CH. 7, 9, 10 Smartbook
If a basket of goods costs $400 in the United States and 40,000 yen in Japan, PPP theory predicts that the dollar/yen exchange rate should be
$.01 per Japanese yen.
If the exchange rate is 1 British pound to $1.35, an American in London will need ______ to purchase a purse priced at 20 pounds.
$27
An American tourist in Japan is interested in buying a souvenir that costs 1800 yen. How much is this in dollars if the exchange rate is $1 to Y400.
$4.50
What are two reasons countries should remain focused on opening markets?
- Because of high tariff rates on imports of selected goods from developing nations into developed nations - Because average tariffs on services remain higher than on industrial goods
Which two groups are negatively impacted when an import tariff is enacted?
- Consumers - Foreign producers
What are two impediments to establishing economic integration?
- Costs of integration - Concerns over national sovereignty
PPP theory, according to research, seems to predict exchange rate movements best for countries in which two situations?
- Countries with high inflation rates - Countries with underdeveloped capital markets
What were two concerns about NAFTA's short-term effect on Mexico?
- Difficult economic restructuring - Increased unemployment
What were two expected results of the Single European Act?
- Lower the costs of doing business between member countries - Give EC firms additional opportunities for economies of scale
Six Caribbean-area countries established the CSME in 2006 to accomplish what two things?
- Lower trade barriers - Coordinate macroeconomic and monetary policy
What are the two main functions of the foreign exchange market?
- Provide insurance against foreign exchange risk - Currency conversion
Which industry is most affected by stipulations of USMCA?
Automobile
As noted in the text, the U.S. government used the threat of trade sanctions to try to convince the _____ government to enforce its intellectual property laws since massive copyright infringements in that country have cost U.S. companies millions of dollars in lost revenue.
Chinese
The ______ sets interest rates and monetary policy for the EU.
ECB
Which form of exposure do most companies give very little consideration to?
Economic
Which objective of the Andean Community has NOT yet been implemented?
Establishment of a common market
Which organization is playing an emerging role in competition policy within the EU and serves as a potential threat to companies wishing to do business there?
European Commission
Because of its economic and political influence, the _____ is considered the most significant trading block in Europe.
European Union
Which two groups represent major trading blocks in Europe
European Union
One of the reasons the European Union was originally formed was because
Europeans desired a lasting peace after enduring two devastating world wars.
True or false: Like transaction exposure, economic exposure is concerned with the effect of exchange rates changes on individual transactions, most of which are short-term situations.
False
True or false: Opponents of NAFTA felt that the program would result in a large exodus of jobs from Mexico.
False
What are three forms of economic integration?
Full political Union, Free Trade Area, Customs Union, Common Market, economic Union
______ is the acronym for the multilateral agreement established in 1947 aimed at the abolition of quotas, tariffs, and subsidies in order to liberalize trade.
GATT
What causes inflation to occur in a country?
Inflation occurs when the money supply in a country out paces the level of production of goods and services.
What effect did the Single European Act have on gross domestic product in the first 15 years?
It raised GDP between two and five percent
Which agreement was an attempt at regional economic integration in the United States?
North American Free Trade Agreement
Which economist was a key figure in the early free trade movement in Great Britain?
Ricardo
______ constrain a firm's ability to export its products by raising the price of the exported product, which could put the firm at a competitive disadvantage with domestic firms in that country.
Tariff barriers
______ permit a specific quantity of imported goods to enter the country under a reduced rate of duty during the quota period.
Tariff rate quotas
What is considered the simplest instrument of trade policy?
Tariffs
______ is considered the most successful attempt at regional economic integration.
The EU
What occurs when a company practices dumping?
The firm is unloading excess production in a foreign market.
What is a bound tariff rate?
The highest tariff rate that can be charged
In order to preserve protectionism, many countries are looking to which of these loopholes associated with antidumping?
The vague definition of dumping
What's the main reason a country would use export tariffs?
To ensure sufficient supply of a good within the country
______ is an economic term that refers to high-cost domestic producers being replaced by low-cost producers within the free trade area.
Trade creation
______ is an economic term defined as replacing lower-cost external suppliers with high-cost suppliers within the free trade area.
Trade diversion
Suppose a company agrees to buy products in 2021 with payment due in 2022. ______ exposure refers to money lost due to an adverse movement in exchange rates between the time the deal is signed and the time when the products are paid for.
Transaction
Following Brexit, Great Britain withdrew from the European Union in 2016.
True
True or false: Empirical evidence suggests that the International Fisher effect does NOT explain short-term exchange rate movements well.
True
Borrowing in a currency from a country with low interest rates and then investing in another currency where interest rates are high is called ______.
a carry trade
PPP theory predicts that changes in relative prices will result in
a change in exchange rates.
