Trade costs, barriers and exchange rates

Question 1

Name the 3 trade costs

Answer 1

1) Transport costs
2) Travel and Communication costs
3) Transaction costs

Question 2

What are the effects of transport costs?

Answer 2

• Improvements in infrastructure to reduce transport costs (airports, canals, container shipping)
• Taxes and energy costs i.e. fuel taxes may be reduced.

Belt and Road Initiative for example

Question 3

What are the effects of travel and communication costs?

Answer 3

-Improving travel methods, and updating digital data systems affecting these costs as do taxes, regulations and energy costs

Question 4

What are the effects of transaction costs?

Answer 4

(The costs associated in obtaining legal and administrative setups to enable trade to take place).

-Better intellectual property rights enforcement and legislation.

Question 5

What are the 5 Trade Barriers

Answer 5

1) Administrative Trade Policies
2) Local Content Requirements
3) Quotas
4) Subsidies/Protectionism
5) Tariffs+NTBs: A tax on imorts, anti-dumping tariffs

Question 6

What are the effects of these trade barriers

Answer 6

Protectionism and the positive and negative effects

Question 7

What are the Exchange Rates

Answer 7

1) Spot Rates –> moment by moment on currency rate
2) Exchange Rate Today –> Rate when bought from retailer/bank
3) Formal Rate –>Specific rate guaranteed in the future
4) Option Future Rate –> specific rate guaranteed if that option is taken up
5) Real Exchange Rate –> rate adjusted by inflation
6) Nominal Exchange Rate –> Constant but reduced by inflation
7) Balance of Payments Rate –> Total inflows to other countries and total outflows from other countries

Question 8

What are the risk effects of Exchange Rates

Answer 8

Transaction Risk–> as foreign trade price of exports and imports change change in revenue an costs
Translation Risk–> Change in valuation of assets valued in foreign currencies
Economic Risk–> Change in market share because of foreign trade price of imports/exports. Balance of Payments can be affected too by changing volumes.

Question 9

What are the positive effects of exchange rates

Answer 9

Transaction and Translation risk can be hedged by forward or option exchange rates.

Economic risk is harder to hedge, as it is harder to predict a shift in market share.

Risks are averted by use of $ to trade, reducing currency fluctuations.

Depreciation can be used to

Question 10

Managed exchange rates?

Answer 10

Government gets involved to keep rates low, by way of foreign currency reserves.