ECON 488 Upper Iowa Universit

R1

Econ: 

The law of one price is determined by the law of demand. Which is by how much a particular person is wanting a product. If a company really wants to sell a product, the lower the cost, the more of that product they are going to sell. When a company doesn’t have as much of a certain product then the price will be higher in hopes that not as many people will purchase it. Even though they call this the “law” of demand it really doesn’t matter until the purchasing power parity comes into play. When it comes to the exchange rate between countries, the richer countries will tend to use the poorer countries which happens because the rich know they can sell it cheap to the poor and they will still purchase it. Which is how those wealthier countries are seen with a higher average of exchange because of the cheaper stuff they are selling. 

References: 

Learning, L. (n.d.). Introduction to Business. The Law of Demand | Introduction to Business. https://courses.lumenlearning.com/suny-hccc-introbusiness /chapter/the-law-of-demand/.

R2

The law of one price tells us that in a competitive market free from factors such as transportation costs and tariffs, the same good should sell for the same price in different countries when expressed in the same currency (Krugman, Paul R.). The law of one rule holds true because if the price of the same good were to become more or less expensive in one country, the demand would change and essentially bring it back to equilibrium, otherwise known as arbitrage opportunity. The law of one price can falter when you consider things like transportation costs, which can potentially increase costs for buyers. Another reason may be tariffs in place that increase the cost for a certain country. A big reason price levels are lower in poor countries is because of supply and demand. If prices are too high for the general population then the product will simply go unsold. In poor countries prices must reflect what the consumers are able to pay, which ultimately pulls the price levels down. I think both the Big Mac and Netflix are great examples as the product should remain the same regardless where you are buying it. Another example might be a pair of Nike Air Force 1’s, a widely popular shoe which is available practically everywhere. 

Reference

Krugman, Paul R., Obstfeld, Maurice. and Melitz, Marc. (2018). “International Economics. Theory & Policy”. 11th Edition. Pearson.

R3

FThe Law of one price states that there will be one price for an identical asset or commodity globally no matter where the location is with certain factors been considered. The law of one price can be achieved by getting rid of price differences through arbitrage opportunities between markets. The forces of the market equilibrium will ultimately converge the price of the asset. The law of one price holds true when there are no violations such as transportation costs, transactions costs, legal restrictions, and market structure. The above-mentioned violations will be the reasons why the law of one price will not hold true. For instance, if there is a transaction cost which is the expense that is incurred when buying goods and services, involved in the trade then the law of one price will not hold true because transaction cost varies across the different markets, geographic regions, prices for the same good and services and can also vary between markets and the same thing goes for the other violations. The empirical support for purchasing power parity (PPP) and the law of one price is so weak in recent data because of the inability to detect mean reversion in real exchange rates during the recent float through standard univariate ADF tests. The price levels are lower in poorer countries because there is more labor in those countries and also the exchange rate is less in poor countries in comparison to rich countries. If the prices are high, the people in the poor country will not be able to purchase the products. The product I will use is mobile phones. Mobile phones are being used globally. The quality is the same everywhere for example apple phones are everywhere in the world and have the same quality. It will be a great product to use for the PPP. 

References
Team, T. I. (2021, June 9). Law of One Price. Investopedia.

https://www.investopedia.com/terms/l/law-one-price.asp.
Krugman, Paul R., Obstfeld, Maurice. and Melitz, Marc. (2018). “International Economics. Theory & Policy”. 11th Edition. Pearson.

ECON 488 Upper Iowa Universit

R1

The scenario I choose is the first one. The labor would want to be paid more since the price of food went up while Capital would need to be increased as well. The labor in manufactured goods would stay the same while the Capital would stay the same. The manufactured would not be impacted since everything would be the same while food would be better off. The reason is that they could get paid more from the price being increased with the increased Capital. The mobile factor for food there can be more employees that want to work there and employees that already worked there would get an increased in pay. The mobile factor for manufactured is it would stay the same or be less because employees would see that food is getting more money. The immobile factor would be the same for manufactured since nothing is changing while for food it could increase since it shows food increasing as well. The company could want to increase the price for the raised price of equipment.

I would choose the first one again for the Heckscher-Ohlin model. The wage rate for labor in food increases however so would be manufactured since it has more labor at a slower rate. The capital would be increased with the food as well since people get worked there a lot more than manufactured for a while till manufactured catches up. Food would be worse off at the start because they were less labor-intensive and they would need to catch up on the rising price of food. While manufacturing is used to the amount of labor they used leaving the better off for the long run till they get back to the amount of being more intense than food.

Reference:

Krugman, P. R., Obstfeld, M., & Melitz, M. (2018). International economics: theory and policy. Pearson.

R2

I am going to choose to talk about scenario 1: price of food increases; price of manufactured goods stays the same.

When it comes to the labor sectors in this case employees are going to be wanting to be paid more because they are going to need more money since the food prices are increases. They will need this raise to help provide for themselves. As far as the company goes they are better off because they aren’t having to pay more for the products since the manufactured goods are staying the same. This means the company is making money off of customers because the customers are paying the higher prices when the company doesn’t really need that extra income since the price of these goods is staying the same. Therefore, the customers are taking a hit while the company is better off because now they are making more than they usually do.

For part 2 I am going to talk about the same scenario.

With the food prices going up, eventually over time the manufactured goods are going to go up as well because the manufactured company is going to start seeing a rise in prices with what they do. All of this cashflow eventually comes back a hit a company on way or another. Sometimes this can take a day and sometimes it will take decades it all just depends. The manufactured goods that are staying the same is usually a more agriculture job that is going to require more physical labor from an employee. Which is why eventually the employee is going to realize the food prices are up and someone is making extra money and it is not that particular person who is making the money.

