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