Openness in Goods and Financial Markets

Question 1

Explain openness in goods markets

Answer 1

• Ability of consumers and firms to choose between domestic goods and foreign goods.
• Even countries most committed to free trade have tariffs and quotas.

Question 2

What are tariffs?

Answer 2

Taxes on imported goods

Question 3

What are quotas?

Answer 3

Restrictions on the quantity of goods that can be imported

Question 4

Openness in financial markets

Answer 4

• Ability of financial investors to choose between domestic assets and foreign assets
• Until recently some rich countries had capital controls

Question 5

Describe openness in factor markets

Answer 5

• Ability of firms to choose where to locate production, and of workers to choose where to work

Question 6

True of False:
The volume of trade is a good measure of openness

Answer 6

False - tradable goods are goods that compete with foreign goods in either domestic markets or foreign markets

Question 7

True or False:
Exports are capable of exceeding GDP

Answer 7

False - it is not possible

Question 8

What is the real exchange rate?

Answer 8

The price of domestic goods relative to foreign goods

Question 9

Define nominal exchange rate

Answer 9

The price of the domestic currency in terms of foreign currency

Question 10

Define (nominal) appreciation

Answer 10

Increase in the price of the domestic currency in terms of a foreign currency (i.e.: increase in exchange rate)

Question 11

What is (nominal) depreciation?

Answer 11

Decrease in the price of the domestic currency in terms of a foreign currency (i.e.: decrease in the exchange rate)

Question 12

Name 5 policies of international trade

Answer 12

1.) Tariffs
2.) Quotas
3.) Exchange rate - value of the price of the currency against another
4.) Import substitution - transition where previously imported goods are now produced in a country
5.) Subsidy - a means of production promotion whereby companies are encouraged to produce more by having government pay for parts of their factors of production

Question 13

Name the three types of exchange rate policies

Answer 13

1.) Fixed
2) Managed
3.) Free-floating

Question 14

What is the foreign exchange market?

Answer 14

• Different currencies are sold
• Buying currency of interest before entering its territories

Question 15

Why are exports regarded as important for currencies?

Answer 15

They aid with strengthening the currency

Question 16

What are the balance of payments?

Answer 16

A set of accounts that summarise a country’s transactions wit the rest of the world

Question 17

What is a current account?

Answer 17

Transactions ABOVE THE LINE record payments to and from the rest of the world

Question 18

Why would countries want to have a positive balance of payment/surplus?

Answer 18

• Exports are greater than imports which contributes towards boosting your net balance
• If exporting less, it’s a loss and causes a deficit

Question 19

List the 3 factors which may cause

Answer 19

1.) Exports - when selling, people must go through foreign exchange market
2.) Tourism - people coming to the country to spend their money
3.) Markets - stock markets/securities/shares

Question 20

What is a financial account?

Answer 20

Transactions BELOW THE LINE record net foreign holdings of domestic assets (e.g.: are people investing in South Africa or are they investing in other countries

Question 21

What is a GNP?

Answer 21

Gross National Product - measures the value added by domestic factors of production

Question 22

List the 3 types of floating exchange rates

Answer 22

1.) Free floating - exchange rate is determined by demand and supply (i.e.: Dollar appreciation/Rand Depreciation vice versa)
2.) Managed floating - when government deliberately intervenes to se the exchange rate
3.) Fixed floating - government of country A agrees with government of country B to fix exchange rate to be exactly what it is IF they can talk to other countries that their currencies should be equal to their Rand.

Question 23

What is direct quotation?

Answer 23

Quoting the exchange rate in your own currency
e.g.: 1 dollar to a rand = R20

Question 24

What is indirect quotation?

Answer 24

$1/20 = $0,05 - quoting using a foreign currency