According to PPP theory, a country with a high inflation rate will see ______ in its currency exchange rate.
a depreciation
It is easiest to establish regional economic integration among
a limited number of adjacent countries.
The European Stability Mechanism was established by the EU to create _____.
a permanent bailout fund
A(n)______ tariff is a tax that is levied on a good on the basis of its value, not on the basis of its weight or quantity.
ad valorem
The Japanese government is used in the text as an example of how governments have effectively used ______ to limit imports of vehicle parts through bureaucratic rules.
administrative trade policies
A country might create safety standards for certain products that other nations can't comply with. As a result, these nations can't be involved with exporting parts for those goods and trade does not exist. These safety standards are a form of _____.
administrative trade policy
Expectations becoming a self-fulfilling prophecy when currency traders move in the same direction at the same time is called the ______ effect.
bandwagon
Residents of the hypothetical nation of Jarna feared that the country's economy was failing. They rushed to convert their domestic currency into U.S. dollars and investors in businesses in Jarna also converted their financial holdings. This mass conversion of currency is known as _____.
capital flight
Tyson is a trader and borrows money in Japanese yen (where the interest rate is 1 percent). He then invests the money in a Canadian bank, where the rate is 5 percent. This is an example of a(n) ______.
carry trade
To protect resources efficiently and ensure that each subunit adopts the correct mix of tactics and strategies, firms should aim for _____ control of exposure.
centralized
Economic exposure is concerned with the affect of ______ on a firm's international earning power.
changes in exchange rates
When high-cost domestic producers have been replaced by low-cost producers within a free trade zone, this is called trade __.
creation
A foreign exchange market is where one country's ______ is converted into that of another country.
currency
An investment made to profit from future currency movements is called
currency speculation.
The bandwagon effect occurs in investing when
currency traders move as a group in the same direction at the same time.
The value of a currency is determined by the ______ of that currency relative to other currencies.
demand and supply
It would be difficult to profit through arbitrage because the ______ for a currency would increase when dealers try to profit from exchange rate discrepancies leading to ______ of that currency, and the price differential would disappear.
demand; appreciation
In theory, if a country's price inflation is rising rapidly, it should expect to see its currency ______ against that of countries in which inflation rates are lower.
depreciate
Most foreign exchange transactions involve the _____ on one side.
dollar
Rank the vehicle currencies based on their level of use. Place the currency with the greatest use at the top of the list and each subsequently-used currency below that.
dollar, euro, yen, pound
There are presently 19 trade blocs in Africa, and many of these blocs have been _____ for years.
dormant
A(n) ______ union adds more economic integration to a common market by requiring a common currency, a common monetary and fiscal policy, and harmonization of tax rates.
economic
Company A is based in Europe and does a large amount of business in the United States. The company fears that the euro will gain in strength against the dollar, so it sets up a local production facility in the United States. This is a way to reduce ______ exposure.
economic
The argument for strategic trade policy suggests a(n) ______ justification for government intervention in trade.
economic
The rate at which the currency of one country can be converted into that of another country is called the ______ rate.
exchange
When a country restricts the export of a product, it is implementing a(n) _____.
export ban
If a country places a 20 percent tax on dairy products exported to other nations in order to limit exports and have sufficient supplies of dairy products for the home country, it is using a(n) ______.
export tariff
Tonya was surprised to learn that her country limited the amount of currency she could convert to U.S. dollars when she went to America to visit her cousin. This limit is an example of a policy of
external convertibility.
A(n) ______ convertible currency allows only nonresidents to convert it into a foreign currency without any limitations.
externally
GATT was put into place under the leadership of the U.S. government as a way to
foster free trade.
When the government does not use quotas, taxes, or other means to restrict what its citizens can buy from or sell to another country, it is called ______ trade.
free
The Association of Southeast Asian Nations was formed with the intent to foster _____.
free trade
Forward exchange rates are exchange rates that govern _____ transactions.
future
The chief financial officer of Linwell Corp. is concerned that since he can't predict changes in future exchange rates, there could be adverse consequences for the firm. One way the company can insure itself against this possibility is by engaging in _____.
hedging
During the campaign for leaving the EU, one of the recent claims said that leaving the EU would allow the British to take back control of _____.
immigration
American car makers promote the idea that Japan makes it difficult for others to compete in the industry because the country has
implemented vehicle parts standards that no other country uses.
The United States has placed a limit on the amount of tuna in airtight containers that can be imported into this country. This is an example of a(n) _____.
import quota
There has been a(n) _____ in regional economic integration in the past two decades.
increase
A swap deal is just like a conventional forward deal in that it
insures against foreign exchange risk.
A business is using hedging when it
insures itself against foreign exchange risk.
