Module Code & Module Title

EC5002 International Business and World Markets

Year and Semester

2020 spring

Assessment weightage & Type

50% coursework

Student Name: Rajdeep shakya (18029270)

Assignment Submission Date: Friday 5th June, 2020

I confirm that I understand my coursework needs to be submitted online via Local Server under the relevant module
page before the deadline in order for my assignment to be accepted and marked. I am fully aware that late
submissions will be treated as non-submission and a marks of zero will be awarded.
Part 1
In late 1981, your father went to a Honda dealer in his home state and paid about $1,000
more for a Civic than he would have paid the year before. Why?
Recession started in 1980 in the USA during the last year of the Jimi Carter presidency. In 1981,
Ronald Reagan from the Republican Party was elected the President of the United States but the
United States Congress was controlled by the Democratic Party. One of the major causes of the
recession was the tight monetary and economic policy of the Jimi Carter administration. After
Reagan became the President, he introduced his famous economic policy of Reaganomics
(supply side economics) which made a great impact in the country’s economy. [ CITATION
whi20 \l 1033 ]

At that time, Japanese made cars had a rising demand in the US auto market. Because of
recession, people usually preferred Japanese made cars over the US made cars because they were
small in size and highly affordable by the working- and middle-class people. Due to less demand
of US made cars, the US automobile companies were running on low profits and the people were
losing their jobs. The US Congress which was controlled by the democrats was ready to impose
strict quotas which was a problem for the Ronald Reagan administration. The policies of the
Democrats and the Republicans differ in many ways. The Democrats prefer controlled economy
whereas the Republicans prefer free market economy. In an ongoing cabinet meeting, the Vice-
President George H.W. Bush suggested a solution for the problem. He suggested if the Japanese
were to voluntarily reduce their exports then it would be a win-win situation for the
administration. Soon after that, the President met the Japanese Foreign Minister in the Oval
Office to discuss about the Voluntary Export Restraint (VER) and the Japanese agreed to
voluntarily reduce their exports. The consequences of the VER were that the Japanese had to
reduce almost 8% of the cars they were exporting into the US than that of 1980. The export limit
was 1.8 million from 1981-83 which was raised to 2.3 million from 1984-85 and so on. Due to
the VER, the US automobile companies started earning profit and it created more jobs.

But still the Japanese automobiles had a high demand. Due to less supply and high
demand of the Japanese made cars, the price increased gradually. According to the law of
demand and supply which states that, “If supply decreases and demand remains unchanged, then
it leads to higher price and lower quantity.” Because of the VER, the profits of the US
automobile companies increased. There was also increase in production and number of jobs in
the US automobile industry. But the people had to pay more money for the Japanese cars due to
less supply and high demand. That is the reason that my father in 1981 had to pay $1000 more to
the Honda dealer to buy a Civic than he would have paid a year before there was a Voluntary
Export Restraint.

Part 2
1) Ans: b
Reason: According to the issue, because these numbers calculate yen per dollar, not dollars per
yen, the statement “the yen rose today from 121 to 117” makes sense. It is the rate of exchange
between the US dollar and the Japanese yen. At first, 1 dollar can buy can buy the 121 yen, but
later only the 117 yen can buy the 1 dollar. So, the US dollar’s purchasing power is devalued
from 121 to 117 yen so therefore this is yen per dollar.

2) Ans: d
Reason: According to question, the price at which one can go into a contract today to purchase
or sell a cash 30 days from now is known as a forward exchange rate because this is also a type
of future exchange rate which predetermined the currency and used for future. It is used as per
the contract. For instance, a company expecting to receive €20 million in 90 days, can enter into
a forward contract to deliver the €20 million and receive equivalent US dollars in 90 days at an
exchange rate specified today.

3) Ans: b
Reason: According to the question, the foreign currency remitted is conveyed as the Philippine
currency. As the remittance rises, so does the Philippine currency demand rises. Growing
demand increases Philippine currency value. Therefore we can say that increment in remittances
from Philippine workers abroad to their families at home is causing appreciation of the
Philippine peso.

