International Trade

Question 1

a direct investment in longer-term assets in another country;

Answer 1

foreign direct investment (FDI)

Question 2

a shorter-term investment in another country and usually involves financial assets like stocks and bonds rather than physical assets

Answer 2

foreign portfolio investment (FPI)

Question 3

illustrates the fact that countries will focus on efficient industries and import what they are relatively less efficient in producing

Answer 3

Specialization (a key gain from trade)

Question 4

the concept of when a country produces a good at a lower opportunity cost than its trading partners do

Answer 4

Comparative Advantage

Question 5

Concept of having the lowest resource cost to do or make something in terms of international trade

Answer 5

Absolute Advantage

Question 6

Graphical representation of a country’s capacity to produce goods and services

Answer 6

production possibilities frontier (PPF)

Question 7

model that represents there is only one factor of production, labor, and countries’ comparative advantage depends on the relative productivity of labor in different economic activities; provides the simplest way to illustrate how comparative advantage depends on opportunity cots

Answer 7

Ricardian model

Question 8

The source of differing comparative advantages

Answer 8

Technologies

Question 9

The price that would exist in the absence of trade

Answer 9

Autarkic price

Question 10

model of international trade that explains comparative advantage in terms of differences in endowments of factors of production like capital and labor

Answer 10

Hecksher-Ohlin model

Question 11

Three ways which countries can protect their domestic industries from foreign competition

Answer 11

Tariffs, quotas, and domestic content provisions

Question 12

policies that seek to control the flow of capital in and out of a country in order to advance the country’s broader economic interests and goals

Answer 12

Capital Restrictions

Question 13

agreements between countries on various rules governing trade between them; promoting free trade amongst them

Answer 13

Regional Trading blocs

Question 14

Trade agreements (or blocs) that remove trade barriers between member countries and allow each country to set up its own trading rules with non-member counties

Answer 14

Free trade areas

Question 15

trade agreements (blocs) that remove trade barriers between member countries and also enforce a binding agreement on trade with non-member countries

Answer 15

Customs unions

Question 16

trade agreements (blocs) that promote free flow of factors of production in addition to the free flow of goods and services

Answer 16

common, single, or unified market

Question 17

Name the forms of Regional Trading Blocs in order of least to most economically integrated

Answer 17

Free trade, customs union, common market, economic union, and economic and monetary union

Question 18

resulting effect is trade agreement policy that takes a country from trading with a lower-price trading partner to a higher-price trading partner

Answer 18

Trade diversion

Question 19

The balance of payments is comprised of three main components that track flows of money between nations for different kinds of transactions. What are these components?

Answer 19

Current account, capital account, and financial account

Question 20

What type of transactions are tracked in the Current Account?

Answer 20

payments for trade in goods and services, investment income like dividends and bond payments, and unilateral transfers like workers’ remittances to families overseas

Question 21

What type of transactions are tracked by the Financial Account?

Answer 21

international purchases and sales of financial assets like corporate stocks and bonds, government securities, direct foreign investments, and foreign currencies.

Question 22

What sort of transactions are recorded in the Capital Accounts?

Answer 22

capital transfers like debt forgiveness and the transfer of assets owned by migrants; the sale and purchase of non-produced and non-financial assets like natural resources, patents, copyrights, and trademarks.

Question 23

Current Account Balance

Answer 23

CA = X - M = Y - (C + I + G)

Question 24

What is the primary function of the World Trade organization (WTO)?

Answer 24

to facilitate trade through the principles of nondiscrimination and reciprocity - mutual benefit/agreement to reduce trade barriers

Question 25

nondiscriminatory policy that ensures all members of the WTO receive the same treatment

Answer 25

most-favored nation rule

Question 26

Who provides capital to countries in times of crisis? and when was it established?

Answer 26

IMF - 1945

Question 27

How does the World Bank help developing countries out of poverty?

Answer 27

by extending aid and advising countries on the right policies to adopt to increase the strength of the economy.

Question 28

How does IMF work to mitigate bailout risks?

Answer 28

by assessing financial markets, analyzing vulnerabilities, and attaching clauses to bailout packages to ensure future fiscal and financial responsibility

Question 29

What is a forward FX rate utilized for?

Answer 29

A trade that will be settled at least three business days after the date the trade was agreed to be by the parties

Question 30

How do you calculate the forward rate?

Answer 30

Spot Rate x (1 + foreign int rate divided by 1 + domestic int rate)

Question 31

What is the value of one “forward point (or Pip)”?

Answer 31

1/10,000th

Question 32

Concept that refers to when countries produce identical goods, and transaction costs and trade barriers are nonexistent, goods should be equally priced once adjusting for exchange rates

Answer 32

Purchasing Power Parity

Question 33

___ transactions involve immediate delivery of the currency

Answer 33

Spot

Question 34

Name the differences between Forwards and Futures.

Answer 34

Forwards can be customized, not sold on an exchange, and don’t have specific collateral requirements. Futures are standardized, are sold on an exchange, and have specific collateral requirements. Futures are only sold for fixed amounts with fixed settlement dates, making them less flexible but also generally very liquid

Question 35

What you use if you need to extend the settlement date of a forward contract

Answer 35

a Swap

Question 36

What is a swap?

Answer 36

it involves extending the settlement date on a forward contract by issuing a new forward contract and an offsetting spot transaction

Question 37

Why are options considered the most flexible FX transaction type?

Answer 37

Because options purchasers are not required to exchange the currency