Exam 1, Section 1 EC 302 Intermediate Macroeconomics Prof. Michael McElroy Spring 2018 Answer any 2 of the 3 questions below. Be sure to read the question carefully, use the framework we ve developed to guide your thinking, and explain your reasoning. Don t stay on the surface... think them through and explain. 1. Larry Kissell is a former Congressman from the 8th Congressional district of North Carolina. When he was running for re-election in 2010 Congressman Kissell posted his views on what steps he would take to bring production back to America. I ve excerpted 4 sentences from his campaign statement below (underscore added). i. I ve fought hard to close the tax loopholes that reward companies for shipping jobs overseas, passed legislation to provide tax incentives to companies that manufacture their products and keep jobs here, and my legislation to require the U.S. government to buy products made in America has finally passed the House. ii. Whether it s the green energy sector, steel and tire manufacturers or even our bountiful North Carolina agricultural exports, we re taking steps towards leveling the playing field and giving our businesses the advantages they need to survive in international markets. iii. For years, Washington insiders and out of touch politicians blindly supported the banner of fair and free trade, without ever stopping to think about whether or not it was actually fair for our American workers. Deals like CAFTA and NAFTA paved the way for a mass exodus of good jobs, and with them went large pieces of our economic prosperity. iv. We must pay attention and when possible always buy Made in the USA. American manufacturing is still alive, and we must check the tags of items we purchase, making sure we do all we can to support the companies that play by the rules and keep their operations on our soil. a. Viewing the first 2 statements from the perspective of The Choice, how do you b. Viewing his last 2 statements from the perspective of The Choice, how do you c. In his statement, Congressman Kissell shows much concern and compassion for some segments of the economy but ignores others. What s missing and in what way does its absence weaken his argument? Be specific and explain.
2. Answer the following questions. a. Poor nations, struggling to develop, have little margin for error compared to wealthier nations. Even a small setback in a subsistence level economy can bring disastrous consequences. To raise their standard of living they need to do it gradually and carefully. This means making particular efforts to increase their exports and, at least until they ve raised their standard of living substantially, minimize their imports. A favorable trade balance, that is a surplus, is the path to the much-needed growth they seek. Evaluate this economic content of this statement. Explain why you agree or disagree. b. Opposition to trade deficits has proved popular with voters and politicians across the spectrum express their concerns about continuing trade imbalances. Mr. Trump s economic adviser, Peter Navarro, recently justified reducing the trade deficit as follows: The economic argument that trade deficits matter begins with the observation that growth in real GDP depends on only four factors: consumption, government spending, business investment, and net exports (the difference between exports and imports). Reducing a trade deficit through tough, smart negotiations is a way to increase net exports and boost the rate of economic growth. Evaluate his statement based on his use of the demand-side expression of real gdp as, in our symbols, y=c+i+g+x. Is his reasoning complete and correct? Explain fully. c. After skimming through your copy of The Choice, your rich Uncle Henry says What nonsense. Dave says something to the effect that when we spend our money on imports we are creating American jobs so we shouldn t worry about job loss. All those imports create jobs all right but they re jobs in foreign countries not at home. Do you agree with his evaluation? Why or why not? Explain your thinking carefully to Uncle Henry. 3. Answer the following questions. a. James Ingram s one page Fable of Trade and Technology inspired his undergraduate student Russell Roberts to later write The Choice. i. What important similarities do you see between the two? Be specific and explain. ii. What is the main point of Ingram s fable and what is the relevance of technology to that insight? Be specific and explain. b. For many years it was incorrectly claimed that Abe Lincoln made the following statement about trade. Whoever may have coined it, it was quoted often for many generations: I do not know much about the tariff, but I know this much, when we buy manufactured goods abroad, we get the goods and the foreigner gets the money. When we buy the manufactured goods at home, we get both the goods and the money.