The WTO's TRIPS agreement attempts to protect _____ around the world.
intellectual property rights
When the euro-zone economies are NOT growing at the same rate, a common monetary policy linked to common currency may mean that ______ rates may not reflect any one individual country's needs.
interest
Export tariffs are _____ common than import tariffs.
less
Since 2010, Mercosur has made ______ progress toward achieving its goals.
little
A(n) ______ states that some percentage of a good must be produced domestically.
local content requirement
Economic exposure is concerned with the ______ - term effect of changes in exchange rates on future prices, sales, and costs.
long
Reciprocal trade agreements between two or more partners are called _____ trade agreements.
multilateral
The stalled Doha Round has caused many nations to use _____ to foster trade.
multilateral trade agreements
Based on the objectives of the Single European Act, the principle of _____ states that a product standard developed in one EC country should be accepted in another.
mutual recognition
Countertrade is a logical choice when a country's currency is
nonconvertible.
A foreign nation is concerned that all jobs in the computer manufacturing industry will be lost to another country. The government decides to step in and prevent this from happening and implements tariffs on certain imports. The leader is praised for this action and reminds voters of this during the next election. In this situation, government intervention is based on a _____ argument.
political
A(n) ______ union consists of a central governing body that regulates the economic, social, and foreign policy of member states.
political
An import _____ is a type of trade restriction that sets a physical limit on the quantity of a product that can be imported into the country in a set period of time.
quota
The Single European Act abolished restrictions on cabotage, which is the
right of foreign truckers to pick up and deliver goods within another member state's borders.
The adverse consequences of unpredictable changes in exchange rates are called foreign exchange ______.
risk
The euro is the ______-most traded currency in the world.
second
Economic theories suggest that free trade allows countries to
specialize in producing goods and service that they are most efficient at producing.
A tax on imports that is designated as a fixed monetary amount per unit of import is called a(n) ______ tariff.
specific
If a country assesses a fixed charge of $5 per unit of rice that's imported, it is using a(n) ______ tariff
specific
The Fisher effect equates the nominal interest rate as
the required real interest rate + expected rate of inflation.
At the simplest of levels, exchange rates are determined by _____.
the supply and demand of currencies
Capital flight is most likely to occur when
the value of domestic currency is rapidly depreciating.
Krugman argues that if each country seeks to follow a strategic trade policy to protect its interests, this may lead to a ______.
trade war
Country A subsidizes oil development and Country B is losing any competitive advantage because of it. Krugman would agree that Country B hopes to minimize subsidies to prevent a
trade war.
Unilateral lowering of trade barriers has not occurred mostly due to a lack of _____ among governments.
trust
Protecting intellectual property, through patents, trademarks, and copyrights, fosters innovation and can lead to what two results?
- Economic growth - Rising living standards
Under the Andean Pact, which two members received special concessions based on the size of these countries?
- Ecuador - Bolivia
Which two Mexico-based industries were granted special protection from foreign direct investment under NAFTA?
- Railway - Energy
Before the United Kingdom decided to exit the EU, how many total countries were involved by 2014?
28
According to Ross Perot, ratification of NAFTA would result in the loss of about ______ million jobs from the United States and Canada, as firms from these countries sought to capitalize on lower wages in Mexico.
5.9
The WTO reports that approximately _____ of all antidumping actions reported involve the basic metals, chemicals, plastics, and electrical equipment industries.
70 percent
Free trade agreements account for nearly ____ of regional economic agreements. Multiple choice question.
90 percent
Which NAFTA country experienced a welfare loss since the program's inception?
Canada
Which type of control of exposure is MOST effective at protecting resources efficiently and ensuring that each subunit adopts the correct mix of tactics and strategies?
Centralized
______ agreements are barter-like agreements used by companies in countries whose currency is nonconvertible.
Countertrade
In the mid-1800s, ______ was the first nation to officially follow free trade.
Great Britain
What three countries made up NAFTA?
Mexico, Canada, United States
True or False: It is the goal of the WTO to bring tariff rates down to zero.
True
The ______ is the organization that encompasses GATT, GATS, and TRIPS.
WTO
When a country experiences hyperinflation, money ______ value very rapidly.
loses
Countries base the decision for intervention on ______ when safeguarding aerospace and semiconductor industries.
protecting national security
By threatening ______ trade sanctions, one country can convince another country to open its markets.
punitive
What are three advantages of regional market integration that can result in cost savings to a business?
- Free movement of goods across borders - Simplified tax regimes - Harmonized product standards
Which two groups are positively impacted when an import tariff is enacted?
- Government - Domestic producers
What are the two components of strategic trade policy?
- Governments should intervene to assist firms in overcoming barriers to entry created by foreign firms due to first-mover advantages. - Governments should subsidize promising domestic firms in emerging industries.
The failure to find a link between which two conditions has been referred to as the purchasing power parity puzzle?
- Inflation rates - Exchange rates
Which two political factors support the idea for economic integration of nations through trade?
