Test Item File 3: Principles of Macroeconomics 22(35) Globalization 1. Explain what globalization means and illustrate with several examples.Globalization is the process of increasing interdependence among countries and their citizens. It includes increasing international trade, travel, the spread of movies and music, the problems of disease, global climatic change, war and so forth.Difficulty: E Type: D2. Discuss the process of economic globalization.Economic globalization is the process of increasing economic interdependence among countries and their citizens..Difficulty: E Type: D3. How can a country have a comparative advantage in the production of a good or service?.A country can have comparative advantage in the production of a good if the production of that good has a lower opportunity cost than it would have if produced in another country.Difficulty: E Type: A4. Suppose that a presidential candidate argued that we should not trade with country X because it has cheap labor. Suppose furthermore that he believed that trade with country Xwould lead U.S. consumers to buy all its goods from country X and that country X would not buy any goods from us because of our relatively higher wages. Critically evaluate this argument.400Test Item File 3: Principles of MacroeconomicsIf U.S. citizens wanted to buy everything in country X, but citizens of country X didn’t want to by anything from us, foreign exchange markets would prevent it from happening. Workers in country X are paid in their own currency. To buy a good produced in country X a buyer has to obtain country X’s currency. But if no citizens of country X wanted to buy anything in the U.S. there would be no one willing to exchange country X’s currency for dollars. In other words, their would be a big demand for country X’s currency but no supply of it. This would result in an increase in the exchange rate of country X’s currency. But if this happens it means that goods in country X will become more expensive! This also makes American goods appear to be cheaper to the citizens of country X. This turns the presidential candidate’s argument on its head. We can’t buy from countries unless they simultaneously buy from us.Difficulty: E Type: A5. What is the counterargument to the claim that protecting an industry from foreign competition will save jobs?The counterargument is that protecting an industry from foreign competition to save jobs will cost jobs in those sectors which would expand with free trade. One of the arguments is that demand for our trading partners will spur growth in the production of our export goods. By stopping trade with another country, we also reduce the number of jobs in its export sectors.Difficulty: E Type: D6. Explain how protecting an industry can lead to inefficiency and a lack of ability to competein world markets later on.Those industries that are subject to rigorous competition from aboard tend to adopt the newest, most efficient technology and hold costs to a minimum. The U.S. steel industry was heavily protected for many years, and it eventually lost most of the world business in steel to vigorously competitive foreign producers.Difficulty: E Type: C7. Explain why trade restrictions used to fight unemployment may not be a sound economic principle.The problem is that when the economy is expanding, unemployment falls and can be low regardless of the composition of trade. The lowest rate of unemployment in decades was in the year 2000. In that year, following the expansion of trade from NAFTA and GATT, unemployment average just 4%, thelowest since 1969. More appropriate tools for fighting unemployment are fiscal and monetary policies.Difficulty: E Type: C401Chapter 22 (35): Globalization 8. Opponents to free trade often argue that it will hurt the environment. What are the two points that global advocates make in response to this criticism?First, environmental regulation is a problem for all countries whether they trade or not. If a country can trade and make itself better off it will have more resources to be able to devote to making a cleaner environment. That is, the environment is a normal good. Second, trade may actually be a lever to increase environmental protection. The WTO and NAFTA have ongoing negotiations designed to pressure countries into improving environmental regulations.Difficulty: E Type: C9. Summarize the conclusions drawn from the Jeffrey Sachs study of trade liberalization which was sponsored by the NBER and the World Bank.In a nutshell it showed that countries that were more integrated into the world economy grew faster than those that were less integrated. Sachs’ study concludedthat open countries grew 2% per year more rapidly than closed economies controlling for a number of factors.Difficulty: E Type: F10. Discuss the main provisions of the Immigration Reform and Control Act of 1986.It granted amnesty to about 3 million illegal aliens and imposed a strong set of employer sanctions designed to slow the flow of immigrants into the United States.Difficulty: E Type: F11. What was the effect of the Immigration Act of 1990?It increased the number of legal immigrants allowed into the United States each year by 150,000.Difficulty: E Type: F12. Explain the economic argument for free immigration.The argument for free immigration is that it increases world output. Labor flowsacross borders in response to wage differentials. If markets are basically competitive, wages reflect the workers’ productivity. In the case of the U.S. it hasmore capital and uses more advanced technology than Mexico, the productivity of low-wage workers is higher in the United States than in Mexico. Thus, the same labor produces more total output after immigration, and world output rises.Difficulty: E Type: C402Test Item File 3: Principles of Macroeconomics13. Explain the economic arguments for and against free immigration.Assuming that immigrants are low-wage workers, equilibrium wages in the market for low-skill labor will rise in the country of origin and fall in the countryof destination. In addition, the return to capital will rise in the destination country, pushing up profits, while capital income will fall in the country of origin. Some opponents to free immigration also argue that immigrants often end up on welfare rolls and become a burden to taxpayers.Difficulty: E Type: C14. Compare and contrast the findings of the David Card study at Berkley with that of the Borjas, Freeman and