Author Question: Under the price-specie-flow mechanism, what happens when, say, Germany's current account surplus is ... (Read 138 times)

audragclark · **on:** Jun 30, 2018

Under the price-specie-flow mechanism, what happens when, say, Germany's current account surplus is greater than its non-reserve capital account deficits?

A) German loans will finance all foreign net imports.
B) Automatic drop in German domestic prices and rise in foreign prices.
C) Gold reserves will flow into Germany.
D) Gold reserves will flow out of Germany.
E) Germany will experience a deficit.

Question 2

It is argued that the United States would be foolish to maintain a free-trade stance in a world in which all other countries exploit child or prisoner labor, or are protectionist.

On the other hand, Ricardo's classic demonstration of the sources and effects of comparative advantage cogently demonstrates that regardless of other country policy, free trade remains the first best policy for a country to follow, since it will maximize its consumption possibilities (conditional upon other country policies). Explain. Discuss the contradiction with the argument in the preceding paragraph.

quynhmickitran · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

C

Answer to Question 2

In the context of the Ricardian model, it is true that gains from trade are strictly a result of world terms of trade, which differ from domestic marginal rates of substitution. In such a world, the reason why foreign goods are cheap is of no concern to domestic consumers. However, in a world which allows for large-scale labor migration, ignoring labor conditions abroad may ultimately result in living standards for domestic workers to be dragged down.