Exam-1 Chapter -5 Global Economics

Question 1

Exchange rates

Answer 1

Are the price of one currency stated in terms of another currency. (1 euro= 90cents)

Question 2

Floating exchange rates

Answer 2

Exchange rates set by the market

Question 3

What makes the value of a currency increase

Answer 3

Exports

Question 4

What makes the value of currency decrease

Answer 4

Imports

Question 5

What effects the price of goods offered for sale in international markets

Answer 5

Exchange rates

Question 6

The balance of payments account

Answer 6

Is the value on international transactions

Question 7

Types of balance of payments accounts

Answer 7

Current account
Capital account
Financial account

Question 8

The current account includes

Answer 8

Goods and services, exports and imports, plus certain money flows

Question 9

The capital account and financial account includes

Answer 9

Changes in foreign owned assets, including government assets.

Question 10

The 2 accounts plus statistical discrepancy, always sum to

Answer 10

Zero

Question 11

Countries try to manipulate the terms of trade

Answer 11

To their advantage

Question 12

In order to manipulate the terms of trade to their advantage, countries use

Answer 12

Tariffs ( taxes on imports), quotas, health and quality standards, and licensing requirements to block imports.

Question 13

What can be used to encourage exports

Answer 13

Subsidies

Question 14

What 2 organizations have dramatically lowered the tariffs and other trade barriers around the world

Answer 14

The General Agreement on Tariffs and Trade( GATT) and its successor World Trade Organization (WTO)

Question 15

Exports

Answer 15

Any international transaction that causes money to flow into a country
Example- for the US, an export would be sale of oranges to Japan
Or sale of banking service by US bank to a European client.
Or the pay check that comes from Italy to a employee of a shoe company who works in the US.

Question 16

Import

Answer 16

And import is in any international transaction that causes money to flow out of the country.
Example-for the US, import would be purchase of coffee from Ecuador
Or sale of an insurance policy by Lloyds of London to a US company
Or the pay check that goes from Wynn resorts in Las Vegas to an employee who works in Macao.

Question 17

Exchange rate

Answer 17

Is the price of a Currency, always expressed in some the Currency

Question 18

Foreign exchange

Answer 18

Is the technical word he used to mean the money for the countries

Question 19

Balance of payments

Answer 19

Each country keeps track of its international transactions using an accounting system that we call balance of payments

Question 20

The balance of payments tells us much

Answer 20

About the state of about economy and about our indebtedness to others and theirs to us

Question 21

When a transaction causes money to flow into a country

Answer 21

It is a credit (+) in the balance of payments

Question 22

When a transaction causes money To flow out

Answer 22

It is called a debit (-) in the balance of payments

Question 23

Note that every transaction

Answer 23

Is going to be a credit (+) for one country and a debit (-) for the other.

Question 24

The debits and credits will

Answer 24

Balance for the world as a whole.

Question 25

Technically, the US has a set of accounts referred to as

Answer 25

International Economic Accounts. These accounts are then subdivided into the :
International Investment Position IIP and
International Transactions Account ITA

Question 26

Contents of current account

Answer 26

1. Exports and imports of goods and services (e.g. Cars, oil, tourism, banking services]
2. Primary income example interest on government bonds owned by foreigners, wages paid by companies to workers in other countries
3. Secondary income example money sent to someone in another country

Question 27

When a commentator says we have a trade deficit

Answer 27

They are either saying we have a deficit ( negative balance) on the exports and imports part of the current account, or on the account as a whole.

Question 28

The US typically has a trade deficit that means

Answer 28

Many countries with which we trade, such as china and Japan, have trade surpluses.

Question 29

The US, while having a overall trade deficit actually has

Answer 29

A deficit with physical goods, and a surplus with services, though the plus on services is much smaller than the minus on physical goods.

Question 30

The plus on services comes about

Answer 30

Because people all over the world purchase financial services from US companies and they travel to the US as tourists.

Question 31

Capital account contents

Answer 31

Capital transfers e.g. Payments from foreign insurance companies to pay for damage caused by a hurricane, mineral rights payment, some borrowing and lending between people in different countries, payment to use a trademark, certain type of leases or licenses

Question 32

Capital account is relatively

Answer 32

A small account

Question 33

Financial account contents

Answer 33

1. Net acquisition of financial assets ( Ford builds a factory in Mexico)
2. Net incurrence of liabilities ( Sony buys a movie studio in the US)
3. Financial derivatives

Question 34

Financial account category is

Answer 34

Primarily the purchase of physical assets such as businesses, land, or houses and the purchase of stocks and bonds

Question 35

Derivatives

Answer 35

Are financial instruments created from other financial instruments, such as a bond backed by a mortgage, these are routinely bought and sold between countries

Question 36

The sum of the values in these three accounts

Answer 36

Should add to zero.

