Chapter 2
The main components of the current account are payments between two countries for what three things?
(1) merchandise (goods) and services (2) primary income (3) secondary income
FIVE major objectives of the IMF
(1) promote cooperation among countries on international monetary issues (2) promote stability in exchange rates (3) provide temporary funds to member countries attempting to correct imbalances of international payments (4) promote free mobility of capital funds across countries (5) promote free trade
5 common factors that could affect a country's appeal for DFI are
1. Changes in restrictions 2. Privatization 3. Potential economic growth 4. Tax rates 5. Exchange rates
six factors that affect international trade flow
1. Cost of labor 2. Inflation 3. National income 4. Credit conditions 5. Government policies 6. Exchange rates
Cofinancing is performed in what three ways
1. official aid agencies 2. export credit agencies 3. commercial banks
How could a floating exchange rate NOT correct international trade imbalances
A country may experience positive net financial flows, which offset the net international trade flows, so that its currency will not necessarily weaken when its balance-of-trade deficit is large. If the home currency does not weaken, it cannot correct the balance-of-trade deficit Another reason why a weak currency will not always improve a country's balance of trade is that many international trade transactions are prearranged and cannot be adjusted immediately to fluctuating exchange rates
A key aspect of the World Bank's mission is its provision of ____________
Structural Adjustment Loans (SALs)
The J-curve effect,
The U.S. balance-of-trade deficit could deteriorate even further in the short run when the dollar is weak because U.S. importers then need more dollars to pay for the imports they have contracted to purchase
the balance of trade
The difference between total exports and total imports
How could a floating exchange rate could correct any international trade imbalance between two countries
The exchange of its currency in greater volume than the foreign demand for its currency could place downward pressure on the value of that currency. Once the value of the country's home currency declines in response to these forces, the result should be more foreign demand for its products
dumping
The practice of exporting of lower-priced products that were produced with the help of government subsidies
balance of payments
a summary of transactions between domestic and foreign residents for a specific country over a specified period of time
Firms in countries where labor costs are low typically have an ________ when competing globally, especially in labor-intensive industries
advantage
secondary income (also known as transfer payments) represents
aid, grants, and gifts from one country to another
International Monetary Fund (IMF)
an international organization that acts as a lender of last resort, providing loans to troubled nations, and also works to promote trade through financial cooperation
___________ will probably not result in an increase in a country's current account balance (assuming everything else remains constant)
appreciation of a countries currency
Bank for International Settlements (BIS)
attempts to facilitate cooperation among countries with regard to international transactions Central banks for central banks
Because the World Bank provides only a small portion of the total financing needed by developing countries, it attempts to spread its funds by entering into ________________
cofinancing agreements
If a country's national income increases by a higher percentage than those of other countries, then its current account should ________, other things being equal
decrease
If a country's inflation rate increases relative to the countries with which it trades, this could cause its exports to _________
decrease, and vise versa
A high home inflation rate relative to other countries would ____ the home country's current account balance, other things being equal. High growth in the home income level relative to other countries would ____ the home country's current account balance, other things being equal
decrease, decrease
An increase in the current account deficit will place ____ pressure on the home currency value, other things equal
downward
______________ represents transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control
portfolio investment
International Finance Corporation (IFC) was established to
promote private enterprise within countries
World Trade Organization (WTO)
provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT
A government that does not act to minimize piracy may indirectly ________ imports and may even _________ MNCs from exporting to that market
reduce, discourage
When credit conditions become more restrictive, it __________ reduces demand for imported supplies
reduces
Governments can reduce it's countries imports by imposing _________ and a ________
tariffs, and a quota
A balance-of-payments statement is composed of _________, __________, and _________
the current account, the capital account, and the financial account
Net primary income in the United States represents
the difference between the primary income receipts (inflows) and the primary income payments (outflows)
Net secondary income represents
the difference between the secondary income receipts and the secondary income payments
The financial account measures
the flow of funds between countries that are due to (1) direct foreign investment (2) portfolio investment (3) other capital investment
The capital account measures
the flow of funds between one country and all other countries due to financial assets transferred across country borders (by people who move to a different country, or due to sales of patents and trademarks)
International Development Association (IDA)
extends loans at low interest rates to poor nations that cannot qualify for loans from the World Bank
intracompany trade
firms purchase products that are produced by their subsidiaries
a weak currency is ________ to improve a country's balance of trade when its international trade involves importers and exporters under the same ownership
less likely
Primary objective of the World Bank (IBRD)
make loans to countries geared toward reducing poverty and enhancing economic development
current account
measures the flow of funds between a specific country and all other countries due to purchases of goods and services or to income generated by assets
primary income (formerly called factor income)
mostly composed of income earned by MNCs on their DFI's and income earned by investors on their portfolio investments
Multilateral Investment Guarantee Agency (MIGA)
offers various forms of political risk insurance