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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.