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The chapter notes that the rise in the U.S. trade deficit during the 1980s was due largely to the rise in the U.S. budget deficit. On the other hand, the popular press sometimes claims that the increased trade deficit resulted from a decline in the quality of U.S. products relative to foreign products. a. Assume that U.S. products did decline in relative quality during the 1980s. How did this affect net exports at any given exchange rate ? b. Draw a three-panel diagram to show the effect of this shift in net exports on the U.S. real exchange rate and trade balance. c. Is the claim in the popular press consistent with the model in this chapter? Does a decline in the quality of U.S. products have any effect on our standard of living? ( Hint: When we sell our goods to foreigners, what do we receive in return?)

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Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305585126

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Chapter
Section
BuyFindarrow_forward

Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305585126
Chapter 32, Problem 3PA
Textbook Problem
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The chapter notes that the rise in the U.S. trade deficit during the 1980s was due largely to the rise in the U.S. budget deficit. On the other hand, the popular press sometimes claims that the increased trade deficit resulted from a decline in the quality of U.S. products relative to foreign products.

a. Assume that U.S. products did decline in relative quality during the 1980s. How did this affect net exports at any given exchange rate?

b. Draw a three-panel diagram to show the effect of this shift in net exports on the U.S. real exchange rate and trade balance.

c. Is the claim in the popular press consistent with the model in this chapter? Does a decline in the quality of U.S. products have any effect on our standard of living? (Hint: When we sell our goods to foreigners, what do we receive in return?)

Sub part (a):

To determine
The impact of changes in the quality of goods on the economy.

Explanation of Solution

The export is the sale of domestic goods in the international market. When the country sells their products in the foreign market that process is known as exporting, and when the country buys from the foreign market, the process is known as importing. The net export is the export minus import of the economy. Similarly, the trade deficit is the situation in which the value of imports of the economy becomes higher than the value of exports of the economy. When the situation is vice versa, it is known as the trade surplus.

It is assumed that the US products have declined in quality during the 1980s...

Sub part (b):

To determine
The impact of changes in the quality of goods on the economy.

Sub part (c):

To determine
The impact of changes in the quality of goods on the economy.

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