International Trade and Investment

Question 1

Define the balance of payments

Answer 1

Summary of transactions between domestic and foreign residents for a specific country over a specified period of time (Usually a year)
It accounts for international transactions by businesses, individuals, and the government

Question 2

Explain the current account of the BOP

Answer 2

Current Account: summary of flow of funds due to purchases of goods or services or the provision of income on financial assets. This is the largest section.

Question 3

Explain the capital account of BOP

Answer 3

Capital Account: summary of flow of funds resulting from the sale of assets between one specified country and all other countries over a specified period of time.

Question 4

Define the financial account of a BOP

Answer 4

Financial Account: refers to special types of investment, including DFI and portfolio investment. International trade and investment.

Question 5

What is included in the current account of the BOP?

Answer 5

Payment for merchandise and services - tangible products and service exports and imports.
Factor income payments - income (interest or dividends) received by investors on foreign investments in financial assets
Transfer payments

Question 6

Explain the Balance of trade

Answer 6

Difference between total exports and imports is the Balance of Trade. Surplus means exports> imports. Most countries run a trade deficit.

Question 7

Explain the debit/credit consequences of Irish person investing in Asian bonds

Answer 7

For ireland that’s a credit of the BOP for Asian country thats a debit on their BOP.

Question 8

What is included in the capital account

Answer 8

Includes the value of financial assets transferred across country borders by people who move to a different country.
Includes patents and trademarks

Question 9

What is included in the financial account

Answer 9

DFI
Portfolio investment - Transactions involving long term financial assets between countries that do not affect the transfer of control.
Other capital investment - Transactions involving short-term financial assets between countries.
Errors and omissions and reserves - Measurement errors can occur when valuing funds transferred into or out of a country.

Question 10

Define outsourcing

Answer 10

The process of subcontracting to a third party in another country to provide supplies or services that were previously produced internally.

Question 11

What is the impact of outsourcing

Answer 11

Increased international trade activity as MNCs purchase products or services abroad.
Lower cost of operations and job creation in countries with low wages.
May reduce domestic jobs.

Question 12

What is considered when making a decision on setting up subsidaries or outsourcing?

Answer 12

Managers of MNC may argue they create jobs for domestic workers.
Shareholders may be more in favour of outsourcing and argue the managers are not maximizing the MNC’s value.
Managers should consider the potential savings that could occur outsourcing.
Managers must also consider bad publicity or bad morale among domestic workers.

Question 13

What are the factors affecting international trade flows?

Answer 13

Cost of labour - low labour costs gives advantage in labor intensive industry.
Inflation - Current account decreases if inflation increases relative to trade partners. This also affects interest rates, need higher rates to curb inflation.
National income - Current account decreases if national income increases relative to other countries.
Credit conditions - tighten if economy is weak
Government policy
Exchange rates

Question 14

How can government policy increase exports

Answer 14

Restrictions on imports
Subsidies for exporters
Restrictions on piracy
Environmental restrictions
Labor laws
Business laws
Tax breaks
Country security laws
Trade requirements
Government ownership or subsidies
Policies to punish governments

Question 15

Explain Dumping

Answer 15

Dumping occurs when a country or company exports a product at a price that is lower in the foreign importing market than the price in the exporter’s domestic market.

Question 16

How can trade requirements be a tool governments use to help increase exports

Answer 16

Forms or obtaining licence are required because firms can export to the country (Bureaucracy)

Question 17

How might exchange rates affect the current account?

Answer 17

Current account decreases if currency appreciates relative to other currencies.
When a home currency is exchanged for a foreign currency then the home currency faces downward pressure, leading to increased foreign demand for the country’s products - may correct the balance of trade deficit somewhat however other forces are at work so this will not be automatic.

Question 18

Explain devaluation of pound vs revaluation

Answer 18

Devaluation - decrease in value of pound in relation to other currencies. Revaluation is increase in value of pound in relation to other currencies.

Question 19

Explain price elastic

Answer 19

Price elastic means product demand is sensitive to price changes. Price elasticity of demand is the ratio of the percentage change in quantity demanded of a product to the percentage change in price.

Question 20

What are the limitations of a weak home currency

Answer 20

Competition: foreign companies may lower their prices to remain competitive.
Impact of other currencies: a country that has balance of trade deficit with many countries is not likely to solve all deficits simultaneously.
Prearranged international trade transactions cannot be adjusted immediately.

Question 21

Explain the J curve effect

Answer 21

Prearranged international trade transactions cannot be adjusted immediately. The lag is estimated to be 18 months or longer, leading to a J-curve effect. This reflects that there us a time lag until any changes in rates are felt in real terms on Balance of Trade.

Question 22

Explain intracompany trade

Answer 22

Many firms purchase products that are produced by their subsidiaries - not necessarily affected by currency fluctuations

Question 23

Give some factors that affect DFI

Answer 23

Changes in restrictions - new opportunities with removal of government barriers
Privatisation -Managers of privately owned businesses are motivated to ensure profitability
Potential economic growth
Tax Rates
Exchange Rates

Question 24

Give the factors that influence international portfolio management

Answer 24

Tax Rates on Interest or Dividends - Investors prefer where taxes are relatively low.
Interest Rates - Money tends to flow to countries with high interest rates, as long as the local currencies are not expected to weaken.
Exchange Rates - Investors are attracted to a currency that is expected to strengthen.

Question 25

What areas do the US rely very heavily on foreign investment in

Answer 25

U.S. manufacturing plants, offices, and other buildings.
Debt securities issued by U.S. firms.
U.S. Treasury debt securities

Question 26

What does IMF stand for

Answer 26

International Monetary fund

Question 27

What are the objectives of the IMF?

Answer 27

Promote cooperation among countries on international monetary issues,
Promote stability in exchange rates
Provide temporary funds to member countries to correct imbalances of international payments
Promote free mobility of capital funds
Promote free trade.
Encourage internationalization of business.
Financing is measured in special drawing rights (SDRs)

Question 28

What is the world bank?

Answer 28

International Bank for reconstruction and development

Question 29

What is the World banks objective?

Answer 29

Make loans to countries to enhance economic development.
Structural Adjustment Loans (SALs) are intended to enhance a country’s long-term economic growth.
Funds are distributed through co financing agreements: Official aid agencies, Export credit agencies, Commercial banks.

Question 30

What is the objective of the WTO

Answer 30

Major Objective - Provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT accord.
Member countries are given voting rights that are used to make judgments about trade disputes and other issues.

Question 31

What is the objective of the IFC

Answer 31

International financial corporation promotes private enterprise within countries. It provides loans to corporations and purchases stock
It traditionally has obtained financing from the World Bank but can borrow in the financial markets

Question 32

What si the objective of the IDA?

Answer 32

International development agency extends loans at low interest rates to poor nations that cannot qualify for loans from the world bank.

Question 33

What is BIS?

Answer 33

Bank for International Settlements. Its an international financial institution offering banking services for national central banks and a forum for discussing monetary and regulatory policies.

Question 34

What is the objective of BIS

Answer 34

Facilitate cooperation among countries with regard to international transactions.
Provides assistance to countries experiencing a financial crisis.
The “central banks’ central bank” or the “lender of last resort.”

Question 35

What is the objective of OECD

Answer 35

Organisation for economic cooperation and Development
Facilitates governance in governments and corporations of countries with market economics.
It has 30 member countries and has relationships with numerous countries.