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Q. An export subsidy has the reverse effect on terms of trade to the effect of an import tariff. Domestically a tariff will raise the price of the import good, deteriorating the domestic part of trade. A production subsidy for the export product will lower the local price of the export good, lowering the domestic parts of trade for the country. Therefore the export subsidy and the import tariff have the same effect. This analysis seems to contradict the first sentence in this paragraph. Discuss this paradox.
Answer: While this (Lerner) correspondence may well take place domestically or internationally the tariff will get better a country's terms of trade. An export subsidy on the other side will in fact lower the international price of the now readily available export good therefore hurting a country's terms of trade.
Q. Explain why large interest rate differences would be strong evidence of unrealized gains from trade. Answer: The difference between offshore and onshore interest rates on
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tion..What is the range of gross barter terms of trade ?
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Q. Who are the major participants in the foreign exchange market? Answer: 1. Commercial banks 2. Corporations 3. Nonblank financial institutions 4. Central banks
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how is exchange rate determined?
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