HTM 2314 Exam 3

Case Against NAFTA

- Jobs could be lost and wage levels could decline in the U.S. and Canada - Mexican workers could emigrate north - Pollution could increase due to Mexico's more lax standards - Mexico would lose its sovereignty

Benefits of the Euro

-savings from having to handle one currency, rather than many -it is easier to compare prices across Europe, so firms are forced to be more competitive -gives a strong boost to the development of highly liquid pan-European capital market -increases the range of investment options open both to individuals and institutions

Nonconvertible Currency

A currency is not convertible when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency.

Hedging

A financial transaction in which one asset is held to offset the risk associated with another asset.

Customs Union

A group of countries committed to (1) removing all barriers to the free flow of goods and services between each other and (2) the pursuit of a common external trade policy.

Common Market

A group of countries committed to (1) removing all barriers to the free flow of goods, services, and factors of production between each other and (2) the pursuit of a common external trade policy.

Economic Union

A group of countries committed to (1) removing all barriers to the free flow of goods, services, and factors of production between each other, (2) the adoption of a common currency, (3) the harmonization of tax rates, and (4) the pursuit of a common external trade policy.

Free Trade Area

A group of countries committed to removing all barriers to the free flow of goods and services between each other but pursuing independent external trade policies.

Carry Trade

A kind of speculation that involves borrowing in one currency where interest rates are low and then using the proceeds to invest in another country where interest rates are high.

Bank Crisis

A loss of confidence in the banking system that leads to a run on banks, as individuals and companies withdraw their deposits.

Foreign Exchange Market

A market for converting the currency of one country into that of another country.

Efficient Market

A market where prices reflect all available information.

Moral Hazard

Arises when people behave recklessly because they know they will be saved if things go wrong.

Law of One Price

In competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in the same currency.

International Monetary System

Institutional arrangements countries adopt to govern exchange rates.

IMF (International Monetary Fund)

International institution set up to maintain order in the international monetary system.

World Bank

International institution set up to promote general economic development in the world's poorer nationals.

Currency Speculation

Involves short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates.

Currency Swap

Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

Court of Justice

Supreme appeals court for EU law.

Treaty of Rome

The 1957 treaty that established the European Community.

Foreign Exchange Risk

The risk that changes in exchange rates will hurt the profitability of a business deal.

Countertrade

The trade of goods and services for other goods and services.

Free Convertible Currency

A country's currency is freely convertible when the government of that country allows both residents and nonresidents to purchase unlimited amounts of foreign currency with the domestic currency.

EU (European Union)

An economic and political union of 28 countries (2015) that are located in Europe.

Levels of Economic Integration

1. Free Trade Area 2. Customs Union 3. Common Market 4. Economic Union 5. Political Union

Political Union

A central political apparatus coordinates economic, social, and foreign policy.

Floating Exchange Rate

A system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand.

Fixed Exchange Rate

A system under which the exchange rate for converting one currency into another is fixed.

The Jamaica Agreement

Agreement (1976) among IMF members to formalize the existing system of floating exchange rates as the new international monetary system

Regional Economic Integration

Agreements among countries in a geographic region to reduce and ultimately remove tariff and non-tariff barriers to the free flow of goods, services, and factors or productions between each other.

Exchange Rate

Amount spent/value of foreign currency

Capital Flight

Converting domestic currency into foreign currency.

Pegged Exchange Rate

Currency value is fixed relative to a reference currency.

Collapse of the Fixed Exchange Rate System

End of Bretton Woods system While the dollar had struggled throughout most of the 1960s within the parity established at Bretton Woods, this crisis marked the breakdown of thesystem. An attempt to revive thefixed exchange ratesfailed, and by March 1973 the major currencies began to float against each other.

Externally Convertible Currency

Limitations on the ability of residents to convert domestic currency, though nonresidents can convert their holdings of domestic currency into foreign currency.

Currency Boards

Means of controlling a country's currency

Montreal Treaty (Protocol)

Meeting in 1987 where a group of nations met in Canada and agreed to take steps to fight against Ozone Depletion-CFC's banned.

Bandwagon Effect

Movement of traders like a herd, all in the same direction and at the same time, in response to each other's perceived actions.

Fisher Effect

Nominal interest rates (i) in each country equal the required real rate of interest (r) and the expected rate of inflation over the period of time for which the funds are to be lent (l). That is i = r + I

Currency Crisis

Occurs when a speculative attack on the exchange value of currency results in a sharp depreciation in the value of the currency of forces authorities to expand large volumes of international currency reserves and sharply increase interest rates to defend the prevailing exchange.

Balance of Trade Equilibrium

Reached when the income a nation's residents earn from exports equals money paid for imports.

European Commission

Responsible for proposing EU legislation, implementing it, and monitoring compliance.

Purchasing Power Parity (PPP)

The amount of money needed in one country to purchase the same goods and services in another country

Spot Exchange Rate

The exchange rate at which a foreign exchange dealer will convert one day currency into another that particular day.

Translation Exposure

The extent to which income from individual transactions is affected by fluctuations in foreign exchange values.

Transaction Exposure

The extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values.

Gold Standard

The practice of pegging currencies to gold and guaranteeing convertibility.

Arbitrage

The purchase of securities in one market for immediate resale in another to profit from a price discrepancy.

Trade Creation

Trade created due to regional economic integration; occurs when high-cost domestic producers are replaced by low-cost foreign producers within a free trade area.

Trade Diversion

Trade diverted due to regional economic integration; occurs when a low-cost foreign suppliers outside a free trade area are replaced by higher-cost suppliers within a free trade area.