This was supposedly a common sense justification for protectionist trade policies. Evaluate the statement s economic validity, especially the point that they get the money. Explain your reasoning. c. The notion of balanced trade is an appealing-sounding and politically popular economic goal. i. What does balanced trade actually mean? Be specific and explain. ii. Suppose such a balance is reached in our economy and voters overwhelmingly support a policy of keeping it balanced, avoiding both trade surpluses and trade deficits. What do you see as the main benefits and costs of such a policy? In other words, what would be gained and what lost? Explain your reasoning. Exam 1, Section 2 EC 302 Intermediate Macroeconomics Prof. Michael McElroy Spring 2018 Answer any 2 of the 3 questions below. Be sure to read the question carefully, use the framework we ve developed to guide your thinking, and explain your reasoning. Don t stay on the surface... think them through and explain. 1. Answer the following questions. a. President Trump asks your advice. I got elected on the promise of (i) ending bad trade deals, (ii) creating jobs, jobs, jobs, and (iii) saving American manufacturing and mining industries. People loved it! Can you believe that some people actually oppose those three great ideas? How can anyone be so stupid? I m a busy man. Give me your best 12 minute response. You were hired to explain the oppositions view. Give him your best quick economic response. Explain your reasoning. b. Warren Buffet says... our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4% more than we produce that's the trade deficit we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own. Elsewhere he worries about the fact that we are essentially trading our assets for consumables by which he means the flood of imported goods and services from abroad. Does the fact that the trade gap is largely consumption goods and services, not machinery and equipment, justify his worries about the consequences for the US economy? Address the specific issue and explain. c. Answer both questions about The Choice:
i) At some point in The Choice, Dave says something to the effect that when we spend our money on imports we are creating American jobs so we shouldn t worry about job loss. What nonsense! All those imports create jobs all right but they re jobs in foreign countries not at home. Do you agree with his response? Explain your reasoning. ii) In The Choice Russell Roberts has the character Ed refer puzzlingly to how the plant that was never built could be the heart of the matter. Explain the role that things that didn t happen play in The Choice and why this is considered to be so important. Be specific and explain. 2. Larry Kissell is a former Congressman from the 8th Congressional district of North Carolina. When he was running for re-election in 2010 Congressman Kissell posted his views on what steps he would take to bring production back to America. I ve excerpted 4 sentences from his campaign statement below (underscore added). i. I ve fought hard to close the tax loopholes that reward companies for shipping jobs overseas, passed legislation to provide tax incentives to companies that manufacture their products and keep jobs here, and my legislation to require the U.S. government to buy products made in America has finally passed the House. ii. Whether it s the green energy sector, steel and tire manufacturers or even our bountiful North Carolina agricultural exports, we re taking steps towards leveling the playing field and giving our businesses the advantages they need to survive in international markets. iii. For years, Washington insiders and out of touch politicians blindly supported the banner of fair and free trade, without ever stopping to think about whether or not it was actually fair for our American workers. Deals like CAFTA and NAFTA paved the way for a mass exodus of good jobs, and with them went large pieces of our economic prosperity. iv. We must pay attention and when possible always buy Made in the USA. American manufacturing is still alive, and we must check the tags of items we purchase, making sure we do all we can to support the companies that play by the rules and keep their operations on our soil. a. Viewing the first 2 statements from the perspective of The Choice, how do you b. Viewing his last 2 statements from the perspective of The Choice, how do you
c. In his statement, Congressman Kissell shows much concern and compassion for some segments of the economy but ignores others. What s missing and in what way does its absence weaken his argument? Be specific and explain. 3. a. James Ingram s one page Fable of Trade and Technology inspired his undergraduate student Russell Roberts to later write The Choice. i. What important similarities do you see between the two? Explain. ii. What is the main point of Ingram s fable and what is the relevance of technology to that insight? Be specific and explain. b. What role do the following play in the economic argument made in The Choice? Be specific about the precise economic significance. i. Ford Fairlanes? Explain. ii. Ed s secretary? Explain. iii. Bill Gates? Explain. iv. Ed s daughter? Explain. c. Buy Local is an appealing-sounding and increasingly popular slogan, enthusiastically endorsed by local Chambers of Commerce and, of course, local and regional businesses hurt by competition from large, faceless multinational corporations who, they argue, steal our jobs as they siphon off our spending to benefit outsiders. Without thinking about larger impacts outside our area, isn t it true that if we spent our money whenever possible in Wake County that it would be a stimulus that would directly or indirectly benefit us all? Why or why not? Be complete and explain your reasoning.