141. A Chinese student pays tuition to a U.S. university. How is this transaction entered in Chinese and U.S. trade data?
ANSWER: It is entered as a service import in China trade data, while it is a service export in U.S. trade data.
142. Irene Jones, a U.S. citizen, purchases a shirt from Walmart for $10 that Walmart imported from China for $5. How did these transactions change the values of U.S. and Chinese imports and exports and the U.S.–China and China–U.S. bilateral trade balances?
ANSWER: U.S. imports increased by $5 and Chinese exports increased by $5, the U.S.–China bilateral trade balance declined by $5, and the China–U.S. bilateral trade balance increased by $5.
143. Some countries have low ratios of international trade (exports + imports) to GDP (such as the United States), while, in other countries, the ratio of international trade to GDP exceeds 100%. How is it possible for trade to exceed the value of GDP?
ANSWER: Countries for which trade exceeds GDP tend to have small economies, are often important centers for shipping goods, and/or import material inputs and do not create much value-added in processing these material inputs into export products. Additionally, the calculation for GDP includes net exports (exports minus imports), while the ratio of trade to GDP includes all trade (exports plus imports). A country with a high level of imports and exports would have a very small trade balance as part of GDP but a very large volume of trade.
144. Why do some countries (such as the United States) have low ratios of international trade (exports + imports)/2 to GDP?
ANSWER: Large countries often have low ratios of international trade/trade flows to GDP because there is significant domestic trade among regions, states, or provinces within these countries.
145. What were the effects of the Smoot–Hawley tariffs?
ANSWER: In the short run, they raised tariffs to an average of 20% on all imported goods (and as high as 60% on some categories of imported goods). Affected nations retaliated by enacting import tariffs of their own on U.S. products, which in turn led to higher tariffs across the world. This was an example of a global trade war.
146. Suppose that in retaliation to British limits on Balkan migrants, Bulgaria carries out its threat to take “reciprocal measures” against British migrants to Bulgaria. Will this work? Why or why not?
ANSWER: No, it will not work. British wages are above the world average, while Balkan wages are below the world average. Thus, few British citizens will seek to migrate to Bulgaria.
147. Until recently, labor could freely move from one country to another within the EU. However, some EU countries now place restrictions on migrants from new EU members. Why have these countries done so?
ANSWER: The major reason is fear that migrants from lower-wage EU countries will cause wages to fall in the higher-wage EU countries.
148. Is most immigration from low-income to high-income countries?
ANSWER: Yes, more than one-half (60%) of migration occurs from non-OECD (mainly low-income) to high-income OECD countries.
149. Explain the differences between vertical and horizontal FDI and provide an example of each.
ANSWER: Horizontal FDI occurs between industrial countries and often involves the acquisition or establishment of firms producing within the same industrial sector (e.g., Fiat's purchase of Chrysler in 2009). Vertical FDI occurs when a firm in an industrial nation acquires or establishes a firm in a developing country that may or may not be within the same industrial sector.
150. Is most FDI from high-income to low-income countries?
ANSWER: No, in 2013, 80% of the world FDI stock was located in OECD countries or owned by these countries.
151. What is reverse-vertical FDI? Provide an example.
ANSWER: Reverse-vertical FDI occurs when a firm in a developing country acquires a firm in an industrialized country. Examples include Lenovo (a Chinese company) purchasing the computer division of IBM, Geely (a Chinese auto manufacturer) acquiring Volvo Motors from Ford Motor Company, and Shuanghui International (a Chinese company) acquiring the American firm Smithfield Foods. The motive is usually to acquire technology and highly skilled labor.
152. What is the most important reason for reverse-vertical FDI to occur?
ANSWER: Reverse-vertical FDI occurs when a firm in a developing country acquires a firm in an industrialized country. The main incentive is to acquire the technical expertise of the firm in the industrialized economy, which the developing country can combine with low wages.