MGT302: Chapter 9-13! Exam 2!
The European Union is a product of what two political factors?
(1) The effects of two world wars on western Europe and the desire for lasting peace. (2) Europe's desire to be seen as a major player in world politics and economics.
Freely 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.
Nonconvertible currency
A currency is not convertible when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency.
Custom 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.
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.
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.
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 currency where interest rates are high.
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.
Mercosur is a free trade pact started in 1988 by which two South American countries?
Brazil and Argentina.
In the political structure of the European Union, the _______ consists of one representative from the government of each member state, but the membership varies depending on the topic being discussed.
European Council.
The Andean Community, while not as successful at meeting the goals it set, was based on the model established by the ____________ _________.
European Union.
Nora is traveling to the Cayman Islands where the Cayman Island dollar is equal to 1.22 US dollars. The money value is an example of a(n) __________ _______.
Exchange rate.
The main goal of regional economic integration is to remove barriers to the free flow of ________.
Factors of production, services, and goods.
True or False: The European Union is considered an optimal currency area.
False.
International Fisher effect (IFE)
For any two countries, the spot enhance rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between countries.
Kendra is traveling to Europe next year and needs to convert $250 into euro for her trip. She plans to go to the bank to complete the transaction. The bank will base the transaction on the currency exchange rate found on the ________ ________ market.
Foreign exchange.
Association of Southeast Asian Nations (ASEAN)
Formed in 1967, an attempt to establish a free trade area between Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Vietnam, and Thailand.
North American Free Trade Agreement (NAFTA)
Free trade area between Canada, Mexico, and the United States.
List the various levels of economic integration starting with least integrated to most integrated.
Free trade area, customs union, common market, economic union, political union.
Lauren's company is eager to trade with Canada because there are no quotas or subsidies on the product they want to sell there. This describes a _______ ________ area.
Free trade.
The political reasons for regional economic integration have been an important factor in several attempts to establish ________ trade areas.
Free.
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.
Currency speculation
Involves short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rate.
Currency swap
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.
One reason given to explain the downfall of the Andean Pact points to the political ideology of the countries involved. This political ideology centered on the _______ end of the political spectrum.
Socialist.
Court of Justice
Supreme appeals court for EU law.
Critics of regional trade blocs are concerned that each bloc will protect its market from outside competition by imposing high ___________.
Tariffs.
Treaty of Rome
The 1957 treaty that established the European Community.
What are the two major trading blocs in Europe?
The European Union and the European Free Trade Association (EFTA).
Foreign exchange risk
The risk that changes in exchange rates will hurt the profitability of a business deal.
Caribbean Single Market and Economy (CSME)
The six CARICOM members that agreed to lower trade barriers and harmonize macroeconomic and monetary policies.
Countertrade
The trade of goods and services for other goods and services.
Forward exchange
When two parties agree to exchange currency and execute a deal at some specific date in the future.
Seventeen of the twenty-seven member states of the European Union that currently use the euro make up the euro ______.
Zone. (textbook says 19 of the 28 member states).
Exchange rate
The rate at which one currency in converted into another.
What lead to the collapse of the Central American Common Market in 1969?
A civil war between Honduras and El Salvador.
CARICOM
An association of English-speaking Caribbean states that are attempting to establish a custom union.
European Union (EU)
An economic and political union of 28 countries (2015) that are located in Europe.
European Commission
Responsible for proposing EU legislation, implementing it, and monitoring compliance.
The Treaty of ________ established the European Community in 1957.
Rome.
What are the responsibilities of the European Central Bank (ECB)?
Sets interest rates and sets monetary policy across the euro zone.
Andean Community
A 1969 agreement between Bolivia, Chile, Ecuador, Colombia, and Peru to establish a customs union.
Treaty of Lisbon
A European Union-sanctioned treaty that will allow the European Parliament to become the co-equal legislator for almost all European laws.
Central American Common Market
A trade pact among Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua, which began in the early 1960s but collapsed in 1969 due to war.
While the EU is seen as an economic union, it is considered imperfect because not all member of the EU have _________.
Adopted the same currency.
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 of production between each other.
Studies of NAFTA's effect show that ________ are the top three trading partners of the US, which suggests that NAFTA has had some positive effects.
Canada, China & Mexico.
Six Caribbean-area countries established the _________ in 2005, which was modeled after the European Union to lower trade barriers and coordinate macroeconomic and monetary policy.
Caribbean Single Market and Economy (CSME).
In 1995, which Latin American country was considered for possibly entry into NAFTA?
Chile.
Lead strategy
Collecting foreign currency receivables early when a foreign currency is expected to depreciate, and paying foreign currency payables before they are due when a currency is expected to appreciate.