Reference:

The Specific Factor Model: Overview. (n.d.). https://saylordotorg.github.io/text_international-trade-theory-and-policy/s08-15-the-specific-factor-model-over.html.

R3

For the following scenario; demand for manufactured goods increases and supply of food increases you would likely see an increase in the wage rate for labor in manufacturing. As demand increases, there will need to be an increase in productivity and supply which could result in the increases wages. Because of the increase in supply of food, wages would be stagnant for agriculture because demand has not changed. In this case, workers in manufacturing would be better off while workers in agriculture would be less impacted. There could be an influx of workers shifting to manufacturing because of the better pay, this being the mobile factor. The immobile factors being equipment, would not be impacted because they are industry specific.

Sticking with the second option where demand for manufactured goods increases and supply of food increases, we would likely see an increase in wage rates for manufacturing. Because it is more labor intensive, it will cost more to meet the increased demand. Agriculture would not be as impacted by this. Rental rates for capital in manufacturing could go up because there is a higher demand for it. I think those in manufacturing would be better off because where there is higher demand there is the need for more work and more potential pay.

ECON 488 Upper Iowa Universit

I’m stuck on a International Economics question and need an explanation.

R1

The United States owes tons of money to China. I feel that this is a negative and positive thing. I feel that it creates a strong relationship for the United States and China because China knows the United States trusts them when it comes to borrowing. Although on the other side of the table, I feel that China is going to think they are able to control the United States. They will feel like they eventually can overtake the United States. All because they have lended so much money to the USA. I believe it is a worry for everyone in the United States.

Also, looking at 2021 history, the United States owes Japan even more than they owe China. This is the United States digging themselves in a hole risking the fact that China and Japan could over power whenever. They could overpower when they feel it is necessary just because of the debt the USA owes.

References:

Is it a Risk for America that China Holds over $1 Trillion in U.S. Debt? ChinaPower Project. (2020, August 26). https://chinapower.csis.org/us-debt/.

R2

Well considering China has had a long time plan to rule the world and by us owing China more than $1.18 trillion in 2018, . Yes, we should be worried about foreign countries owning $6 trillion in U.S. financial assets. Biden administration has killed our economy. The inflation rate has rocketed the most it has increased since the ’90’s. The U.S. nation debt is owned by the U.S. Government due to their so-called stimulus packages. Every time the Federal Reserve prints new money the inflation rate will rise.

As of March 31, 2021 U.S. debt has reached an all time high of $28.1 trillion. Which is completely outrageous and could have been prevented. China is the largest owner of the U.S. debt. I did not know that they own the Social Security Trust Fund. There are two categories the debt falls into; Intragovernmental holdings, which is 22%, and debt held my the public, which is 78%. I did not know that the intragovernmental holdings is the government owing money to themselves. As of 2021, intragovernmental holdings well over $6 trillion.

The Federal agencies owns the most social security. “The following is the breakdown from February 2021:

* Social Security trusts, which includes the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds: $2.90 trillion

* Office of Personnel Management Retirement: $955.1 billion

* Military Retirement Fund: $1.01 trillion. Which has become a HUGE issue in funding our nation’s defense and is only expected to grow

* Medicare, which includes the Federal Supplementary Medical Insurance Trust Fund: $304.4 billion

* Cash on hand Federal Government Operations: $723 billion” ( U.S et al., 2021)

Also, below is a diagram I retrieved from the Balance.com article ( U.S et al., 2021)

After reading the rest of the article the U.S. debt that owed to Japan and China. Which is incorrect, majority of the debt that is owed to Social Security and pension funds. This is the American citizens retirement money. Which the government should not be allowed to take any money from the social security trust funds. We don’t have a choice if the Federal government takes this out of our paychecks. I have always been against this as this money is supposed to be paid out to those that retire and should be receiving more than $1,000 or so a month to live on. How is this right? Retired citizens have worked so hard all of their lives and should be receiving the proper amount to be able to live on and it’s not there for the government to do with what they will.

U.S. national debt is figured by: taking the public debt that’s held by other countries, the Federal Reserve, mutual funds, and other entities and individuals and add the Intragovernmental holdings, held by SS, Military retirement fund, Medicare, and other retirement funds. ( U.S et al., 2021)

REFERENCE

U.S, F. B. F. L. K. A. is an expert on, Economies, W., investing, Analysis, W. O. 20 Y. of E. in E., & Amadeo, business strategy S. is the P. of the economic website W. M. W. R. T. B. editorial policies K. (n.d.). The Real Owner of the US Debt Will Surprise You. The Balance. Retrieved June 22, 2021, from https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124#:~:text=9-

R3

I don’t know that we should be gravely concerned about the amount of United States financial assets that are owned by China, but we ought to at least be cognizant of China’s leverage – whether they use it or not. For one, China has owned a tremendous amount of United States debt for decades now, and while it would be easy on paper for China to call in all its debt, in practice it is highly unlikely. To do so, as Amadeo (n.d.) explains, would send the demand for the United States dollar plummeting, which would disrupt the international markets and cause China’s economy to suffer just like every other country.

Yes, it is not ideal that foreign nations hold a ton of United States debt, but I think the idea that a nation like China would take an action to devalue the dollar so drastically just isn’t going to happen in reality. If China were to call in its debt, it would eventually lead to United States consumers buying domestic products instead of imports, which would negatively impact China – something that China wants to avoid.

References

Amadeo, K. (n.d.). How Much Does the U.S. Owe China? Retrieved from https://www.thebalance.com/u-s-debt-to-china-how-much-does-it-own-3306355

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