In reality there are data problems that will prevent this from happening

Question 37

Values

Answer 37

The government adds a category called the Statistical Discrepancy, which is always equal to the difference between the accounts and makes them add up to zero

Question 38

The United States mostly has trade deficits with nations

Answer 38

Because we buy more goods from them than they buy from us

Question 39

Because exchange rates are related to prices, and because exchange rates are related to imports and exports so

Answer 39

The trade deficit should be related to our exchange rates.

Question 40

Just as goods trade for money, money can be traded for

Answer 40

Money. This does not mean changing a $20 bill for a $10 and two fives, but rather changing dollars into Yen or euros.

Question 41

Each currency in the world

Answer 41

Has a price, actually many prices, each measured in terms of the other currency

Question 42

What is one of the links in the chain of international trade

Answer 42

Exchange rates

Question 43

Exchange rates are always

Answer 43

Opposite’s. If One dollar= 100 yen , then one yen is 1/100 dollars or one cent.

Question 44

Floating exchanges rates

Answer 44

Exchanges rates derailed by market forces are referred to as floating exchange rates

Question 45

Fixed exchange rates

Answer 45

When the government control the exchange rates, they are said to be fixed.

Question 46

Another name for fixed exchange rates is

Answer 46

Pegged

Question 47

While countries have generally floating exchange rates

Answer 47

All exercise some control over the value of their currency

Question 48

What determines the price of the dollar and the currencies of other countries

Answer 48

Supply and demand.

Question 49

When we buy goods from them

Answer 49

We need their money (increased demand).

Question 50

We buy their money

Answer 50

With ours so their is increase supply

Question 51

In the international markets the dollar has become

Answer 51

More scarce, and therefore, more valuable.

Question 52

The euro has become

Answer 52

More plentiful, and therefore, less valuable.

Question 53

When the dollar increases in value through the market,

Answer 53

We say that it has appreciated.

Question 54

When a currency falls in value through the market,

Answer 54

It depreciates

Question 55

When we the government controls the words are

Answer 55

Revalue and devalue

Question 56

So, every time the U.S sells goods to other countries,

Answer 56

It makes the dollar more valuable.

Question 57

Every time U.S consumers buy goods made in other countries

Answer 57

The value of the dollar falls

Question 58

The ability of people to buy goods made in other countries, and the ability of companies to sell goods in people who live in other countries depends

Answer 58

In large part on the exchange rate.

Question 59

Financial crisis

Answer 59

Means that the value of their currency is falling, making it difficult or impossible for them to buy goods from other countries, sometimes including food, oil or other necessities of life.

Question 60

Appreciation:

Answer 60

Supply and demand (the market) cause a currency to rise in value.

Question 61

Depreciation:

Answer 61

Supply and demand (the market) cause a currency to fall in value.

Question 62

Revaluation

Answer 62

The government causes a currency to rise in value

Question 63

Devaluation

Answer 63

The government causes a currency to fall in value.

Question 64

Bretton Woods

Answer 64

A monetary policy that focuses on fixed exchange rates to ensure political and economic stability. It is important because the Bretton Woods Agreement allowed for the U.S. to adopt the gold standard and allowed other countries to peg their currencies to the U.S. dollar, which was effective until the U.S. dropped out of Bretton Woods.

Question 65

Prior to Bretton Woods which currency ruled the world:

Answer 65

British pound

Question 66

All countries’ international transaction were built around what?

Answer 66

Gold

Question 67

By changing their exchange rates, othe countries could

Answer 67

Effectively change the prices of the goods they exported and imported.

Question 68

Bretton Woods made the United States dollar

Answer 68

The center of the world financial system, but Britain opposed since it made the British pound less important.

Question 69

What was the primarily concern of Bretton Woods

Answer 69

To create a system that would help rebuild the world, and in the process, make another world war less likely.

Question 70

In 1971, President Nixon

Answer 70

Pulled the US out of Bretton Woods by cutting the tie between the dollar and gold.

Question 71

By 1973, the world had shifted to what system ?

Answer 71

Market based system

Question 72

A trade deficits with China means what?

Answer 72

That we import more from them than we export.

Question 73

Trade deficits and trade surpluses should go away autoamatically

Answer 73

If the markets are working correctly.

Question 74

The gains from trade are often small and require what?

Answer 74

The cooperation of both trading partners to be fully realized.

Question 75

Trade Manipulation

Answer 75

Some countries attempt to manipulate their trade relations to shift benefits away from their partners and on to themselves. These nations are the modern Mercantilists.

