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Balance of Payment Problems

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1) (arguments for trade restrictions) Explain the national defense, declining industries, and infant industry arguments for protecting a domestic industry from international competition.

2) (arguments for trade restrictions) Firms hurt by lower priced imports typically argue that restricting trade will save U.S jobs. What is wrong with this argument? Are there ever any reasons to support such trade restrictions?

3) (balance of payment) The following are hypothetical data for the U.S. balance of payments. Use the data to calculate each of the following:
a. merchandise trade balance
b. balance on goods and services
c. balance on current account
d. financial account balance
e. statistical discrepancy
billions of dollars
merchandise exports $350
merchandise imports $2,425.00
service exports $2145
service imports $170
net income and net transfers $221.5
change in U.S. owned assets abroad $245.0
change in foreign owned assets in U.S. $100.0

4) (Balance of payments) Explain where in the U.S. balance of payments an entry would be recorded for each of the following:
a. A Hong Kong financier buys some U.S. corporate stock.
b. A U.S. tourist in Paris buys some perfume to take home.
c. A Japanese company sells machinery to a pineapple company in Hawaii.
d. U.S. farmers gave food to starving children in Ethiopia.
e. The U.S. treasury sells a bond to a Saudi Arabian prince.
f. A U.S. tourist flies to France on Air France.
g. A U.S. company sells insurance to a foreign firm

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Solution Preview

Section 1
National Defense - The National Defense argument is based on the premise that certain critical and essential goods cannot be outsourced to countries in the interest of national security. For example, the national defense argument is widely applied to critical goods and services such as Weapon Systems and Currency Printing that can be misused by the other country that can jeopardize the national security.

Declining Industry - The declining industry argument is based on the fact that international competition introduces increased supply and hence a drop in the prices of goods and services. A drop in the prices result in increased pressure on the domestic producers and can push them out of business.

Infant Industry - The Infant Industry argument is based on the long-term cost economics and learning effect that can help emerging industries become competitive after a certain period. Companies thus ask for protection ...

Solution Summary

This solution provides answers to various problems regarding balance of payments.

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See Also This Related BrainMass Solution

What has caused the U.S. run a merchandise trade deficit year after year since the early 1980s?
Is the current account a deficit problem? Explain.
Is the trend of the international investment position of the U.S. problematic? Why or why not?
How is the current account related to a country's business cycle?
What is the relationship between a country's net financial inflow and its current account?
How does the U.S make adjustments for the balance of payment issues?

Your hometown newspaper needs someone to write an informative article on large scale economic issues. The reporter who spoke with you before thinks of you, welcomes you home, and requests another article. Click here to view a summary of disaggregated data drawn from information provided on the 2000 U.S. balance of payments which is in the 2002 federal document, Economic Report of the President, available on the web.

In addition to the balance of payments data presented above, the Bureau of Economic Analysis' document entitled International Investment Position of the United States (http://www.bea.gov/bea/newsrel/intinvnewsrelease.htm) offers the following information.

"At year-end 2002, the value of foreign investments in the United States exceeded the value of U.S. investments abroad by $2,387.2 billion (preliminary) with direct investment valued at current cost. At year-end 2001, foreign investments in the United States exceeded U.S. investments abroad by $1,979.9 billion (revised)."

Write a 2-3 page article on the United States's current account deficit. The reporter will edit your material down to a usable length but asked for plenty of material with which to start. She requests that you answer the following questions:

What has caused the U.S. run a merchandise trade deficit year after year since the early 1980s?
Is the current account a deficit problem? Explain.
Is the trend of the international investment position of the U.S. problematic? Why or why not?
How is the current account related to a country's business cycle?
What is the relationship between a country's net financial inflow and its current account?
How does the U.S make adjustments for the balance of payment issues?

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