Untitled Flashcards Set

ANSWERS:   #7 is A #14 is D

Chapter 9:

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.

• Abolish/ End trade Barriers 

Rule of Origin

•  A certain percentage of the value of a good has to be produced by countries within the free trade area.

European Free Trade Association (EFTA)

•  A free trade association including Norway, Iceland, Liechtenstein, and Switzerland.

Customs Union-  

• Common External Barriers 

• 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-

•  Free or factors of production.

• A group of countries committed to (1) removing allbarriers 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- 

• One central bank

• A group of countries committed to (1) removing allbarriers 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.

• Land, labor, entrepreneurship 

Political Union-

• One Currency 

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

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 low-cost foreign suppliers outside a free trade area are replaced by higher-cost suppliers within a free trade area.

European Union-

• An economic and political union of 27 countries (2020) that are located in Europe.

Treaty of Rome Established in 1957 Europe community.

Regional trade blocs promote regional economic integration

• WTO must be modified 

Economics believe free trade agreements produce gains from trade for all member countries. 

GATT and WTO seek to reduce trade barriers but reaching agreements is difficult.

GATT (then) WTO (now) Global

Regional

• Merrosur 

• Andean Gp

• USMCA

• ASEAU

• EU

EU has been the most ambitious move toward regional economic integration.

Transparent:

• Duties- Tax on imports

• Quotas- Limit Quantity 

Non- Transparent: 

• Local Content Rules 

• Labeling Rules

• Safety 

• Quality

• Labor

• Gout 

• Red Tape 

Chapter 10:  (Foreign, Currency, Exchange):

Foreign Exchange Market: 

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

Foreign Exchange Risk:

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

Exchange Rate:

• The rate at which one currency is converted into another.

Arbitrage:

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

Spot Exchange Rate:

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

Currency Speculation:

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

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.

Spot Exchange Rate:

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

Forward Exchange: 

• When two parties agree to exchange currency and execute a deal at some specific date in the future.

Forward Exchange Rates:

• The exchange rate governing a forward exchange transaction.

Currency Swap:

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

 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.

Efficient Market:

• A market where prices reflect all available information.

Inefficient Market:

• One in which prices do not reflect all available information.

Freely Convertible:

• 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.

Externally Convertible: 

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

Countertrade:

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

Transaction Exposure: 

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

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.

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.