Question 76

Modern Mercantilist leaders are focusing on doing what?

Answer 76

Increasing the economic power of the nation without regard to its impact on their partners. In fact, they may view trade as a “war,” with winners and losers.

Question 77

What would a mercantilist country try to do?

Answer 77

Sell its products to others, and not buy goods from other countries

Question 78

How do countries manipulate trade?

Answer 78

1. The country can manipulate the value of its currency, the exchange rate, to make it easier for people from other countries to buy its goods.
2. They erect barriers to trade. These are mechanisms that make it difficult for goods from other countries to enter.

Question 79

In a money economy where buying and selling are separate activities

Answer 79

Terms of trade may emerge in the short term that are detrimental to the country. In other words, i buy from you thinking that you will buy from me too, but you take my money and your money and walk away.

Question 80

Ways to manipulate trade:

Answer 80

1. Tariffs
2. Quotas.
3. Licensing Requirements
4. Health and Quality Standards
5. Subsidies
   T Q L H S

Question 81

Tariffs

Answer 81

A tariffs is a tax that applies only to goods entering a country. It is exactly like the sales tax usually charged to purchase goods inside a country, except that is into charged against domestic goods.

Question 82

Quotas:

Answer 82

A quota is a physical limitation on the quantity of a good. For example, The U.S. Might limit beef shipments from Argentina to 500,000 pounds per year.

Question 83

Licensing Requirements.

Answer 83

A country may require businesses to have a license or permit to sell products within its borders.

Question 84

By making licenses difficult, expensive, and time consuming to obtain,

Answer 84

Foreign sellers may decide the effort to obtain a license is not worth it and simply not sell products in that country.

Question 85

Health and Quality standards

Answer 85

Countries may limit products from other countries by setting high standards for health concerns or minimum standards for the quality of products that enter (consumer safety). Example ban on beef shipment because of mad cow disease.

Question 86

Subsidies:

Answer 86

This is the “positive” way, where the other four try to stop imports, subsidies are used to encourage exports.

Question 87

Subsidies

Answer 87

Means a pavement from the government to a business when that business exports

Question 88

From the point of view the Mercantilist country, trade barriers may allow

Answer 88

Their country to sell to others without having to buy, and thereby becoming richer at the expense of others.

Question 89

What economist think about Mercantilist countries?

Answer 89

1. Both countries would be better off if they cooperated.
2. Consumers will be hurt because they will have a smaller selection of goods to buy.
3. IF two countries, say the U.S and Japan, both erect trade barriers, neither will buy from the other, which means that neither will sell to the other, and both will be damaged by the barriers.

Question 90

Hayley-Smoot tariffs

Answer 90

1930-highest tariff in U.S. history. It raised duties on agricultural and manufactured imports. It may have contributed to the spread of international economic depression

Question 91

With a few years after the end of World War 2 (1947), most of the coutnries in the world gore together and created the

Answer 91

General Agreement on Tariffs and Trade, or GATT. GATT markedly lowered tariffs and trade barriers around the world

Question 92

The United States has negotiated specific treaties with most of the world countries in which we trade

Answer 92

low tariffs on goods we want to export for low tariffs on goods they want to import

Question 93

Coupled with treaties such as the North American Free Trade Agreement

Answer 93

Which removed all tariffs with Mexico and Canada, the US has adopted a strong free trade position.

Question 94

Most Republican and Democrats in Congress

Answer 94

have favored free trade

Question 95

Liberals and conservatives have

Answer 95

Opposed free trade

Question 96

What do the conservative Republicans, who tend to be Mercantilist believe?

Answer 96

That such agreements weakened the country and oppose them. T

Question 97

The liberal Democrats believe that

Answer 97

Such agreements are bad for American labor by moving jobs to other countries and oppose them.

Question 98

Business are equally

Answer 98

Divided on free trade.

Question 99

Dumping

Answer 99

Selling below the cost of manufacture is called “dumping”

Question 100

The US have antidumping laws

Answer 100

Which allow the imposition of tariffs to counter the dumping.

Question 101

During the Kennedy Round and Tokyo Round

Answer 101

Trade barriers of all kinds were lowered, though more so for the developed world and less in the developing countries.

Question 102

In 1994, GATT was replaced by what?

Answer 102

The World Trade Organization (WTO). Which went beyond GATT by creating what amounts to a world trade court.

Question 103

Today a web search on the WTO finds

Answer 103

Numerous websites and articles arguing either that the WTO increases world trade and equalize things for everyone, or that the WTO is a pawn for the big countries and takes advantages of the small.