- Interdependency among nations decreases the potential for violent conflict. - It can enhance the political weight of those countries in the world
What are two drawbacks of government intervention in the process of free trade?
- It invites retaliation and trade wars. - It's unlikely to be well-executed
What are the two most notable features of the foreign exchange market?
- It is active 24-hours a day. - The various trading centers are all integrated.
What are the four issues currently at the forefront of the WTO agenda?
- Protectionism in agriculture - Lack of intellectual property protection - High tariffs on nonagricultural goods and services - Antidumping policies
What are three trade barriers that can constrain a firm's ability to disperse productive activities?
- Quotas - Tariffs - Local content regulations
What are three moderately decent predictors of long-term changes in exchange rates?
- Relative monetary growth - Nominal interest rate differentials - Relative inflation rates
What are two requirements countries must take to qualify for EU membership?
- Respect human rights - Establish stable democratic government
What are two potential costs Britain might face now that its exit from the EU is complete?
- Some multinationals may move operations to other EU countries to access the single market. - There might be a decrease in the rate of economic growth.
Which two actions can governments use to intervene in business with the intent of helping firms establish a competitive advantage?
- Subsidies - Antidumping actions
What are two characteristics of countervailing duties?
- They are a special tariff. - They can be substantial and stay in place for five years.
In what two ways can a government use intervention in trade as a foreign policy instrument?
- To grant preferential trading terms to countries it wants to build relations with - To pressure or punish "rogue states"
International businesses use foreign exchange markets for what three reasons?
- To invest spare cash for the short term in money markets - To convert foreign currencies it receives from transactions into its own currency - To pay a foreign company for its products or services in its country's currency
In _____ Britain withdrew from the European Union following _____.
2016, Brexit
As of _____, all members of WTO were participating in one or more regional trade agreements.
2020
Approximately how many regional trade agreements are currently in force?
303
What is hyperinflation?
An explosive and seemingly uncontrollable price inflation in which money loses value very rapidly
In 1969, which countries created the Andean Pact that was modeled on the EU, but was not as successful in achieving regional groups objectives?
Bolivia, Chile, Colombia, Ecuador, Peru
Mercosur is a free trade pact started in 1988 by which two South American economies?
Brazil Argentina
In 2004, the U.S. and six Central American countries formed a free trade agreement called
CAFTA.
Studies of NAFTA's effects show that ______ are the top three trading partners of the United States, which suggests that NAFTA has had some positive effects.
Canada, China, and Mexico
_____ typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.
Currency speculation
What is the key way a company can reduce economic exposure?
Distribute production facilities and assets to various locations
The weakening of which currency helped raise the value of the euro beginning in 2002?
Dollar
In 1975, Congress restricted the export of U.S. crude oil in response to the actions taken by OPEC. This restriction is an example of which trade policy?
Export ban
Which function did the creators of the WTO hope it would perform?
Facilitate future trade deals
True or False: Government policies related to international trade have little effect on the success of a business.
False
True or False: The introduction of the euro created greater competitive pressure in the European automobile industry which has resulted in higher prices for the consumer.
False
True or false: Government intervention in the foreign exchange markets does NOT affect the ability of PPP in predicting exchange rate movements.
False
True or false: Krugman advocates that it is logical to expect the U.S. government to ignore special-interest politics when forming policy.
False
True or false: The Single European Act had little to no impact on the EU economy.
False
True or False: Critics say that the EU is an optimal currency area which is why it is difficult to adopt a single currency.
False - The EU is not considered an optimal currency area.
Able Appliances needs to convert the pounds it earns from selling products in Great Britain to dollars. What mechanism allows the company to make this conversion?
Foreign exchange market
______ trade is the economic policy of not discriminating against exports to or imports from foreign countries.
Free
What is the least integrated form of economic integration?
Free trade area
As the text notes, support for the euro was compromised when _____ was put in the position of underwriting loans to bail out the governments of Greece, Portugal, and Ireland.
Germany
The impending British exit from the EU is seen by other smaller member nations as a problem because Britain acts as a counterweight to the economic power of _____.
Germany
Which country was always considered a major holdout in the EU because it did NOT agree to accept the euro as a common currency?
Great Britain
In 2010, the IMF agreed to bailout _____ because of fears the country might default on its sovereign debt.
Greece
Country A wants to lower trade barriers with its neighbor, Country B. While both countries support free trade, they are both reluctant to lower their barriers because they are not sure the other country will reciprocate. What obstacle is preventing the advancement of free trade between these countries?
Lack of trust
The most important foreign exchange trading center is ______ with 43 percent of the activity.
London
The five most important foreign exchange trading centers in terms of level of activity are
London, New York, Zurich, Tokyo, and Hong Kong.
What committed EU members to adopt a common currency by January 1, 1999?
