6. Economics of International Trade

Which of the following would most likely promote international trade? A. Increased tariffs B. Higher transportation costs C. Faster transport of products and services

C is correct. Improvements in transportation, including faster transport, help international trade. A is incorrect because tariffs are trade barriers; they are effectively taxes (duties) levied on imported goods and services. Increased trade barriers limit international trade. B is incorrect because higher transportation costs increase the cost of importing and exporting goods, which limits international trade.

A central bank's intervention aimed at stabilising the value of its currency within a certain range best describes a: A. fixed exchange rate system. B. pure floating exchange rate system. C. managed floating exchange rate system.

C is correct. Under a managed floating exchange rate system, a country's central bank intervenes to stabilise its currency within a certain range. To do so, it buys its domestic currency using its foreign currency reserves to strengthen its domestic currency or buys foreign currency using its domestic currency to weaken its domestic currency.

The most likely objective of an exporter using the forward market in currencies is to: A. reduce risk. B. increase profit. C. increase currency exposure.

A is correct. An exporter is most likely to use the forward market in currencies to reduce the currency risk associated with a future cash flow in a foreign currency. Using the forward market allows the exporter to gain predictability about future cash flows exposed to currency risk. Thus, the exporter can focus on its core business activities rather than worry about currency risk. B is incorrect because the exporter does not use the forward market in currencies to increase profits but to reduce currency risk. C is incorrect because by using the forward market, the exporter is trying to decrease, rather than increase, currency exposure.

Payments from a computer company in the United Kingdom to a company in India that operates a call centre to answer questions from the computer company's customers are most likely included in the United Kingdom's: A. current account. B. capital account. C. financial account.

A is correct. Answering questions at a call centre in India to service a computer company's customers in the United Kingdom is an export of service from India and an import of service for the United Kingdom. The flow of money for service is included in the current account in the balance of payments.

Country A can produce 1 electric turbine using 10 units of labour and 4 refrigerators using 10 units of labour. Country B can produce 1 electric turbine using 7 units of labour and 4 refrigerators using 12 units of labour. According to the theory of comparative advantage, Country A should produce: A. refrigerators and trade with Country B for electric turbines. B. electric turbines and trade with Country B for refrigerators. C. electric turbines and refrigerators and not trade with Country B.

A is correct. Country A has both an absolute and a comparative advantage in the production of refrigerators. It only takes 2.5 units of labour (10 units of labour divided by 4 refrigerators) to produce a refrigerator in Country A compared with 3.0 units of labour (12 units of labour divided by 4 refrigerators) in Country B. By contrast, Country B has both an absolute and a comparative advantage in the production of electric turbines. It only takes 7 units of labour to produce an electric turbine in Country B compared with 10 units of labour in Country A. Thus, according to the theory of comparative advantage, both countries will be better off if Country A makes refrigerators, Country B makes electric turbines, and they trade with each other.

The country of Australia classifies products departing from the port of Melbourne to other countries as: A. exports. B. imports. C. net exports.

A is correct. Exports are products and services that are produced within a country's borders and then transported to another country. B is incorrect because imports are products and services that are produced outside a country's borders and then brought into the country. C is incorrect because net exports represent the difference between exports and imports of products and services.

If a country has a current account surplus, it most likely has a capital and financial account: A. deficit. B. surplus. C. in balance.

A is correct. If a country has a current account surplus, it will have a capital and financial account deficit—the country is a net saver and ends up being a net lender to the rest of the world.

International trade most likely: A. helps keep prices down. B. reduces competition. C. reduces demand for domestic products and services.

A is correct. International trade promotes greater efficiency, which helps keep prices down. B and C are incorrect because international trade tends to increase competition and increase demand for domestic products and services.

A company imports goods and pays for them in a foreign currency. Which of the following exchange rate systems would eliminate currency risk for the company? A. Fixed B. Pure floating C. Managed floating

A is correct. The advantage of a fixed exchange rate system is that it eliminates currency risk (or foreign exchange risk), which is the risk associated with the fluctuation of foreign exchange rates. Under a fixed exchange rate system, the company will know with certainty the amount it will pay for the imported goods. B and C are incorrect because under pure or managed floating exchange rate systems, the company faces currency risk.

A currency dealer makes more money when the: bid-offer spread is wide. bid-offer spread is narrow. bid rate is equal to the offer rate. A. bid-offer spread is wide. B. bid-offer spread is narrow. C. bid rate is equal to the offer rate.

A is correct. The bid exchange rate (or bid rate) is the exchange rate at which the currency dealer will buy the foreign currency, and the offer exchange rate (or offer rate) is the exchange rate at which the currency dealer will sell the foreign currency. The currency dealer makes a profit by buying a unit of currency more cheaply than it sells it. Thus, the wider the bid-offer spread, the more money the currency dealer makes.

Countries with exports greater than imports most likely have a current account: A. deficit. B. surplus. C. in balance

B is correct. A country with exports greater than imports has positive net exports, or a trade surplus. The trade balance tends to dominate the current account balance, so this country most likely has a current account surplus.

Which of the following would most likely be reduced if India imposed a tariff on goods from Japan? A. India's exports B. India's imports C. Japan's imports

B is correct. A tariff tends to make imported goods more expensive. Goods imported from Japan would likely be more expensive, which would reduce India's imports (and Japan's exports).

A country's currency will most likely depreciate when the country experiences high: A. interest rates. B. government debt. C. economic growth.

B is correct. High government debt tends to lead to a depreciation of a country's currency. A and C are incorrect because high interest rates and high economic growth tend to lead to an appreciation of the country's currency.

Which of the following is most likely to cause a country's currency to appreciate? A. High inflation B. Political instability C. A current account surplus

C is correct. A current account surplus tends to lead to an appreciation of a country's currency. A and B are incorrect because high inflation and political instability tend to lead to a depreciation of a country's currency.

Which of the following is a foreign exchange transaction involving the forward market? A. A company writes a cheque in foreign currency. B. A tourist converts US$1,000 into euros at an airport. C. A company agrees to buy US$100,000 for ¥7,500,000 in 60 days.

C is correct. An agreement to convert one currency into another in the future is a foreign exchange transaction that involves the forward market. A and B are incorrect because writing a cheque in a foreign currency and converting US dollars into euros at the airport are foreign exchange transactions conducted in the spot market.