Question 1

What concepts underlies the benefits of international economic activity (i.e., international trade)?

Accepted Answer

Comparative advantage. Comparative advantage is the ability of one economic entity (nation) to produce a good or service at a lower opportunity cost than another entity (nation). It is comparative advantage that determines the economic benefits from international trade.

Question 2

What accounts used by the U.S. to account for transactions and balances with other nations (i.e., those not in the U.S. balance of payments statement)?

Accepted Answer

Capital account, financial account, and current account

Question 3

Freely fluctuating exchange rates perform what type of functions?

Accepted Answer

They automatically correct a lack of equilibrium in the balance of payments.

Question 4

What is a statement expressed in the form of "1 euro = $1.20" expresses a/an?

Accepted Answer

direct exchange rate. A direct exchange rate expresses the domestic price of one unit of foreign currency. In this case, 1 euro, the foreign currency, costs $1.20, the domestic currency. An indirect exchange rate expresses the foreign price of one unit of the domestic currency. Given the direct exchange rate, the indirect exchange rate can be calculated (or vice versa). If the direct exchange rate is $1.20 per euro, the indirect exchange rate is 1.00/$1.20 = .8333, or $1.00 = .8333 euro.

Question 5

A put is an option that gives its owner the right to do what?

Accepted Answer

Sell a specific security at fixed conditions of price and time. A put option is a contract that gives the owner the right, but not the obligation, to sell a specified amount of an underlying asset (e.g., security) at a specified price within a specified time.

Question 6

What type of exchange risk derives from changes in currency exchange rates that alter the value of future transactions?

Accepted Answer

Economic exchange risk. Economic exchange risk derives from changes in currency exchange rates that alter the value of future revenues or costs. Exchange rate changes may make future foreign revenues convert to fewer units of a domestic currency (or other currency) or make future costs convert to more units of a domestic currency (or other currency). These types of changes may reduce the financial viability of future transactions between entities for which the currency exchange rate has changed.

Question 7

What best describes "transfer pricing?"

Accepted Answer

The determination of the amounts at which transactions between affiliated entities will be recorded.

Question 8

What criteria is used to establish transfer pricing?

Accepted Answer

Costs incurred by the selling affiliate, fair value based on the price in the market, and price negotiated between affiliates. NOTE: costs incurred by the buying affiliate is not included. The transfer price would constitute an element of cost in determining (total) costs incurred by the buying affiliate; costs to the buying affiliate would not establish the transfer price paid by the buying affiliate.

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Reason For International Trade Flashcards

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