Maastricht Treaty
The trade pact developed in 1988, initially between Argentina and Brazil, is called ______.
Mercosur
Which country risked the most from participating in NAFTA because it does NOT have access to the capital resources and highly-skilled workforce found in the other countries?
Mexico
To signify the importance of the ______, the European Community decided to change its name to the European Union once the act took effect.
Single European Act
Many Western countries imposed trade sanctions against ______ during the 1980s and 1990s to encourage the country to improve human rights policies by dropping its apartheid policies.
South Africa
________ exposure is the risk, faced by companies involved in international trade, that currency exchange rates will change after the companies have already entered into financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for firms.
Transaction
True or False: If we could understand how exchange rates are determined, we might be able to identify exchange rate movements.
True
True or False: The USMCA prohibits duties on music and ebooks.
True
True or False: The United States has imposed trade sanctions on other countries as a way to protect and promote human rights in those nations.
True
True or False: The foreign exchange market is a 24-hour a day operation that essentially never sleeps.
True
True or false: Government-imposed import quotas can limit a company's ability to serve a country from a foreign location.
True
True or false: Many of the newer EU nations that had committed to adopting the euro have now put their plans on hold.
True
True or false: One political reason for economic integration is the potential to minimize violent conflict between nations.
True
True or false: Quota rent refers to the extra profit that producers make when supply is artificially limited by an import quota.
True
True or false: Spot against forward is a common type of currency swap.
True
True or false: The fact that countries are using the WTO represents an important vote of confidence in the WTO's dispute resolution procedures.
True
True or false: Export tariffs are sometimes levied to raise revenue for the government.
True - Two objectives of export tariffs: raise revenue for the government and reduce exports from a sector.
Proponents of NAFTA believed that it would result in
U.S. and Canadian consumers benefiting from lower prices.
Japan imposed a limit on auto exports to the United States as a result of pressure by the U.S. government. What instrument of trade policy does this represent?
Voluntary export restraint
Which statement best describes the response by EU members to the introduction of the euro as a common currency?
While many members accepted the euro, several long-term members did not.
The European Commission, to maintain the level of competition in the EU, is increasingly willing to impose conditions on businesses before allowing
a merger or acquisition.
When an optimal currency area exists, similar underlying structures of economic activity make it more feasible to adopt _____.
a single currency
The Maastricht Treaty committed EU members to
adopt a common currency by January 1, 1999.
A restriction put on new members to the EU that entered in 2004 was that these new members could not ______ for several years.
adopt the euro
Governments develop ______ policies to punish foreign companies that sell their products at below fair market value.
antidumping
The WTO does allow ______ to be imposed on foreign goods sold below their cost of production when domestic producers are being hurt.
antidumping duties
If the demand for the yen outstrips its availability and if the supply of the dollar outweighs the demand, the yen will ______ against the dollar.
appreciate
Which industries are frequently targeted by antidumping actions?
basic metals, chemicals, plastics, machinery, electrical equipment
According to the Fisher effect, if the real interest rate in country #1 is 8 percent and it is 5 percent in country #2, an investor would take advantage of this by
borrowing from #2 and investing in #1.
The euro was established because a _____ currency would make it easier for Europeans to compare prices.
common
The members of Mercosur agreed on a _____ in 2010 in an attempt to avoid paying tariffs more than once.
common customs code
A(n) ______ allows the free movement of factors of productions among member countries, eliminates trade barriers among member countries, and has a common external trade policy.
common market
With the increase in single regional markets, managers must continually monitor for threats, including that the business environment within each grouping has become more
competitive.
Jameson Electric Corp. would use the foreign exchange market when it needs to
convert currencies
An argument against regional free trade agreements contends that the benefits have been oversold, but ______ have often been ignored.
costs
When a country's currency is nonconvertible, a company may engage in ______, where goods and services will be traded for other goods and services.
countertrade
Countries can use ______ duties on an offending import to offset dumping.
countervailing
Feldman Technology Group has international holdings in India. The company often needs to fund large orders for parts in India with the knowledge that an Indian importer will soon buy completed product from Feldman. These transactions require large sums of capital in both dollars and rupee and as a way to move from one currency to another without incurring foreign exchange risk, the company should use a(n) _____.
currency swap
In moving toward economic and political integration, a(n) ______ union removes trade barriers among member nations and establishes a common trade policy for nonmembers.
customs
Currently, the Andean Community functions as a
customs union
A lead strategy occurs when a firm attempts to collect foreign currency receivables early when a currency is expected to ______ and pay foreign currency payables before they are due when a currency is expected to ______.
depreciate; appreciate
In the foreign exchange market, it is _____ to profit through arbitrage.
difficult
Since the WTO has a limited scope, the risk remains that regional economic integration will result in trade __.
diversion
When lower-cost external suppliers are replaced by higher-cost suppliers within a free trade zone, this is called trade __.
diversion
When manufacturers export a product to another country at a price either below the price charged in its home market or below its cost of production, it is called ______.
dumping
The extent to which a firm's future international earning power will be affected by exchange rate changes is called ______ exposure.
economic
The goal of NAFTA was to
eliminate tariffs on trade between the nations.
