*29. A trade deficit, he said, is not an indication that a country has low productivity or low-quality products. It is an indication that the domestic investment rate is high relative to the rate of _____________.
Fill in the blank and explain your reasoning.
Numerical Exercises
N1. Suppose a U.S. Toyota dealer imports 100 cars worth $10,000 each and the Japanese manufacturer buys a U.S. bond with the $1 million proceeds. What happens to the U.S. balance of trade? The current account? The balance of payments?
N2. If the exchange rate is 4 francs per dollar and 1.5 marks per dollar, what should be the exchange rate between francs and marks?
N3. Suppose the central bank has intervened in the foreign exchange market to fix the exchange rate by selling $4 billion. If the current account deficit is $10 billion, what is the capital account balance?
N4. In the example of appendix 15.1, how much extra total output would result if Ecuador chose to forgo five instead of two tons of wheat?
N5. Suppose that to produce two bolts of cloth England must forgo 15 bottles of wine, and that to produce 3 bolts of cloth Portugal must forgo 40 bottles of wine. Which country has a comparative advantage in which good?
N6. In the preceding question, if the world price of cloth were $30 per bolt and the world price of wine $5 per bottle, how should England and Portugal specialize?
N7. In question N5, if the world price of cloth were $60 per bolt and the world price of wine $6 per bottle, how should England and Portugal specialize?
Appendix 15.1 The Principle of Comparative Advantage
Economists believe that countries are better off specializing at what they do best and trading, rather than forbidding trade and meeting all their needs through domestic production. It would be very expensive for the United States to grow its own supply of bananas, for example; it is much cheaper to grow extra wheat and trade it for bananas.
This banana example is easy to understand because banana-producing countries such as Ecuador are much more efficient at producing bananas than is the United States, and the United States is much more efficient at producing wheat than is Ecuador. In such a case
