard played a central role in starting, deepening, and spreading the twentieth century's greatest...

Gold Standard

An international gold standard avoids the asymmetry inherent in a reserve currency standard by avoiding the 'Wth currency problem. Under a gold standard, each country fixes the price of its currency in terms of gold by standing ready to trade domestic currency for gold whenever necessary to defend the official price. Because there are N currencies and N prices of gold in terms of those currencies, no single country occupies a privileged position within the system Each is responsible for pegging...

Tale Of Two Dollars

Back in 1976, the United States dollar and the Canadian dollar traded roughly at par, that is, at a one-to-one exchange rate. In the following decades, however, Canada's dollar has steadily depreciated against its American cousin. By early 2002, a Canadian dollar was worth only about 65 United States cents.* The tendency of the Canadian currency to depreciate accelerated in the late 1990s as the world prices of many of Canada's natural resource exports slumped. Canadian manufacturing exporters...

The Calm Before the Storm 19581965

In 1958, the same year currency convertibility was restored in Europe, the U.S. current account surplus fell sharply. In 1959 it moved into deficit. Although the current account improved in I960 as the U.S. economy entered a recession, foreign central banks converted nearly 2 billion of their dollar holdings into gold in that year, after having converted around 3 billion in 1958 and 1959. The year 1960 marked the end of the period of dollar shortage and the beginning of a period dominated by...

Fixing the Exchange Rate to Escape from a Liquidity Trap

Liquidity Trap

During the lengthy Great Depression of the 1930s, the nominal interest rate hit zero in the United States and the country found itself caught in what economists call a liquidity trap. Recall from Chapter 13 that money is the most liquid of assets, unique in the ease with which it can be exchanged for goods. A liquidity trap is a trap because once an economy's nominal interest rate falls to zero, the central bank cannot reduce it further by increasing the money supply that is, by increasing the...

Info

Source International Monetary Fund, International Flnanc Exchange Arrangements with i o Separate Legal Tender The currency of another country circulates as the sole legal tender or the member belongs to a monetary or currency union in which the same legal lender is shared by the members if the union. Currency Board Arrangements A monetary regime bailed on at explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with...

E Theory of Optimum Currency Areas

There is little doubt that the European monetary integration process has helped advance the political goals of its founders by giving the European Union a stronger position in international affairs. The survival and future development of the European monetary experiment depend more heavily, however, on its ability to help countries reach their economic goals. Here the picture is less clear because a country's decision to fix its exchange rate can in principle lead to economic sacrifices as well...

Key Terms

Basel Committee, p. 650 debt instrument, p. 640 emerging markets, p. 652 equity instrument, p. 640 Eurobank, p. 644 Eurocurrencies, p. 644 Eurodollar, p. 644 international banking international capital market, p. 636 lender of last resort LLR , p. 649 moral hazard, p. 654 offshore banking, p. 643 offshore currency trading, p. 644 portfolio diversification, p. 639 risk aversion, p. 638 securitization, p. 653 reserve currency, This argument is made in The Euro-Dollar Market An Interpretation,...

Sssons of Developing Country Crises

The emerging market crisis that started with Thailand's 1997 devaluation produced what might be called an orgy of finger-pointing. Some Westerners blamed the crisis on the policies of the Asians themselves, especially the crony capitalism under which businessmen and politicians had excessively cozy relationships. Some Asian leaders, in turn, blamed the crisis on the machinations of Western financiers even Hong Kong, normally a bastion of freemarket sentiment, began intervening to block what it...

Irchasing Power Parity

The theory of purchasing power parity states that the exchange rate between two countries' currencies equals the ratio of the countries' price levels. Recall from Chapter 14 that the domestic purchasing power of a country's currency is reflected in the country's price level, the money price of a reference basket of goods and services. The PPP theory therefore predicts that a fall in a currency's domestic purchasing power as indicated by an increase in the domestic price level will be associated...

In Munich A Bratwurst Costs 2 Euros A Hot Dog Costs 1 At Boston S Fenway Park. At An Exchange Rate Of 1.50 Per Euro

In Munich a bratwurst costs 2 euros a hot dog costs 1 at Boston's Fenway Park. At an exchange rate of 1,50 per euro, what is the price of a bratwurst in terms of hot dogs All else equal, how does this relative price change if the dollar appreciates to 1.25 per euro Compared with the initial situation, has a hot dog become more or less expensive relative to a bratwurst 2. A U.S. dollar costs 7.5 Norwegian kroner, but the same dollar can be purchased for 1.25 Swiss francs. What is the...

Interest Parity

Economics makes an important distinction between nominal interest rates, which are rates of return measured in monetary terms, and real interest rates, which are rates of return measured in real terms, that is, in terms of a country's output. Because real rates of return often are uncertain, we usually will refer to expected real interest rates. The interest rates we discussed in connection with the interest parity condition and the determinants of money demand were nominal rates, for example,...

Problems

How does the DD schedule shift if there is a decline in investment demand 2. Suppose the government imposes a tariff on all imports. Use the DD-AA model to analyze the effects this measure would have on the economy. Analyze both temporary and permanent tariffs. 3. Imagine that Congress passes a constitutional amendment requiring the U.S. government to maintain a balanced budget at all times. Thus, if the government wishes to change government spending, it must change taxes by the same...