The WTO is more successful than GATT because the WTO has ______ that make it more effective.
enforcement mechanisms
A tactic that reduces translation and economic exposure is
entering into forward exchange rate contracts.
The extent to which income from individual transactions is affected by fluctuations in foreign exchange values is known as transaction ______.
exposure
A policy of ______ convertibility is in place in some countries and places restrictions on residents' ability to convert domestic currency into a foreign currency.
external
A lack of barriers to the trade of goods and services among member countries is found in a(n)
free trade area.
Some country's governments do not put any limits on the purchase of foreign currency for residents and nonresidents. These country's have a _____ currency.
freely convertible
When a country allows both residents and nonresidents to purchase unlimited amounts of a foreign currency, the country's currency is
freely convertible.
The WTO will work hard to reduce tariffs toward zero because this will lead to substantial ______ in trade.
gains
The establishment of the euro is seen as a surprising political accomplishment because it required participating governments to
give up control over monetary policy.
During the 1980s and early 1990s, protectionism around the world _____.
increased
Government intervention is said to be self-defeating because it tends to protect _____.
inefficient firms
The ______ argument for trade intervention states that developing countries need to support new industries until they are strong enough to compete globally.
infant industry
The oldest argument for government intervention in trade in which developing nations must protect their domestic industries until they are ready to compete globally is the ______ argument.
infant industry
In the context of the Fisher Effect, different interest rates in Argentina and Italy reflect differing expectations about ______ between those countries.
inflation rates
The Fisher effect predicts that there is a strong relationship between ______ and interest rates.
inflation rates
The European Union's support for the Common Agricultural Policy illustrates why strategic trade policy is problematic. In this instance, the government was influenced by ______ to the detriment of consumers.
interest groups
One main reason why the IFE is NOT good at explaining short-term exchange rate movements is the impact of ______ in determining the expectations of market traders.
investor psychology
When governments intervene in foreign trade, they often claim they are protecting ______ from unfair foreign competition.
jobs
A ______ strategy is when a firm attempts to delay the collection of foreign currency receivables when a currency is expected to appreciate and delay foreign currency payables when a currency is expected to depreciate.
lag
A ______ strategy is when a firm attempts to collect foreign currency receivables early when a currency is expected to depreciate and pay foreign currency payables before they are due when a currency is expected to appreciate.
lead
In order to win a contract in Mexico, QVB Auto Manufacturing must make 65 percent of the component parts of their vehicles in Mexico. This is an example of a(n)
local content requirement.
According to research, PPP theory is a relatively good predictor of ______ exchange rate movements, but is not as good a predictor of ______ movements.
long-run; short-run
The creation of a single market creates _____ costs of doing business.
lower
It was acknowledged that one potential effect of NAFTA was that member countries would take advantage of ______ by moving production efforts to Mexico.
lower labor costs
A government would impose administrative trade policies in order to
make it difficult for imports to enter a country.
The text suggests that as a way to take control of exchange rate risk, firms should produce _____ foreign exchange reports.
monthly
Governments occasionally protect certain industries, like defense-related industries, for ______ reasons.
national security
The main reason Great Britain did NOT agree to accept the euro as a common currency is because doing so would require Great Britain to relinquish control of the monetary policy, and as a result, ______ would be diminished.
national sovereignty
When neither residents nor nonresidents are allowed to convert a currency to a foreign currency, the currency is considered
nonconvertible.
Regional trade blocs can possibly occur in markets that are protected from outside competition because ______ barriers are in place, and the WTO does not cover some of these types of barriers.
nontariff
The law of ______ is the economic theory that the price of a given security, asset, or commodity must have the same price when exchange rates are taken into consideration.
one price
Today, many nations are _____ new trade policies associated with the WTO.
opposed to
The international Fisher effect states that for any two countries, the spot exchange rate should change in an equal amount, in the _____ direction to the difference in nominal interest rates between the two countries.
opposite
African countries have attempted to form a continental trade agreement, but have been stymied by significant ______ turmoil.
political
The United States is considered a close example of a _____ because 50 independent states are effectively combined into a single nation.
political union
Based on economic theories, free trade is viewed as a ______ as all participating nations stand to gain.
positive-sum game
If the spot exchange rate is $1 to 110 yen and the 90-day forward rate is $1 to 100 yen, then the yen is selling at a ______ to the dollar in the 90-day forward market.
premium
When the growth in a country's money supply is faster than the growth in its output of goods, ______ tends to increase.
price inflation
When analyzing the economic effects of import tariffs, it has been concluded that tariffs are considered anti-consumer and pro-_____.
producer
Sometimes governments pay subsidies to help companies survive challenging economic climates. In effect, these companies have
received an unfair competitive advantage.