The European Parliament must approve all members of the European _______ before this body can begin its work.
Commission.
Along with the possibility of lost jobs, what is another impediment to establishing economic integration?
Concerns over national sovereignty.
Capital flight
Converting domestic currency into a foreign currency.
The ________ is made up of one judge from each country and its the appeals court for EU law.
Court of Justice.
Currently, the Andean Community functions as a ________.
Customs union.
One of the first steps to economic and political integration is a(n) _________ union, where trade barriers among member nations are removed and a common trade policy is adopted.
Customs.
Lag strategy
Delaying the collection of foreign currency receivables if that currency is expected to appreciate, and delaying payables if that currency is expected to depreciate.
The weakening of which currency helped raise the value of the euro beginning in 2001?
Dollar.
The _______ (use acronym) concentrated in the trade of industrial goods and was made up of European countries that did not initially join the European Community.
EFTA. (European Free Trade Association).
A political union coordinates _________.
Economic policy, foreign policy, and social policy of the member states.
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.
The _______ theories of international trade predict that free trade allows countries to specialize in producing goods and service that they are most efficient at producing, and economic integration encourages this specialization.
Economic.
European Parliament
Elected EU body that provides consultation on issues proposed by the European Commission.
The opponents of NAFTA claimed that there would be a large depletion of _______ from the US and Canada as firms from these countries sought to increase profits from lower wages in Mexico.
Jobs.
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.
NAFTA is a regional economic alliance made up of the United States, Canada, and ________.
Mexico.
One potential effect of NAFTA is the member countries would take advantage of lower labor costs by moving production efforts to _______.
Mexico.
Proponents of NAFTA argued many would benefit from the movement of low-skilled, labor intensive manufacturing industries to _________, which might have a competitive advantage in this area.
Mexico.
The country that risked the most from participating in NAFTA was ______ because this country does not have access to the capital resources, highly skilled workforce, and greater technological sophistication compared to the other two countries.
Mexico.
Bandwagon effect
Movement of traders like aa herd, all in the same direction and at the same time, in response to each other's perceived actions.
The main reason Great Britain has not agreed 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.
What are the characteristics of a common market?
No barriers to trade among member countries (includes a common external trade policy, and allows factors of production to move freely among members). Free movement of labor and capital (because there is no restrictions on immigration, emigration, or cross-border flows of capital among member countries).
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 lend (l). That is, i=r+l.
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 barrier.
Nontariff.
What represents an attempt a regional economic integration in the United States?
North American Free Trade Agreement (NAFTA).
Inefficient market
One in which prices do not reflect all available information.
Mercosur
Pact between Argentina, Brazil, Paraguay, and Uruguay to establish a free trade area.
Contrary to its name, the European ________ is primarily a consultative rather than legislative body.
Parliament.
An unexpected benefit of NAFTA has been increased ________ stability in Mexico that has led to government stability.
Political.
The Central American Free Trade Agreement was designed to _______ between the member nations.
Reduce trade barriers.
Optimal currency area
Region in which similarities in economic activity make a single currency and exchange rate feasible instruments of macroeconomic policy.
The contents of NAFTA include _______.
Removal of most barriers on the cross-border flow of services, removal of most restriction on foreign direct investment, protection of intellectual property rights.
Central America Free Trade Agreement (CAFTA)
The agreement of the member states of the Central American Common Market joined by the Dominican Republic to trade freely with the United States.
Spot exchange rate
The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day.
Forward exchange rate
The exchange rate governing a forward exchange transaction.
Economic exposure
The extent to which a firm's future international earning power is affected by changes in exchange rates.
Transaction exposure
The extent to which income from individual transactions is affected by fluctuations in foreign exchange values.
Translation exposure
The extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange rate.
European Council
The heads of state of EU members and the president of the European Commission.
Arbitrage
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy.
What is the term for when lower-cost external suppliers are replaced by higher-cost suppliers within a free trade zone?
Trade Diversion.
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.
What is the term for when high-cost domestic producers have been replaced by low-cost producers within a free trade zone?
Trade creation.
Trade diversion
Trade diverted due to regional economic integration; occurs when low cost foreign suppliers outside a free trade area are replaced by higher-cost suppliers within a free trade area.
Maastricht Treaty
Treaty agreed to in 1992, but not ratified until January 1, 1994, that committed the 12 member states of the European Community to a closer economic and political union.
Which treaty provided additional power to the European Parliament.
Treaty of Lisbon.
True or false: Nearly all WTO members were participating in regional trade agreements by 2014.
True.
What depicts the status of the euro since 2008?
it has weakened.