The purchasing power parity puzzle is the name given to the failure to find a strong link between exchange rate movements and
relative inflation rates.
The economic benefit gained when the supply is artificially restricted by an import quota is called quota ______.
rent
During 2007 and 2008, many investors were taking money out of the United States by selling U.S. stocks, and purchasing euro-denominated assets; therefore, the value of the euro _____.
rose
The impact of psychological factors and investor expectations makes it difficult for exchange rate theories to predict ______ changes in exchange rates.
short-term
If we accept that the tenets of strategic trade policy are correct, then the government _____ intervene in international trade.
should
The Trump administration negotiated a successor agreement to NAFTA because it believed that NAFTA had caused
significant job losses in the United States.
Currency ______ involves buying, selling, and holding currencies in order to make a profit from favorable fluctuations in exchange rates.
speculation
A(n) ______ exchange rate is the price to exchange one currency for another for immediate delivery.
spot
According to strategic trade policy, governments should use ______ to support development work aimed at commercializing target technologies.
subsidies
A(n) ______ is a payment by the government to a domestic producer to help lower production costs so they are better able to compete with foreign imports.
subsidy
The nationwide company, Nightingale Health Systems, received a tax break from the government when it was faltering and ready to declare bankruptcy. This subsidy helped the company with production costs and allowed it to have a stronger presence in the competitive health industry. This tax break is a type of _____.
subsidy
A tax on goods coming into or leaving a country is called a(n) ______.
tariff
Taxes placed on imports to protect domestic producers from foreign competition and to produce revenue for the government are called
tariffs
What are the 7 main instruments of trade policy?
tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, and antidumping duties
A key impediment to economic integration is that although a majority of citizens may benefit from free trade, certain groups may lose their jobs to low-cost and low-skilled labor in other countries as was the experience of some U.S. and Canadian workers in the ______ industry following the establishment of NAFTA.
textile
The Economist magazine version of the PPP uses ______ as a proxy for a "basket of goods."
the Big Mac
CARICOM was a customs union created in 1991 among countries in _____.
the Caribbean
Costa Rica, El Salvador, Guatemala, and other countries formed a common market in the early 1960s that was called
the Central American Common Market.
The CAFTA was formed to lower trade barriers between ______.
the United States and Central America
According to _____, identical products sold in different countries must sell for the same price in competitive markets when their price is expressed in terms of the same currency.
the law of one price
One of the greatest benefits of local content regulations for a producer is that _____.
they limit foreign competition
Paul Krugman would agree that while strategic trade policy seems appealing in theory, in reality, strategic trade policy is _____.
unworkable
A self-imposed trade restriction on the quantity of a good that the exporting country is allowed to export to another country is called a(n)
voluntary export restraint.
The collapse of the Central American Common Market was a result of ______.
war between Honduras and El Salvador
When a government intervenes in cross-border trade by implementing a trade barrier, it ______ the link between relative price changes and changes in exchange rates predicted by PPP theory.
weakens
What are three reasons that caused the global trading system erected under GATT to be strained during the 1980s and early 1990s?
- The persistent trade deficit in the United States - The economic success of Japan - Countries found ways to get around GATT regulations
Which two outcomes typically occur with the implementation of local content regulations?
- The restrictions on imports raise the prices of imported components, which lead to higher prices for consumers. - Local content regulations provide protection for a domestic producer.
What are two potential threats to firms outside of a trading block such as the EU?
- Those firms would face likely long-term improvement in the competitive position of firms within the market - Those firms might be shut out of the market by a "trade fortress"
What are two reasons for a customs union being put in place?
- To eliminate trade barriers between member countries - To establish a common external trade policy
What are the two reasons that export tariffs are levied?
- To reduce exports from an industry sector, often for political reasons - To raise revenue for the government
Which three countries were included in the NAFTA agreement when it went into place in 1994?
- United States - Mexico - Canada
The two restrictions put on new members to the EU that joined in 2004 were:
- free movement of labor among the new and existing members was prohibited for several years. - they could not adopt the euro for several years
Two strategies that can be used to reduce translation and transaction exposure are:
- lag strategy. - lead strategy.
Most economic theories of exchange rate movements agree that three factors have an impact on future exchange rate movements in a country's currency. These factors include:
- market psychology. - the country's price inflation. - the country's interest rate.
GATT negotiations continue to deal with additional issues such as
- services. - intellectual property. - agricultural subsidies.
While there were a total of 196 cases handled by GATT, records show that between 1995 and 2019, the WTO successfully handled more than _____ trade disputes.
500
True or False: While the NAFTA agreement provided many protections, it failed to include protections for intellectual property.
False
True or false: The greater the number of countries involved in economic integration, the easier it is to reach an agreement among the countries.
False - When there are many countries involved in economic integration, there are more perspectives to consider and it is harder to reach an agreement.
True or false: More companies pay greater attention to reducing their translation exposure than economic exposure when managing foreign exchange risk.
True
True or false: To limit imports over the set quota, tariff rate quotas are common in agriculture
True
According to the strategic trade policy argument, a government can help raise national income if it can somehow ensure that the firms that gain a first-mover advantage in an industry are_____.
domestic firms
Regional _____ integration creates agreements among countries in a specific geographic area in order to reduce and eventually remove tariff and nontariff barriers to the free flow of goods.
economic
A consequence of subsidies paid to companies during difficult economic times—for example, the Japanese farm subsidies—is
giving recipients an unfair competitive advantage.
When a country's money supply grows faster than the output of goods and services, this causes
inflation.
According to the international Fisher effect, there is a relationship between spot exchange rates and _____ between countries.
interest rates
One way to deal with euro economies that are NOT growing in unison is to engage in fiscal transfers, which involves taking money from ______ and giving it to areas that are not as successful.
prosperous regions
The main objective of antidumping policies is to
protect domestic producers from unfair foreign competition.
The TRIPS agreement is based on the notion that inadequate protection of intellectual property ______ the incentive for innovation.
reduces
The adverse consequences of unpredictable changes in exchange rates are called foreign _____ exchange .
risks
GATT rules initially only dealt with trade in manufactured goods and commodities. With the increase in trade in the ______ sector, the Uruguay Round sought to establish agreements to cover this area.
service
Some economists argue that regional free trade agreements will provide global benefits only if
trade creation exceeds trade diversion.
Suppose a U.S. company agrees to buy products worth 1 million euros. At the time of the agreement, the dollar/euro exchange rate was $1 = €1.10, but at the time of payment, the exchange rate is $1 = €0.80. The additional money owed by the U.S. company due the adverse movement in exchange rates between the time of the deal and the time when payment is due is called ______ exposure.
transaction
The trade sanctions on Iraq that were imposed in 1991 after the Gulf War are an example of
using trade policy to punish rogue states.
What two political factors led to the development of the European Union?
- The devastation of western Europe during the two world wars. - Europe's desire to hold its own on the world's political and economic stage.
Which three long-term members of the EU were NOT receptive to the euro as a common currency as set forth by the Maastricht Treaty?
- Sweden - Denmark - Great Britain
According to the text, what are three economic effects of import tariffs?
- Tariffs are anti-consumer. - Tariffs reduce the overall efficiency of the world economy. - Tariffs are generally pro-producer
What are two characteristics of the European Central Bank?
- It is meant to be free from political pressure. - It was established to ensure price stability.
What are two potential problems with an economic union?
- It requires a coordinating bureaucracy. - There is a surrender of some national sovereignty.
In the campaign to leave the EU, certain groups voted to stay and others voted to leave. What were two characteristics of those who wanted to leave?
- Less educated - Older
Firms should only rely on what four things to predict exchange rate movements?
- Monthly foreign exchange exposure reports - Transaction and translation exposure - Forecasting future exchange rates - Establishing good reporting systems
What are two ways trade barriers hamper a firm's productive activities?
- Quotas limit the ability to serve a country from outside locales. - They raise the cost of exporting products.
Which level of economic integration is present in an agreement that has no barriers to trade among member countries and allows factors of production (such as labor) to move freely among the members?
A common market
Company ABC in Scotland exports a pound of cheese to the United States for $100. The United States places a 9 percent tax on the cheese as a proportion of its value. What type of tariff is this?
Ad valorem
Which nations are a part of ASEAN?
Brunei, Cambodia, Indonesia, Laos, Myanmar, Vietnam, Myanmar, Philippines, Singapore
What is the transaction called where two parties agree to exchange currency at some specific date in the future?
Forward exchange
_____ exposure refers to the present measurement of past events using currency exchange rate changes on a company's financial statements.
Translation
A lag strategy occurs when a firm attempts to delay the collection of foreign currency receivables when a currency is expected to ______ and delay foreign currency payables when a currency is expected to ______.
appreciate; depreciate
Buying a currency low and immediately selling it high to make a profit from the price discrepancy is called _____.
arbitrage
The New York yen/dollar exchange rate was Y125=$1. Through ______, a dealer can make a profit on this currency transaction by buying it low and selling it high.
arbitrage
When General Electric won a contract for a $150 million generator project in Romania, it agreed to take payment in the form of Romanian goods that could be sold for $150 million on international markets. This is an example of
countertrade.