Question 4-6 refers to the situation as described below

The table below shows hypothetical values for the consumer price indexes (CPI) of the U.S.,
the U.K., and Japan in 2014 and 2018. Their currencies are also indicated as the dollar ($),
pound (£), and yen (¥) respectively. Suppose that exchange rates in 2014 were

2014: $/£= 1.60, ¥/$ = 100, and ¥/£= 160

U.S. U.K. Japan

Currency $ £ ¥
:
CPI 2014: 100 200 150
CPI 2018: 120 230 165

Calculate the exchange rate for 2014:

4. £/$ = 0.625

5. $/¥= 0.01

6. £/¥= 0.00625

The calculation of the exchange rate for 2014:

4. £/$ =1/$/£= 1/1.6 = 0.625

5. $/¥ = 1/¥/$ =1/100= 0.01

6. £/¥ = 1/¥/£ =1/160= 0.00625

7) Ans: a
Reason: When the currency is devalued by the country, the foreign exchange rate for that
currency will be lower. Where there has been a lower exchange rate than the other countries, that
country tends to buy more goods and services. As a result, the increase in exports of a country
that devalues its currency income will increase as the devaluation stimulates aggregate demand.

8) Ans: c
Reason: When the currency's supply exceeds demand then its value decreases. Here the peso's
demand is met by a supply of 1.3 billion pesos, which means that the peso’s value is being
decreased. So, to peg the peso to the US dollar, Mexico's central bank will add $1, 30,000,000 to
its dollar reserves so as to make the balance of demand and supply.

9) Ans: d
Reason: Scarcity in the global supply of gold mined in Alaska is not a contributory factor in the
financial crisis of 2008 because it is not the cause of the financial crisis which have been
occurred in 2008. The financial crisis causes by credit swamp deficit by credit rating agencies,
which leads to an increase the mortgage lending. And also low income and high employment
lead to the financial crisis.

10) Ans: a

Reason: According to the question, lending to people to buy houses who are at greater risk of
being unable to meet the repayments is best describes of subprime mortgage lending because
subprime mortgage lending describes as it is a loan that is meant to be offered to prospective
borrowers with impaired credit records, or cannot repayment their obligations.
 Part 3

1) Identify the following transactions by whether they belong in the U.S. current account,
capital account, or financial account, positively (contributing to a surplus in that account)
or negatively. Put a plus (+) or a minus (-) sign in the appropriate column. (8*2.5=20)

Current Capital Financial

International Economic Transactions Account Account Account
a. A US farmer sells a truckload of artichokes to a
Canadian restaurant
+
b. A German professor is paid royalties on a textbook
-
published by a Boston publishing firm
c. A Student in Thailand deposits dollars in a Los Angeles
bank account, planning later to pay tuition at UCLA
+
d. The owner of a pizza chain in Kansas sends $1000 to
relatives in Sicily
-
e. An American company buys a warehouse in Ireland
-
f. AT&T pays dividends to holders of its stock in Brazil
-
g. A Brazilian widow buys stock in AT&T
+
h. A Michigan student, preparing for a semester abroad in
France, buys $1000 worth of French currency
-
Question no 2
A. Explain how financial crisis in another developing country in the region can cause or
contribute to a financial crisis in a developing country.
The developing countries are connected with each other; therefore their economies are
interrelated. Many developing countries do not have an adequate resources to stimulate their
economy and protect their socially disadvantages population to the same extent as the
industrialized countries. So, they have increased their cooperation with one another in terms of
their supplies.

Let us see the illustration below:

As we can see in the above illustration, Nepal has been supplying mushroom and pashmina to
India. India has been supplying petroleum and gases to Nepal. So, both these developing
countries are dependent upon one another, due to which crisis in one contributes to crisis in
another.

What causes financial crisis?

When the country’s GDP goes down, the per capita income will also go down, which causes the
availability of jobs to go down. When there is less job, people will fail to pay their dues. The
banks will have more NPA hence the development work will not be there, the investment will be
postponed. It will result into the less demand for products. Factories will shut down periodically.
When there’s less work, people will have less money which will decrease the spending as well.
This is a process which will result into a financial crisis in the country.

Now, when the countries are trade partners, especially in the case where those two countries
depend on one another (Or one country depends on the other) the scarcity of demand of Goods in
one country is fulfilled by the others, and vice-versa.

In this era of globalization, we can almost surely state that economy of any country depends on
various others. One aspect is trade.

Trade
For emerging economies as well as developing economies and financial crisis is not uncommon
phenomenon. Since, the early 1990’s countries as diverse as Mexico, Russia, a number of East
Asian countries, Brazil, Turkey and Argentina have all been hit by either currency or financial
crisis. Due to the global financial market, emerging economies witness a substantial fall in their
exports as the financial crisis hit consumer spending of the other developing countries. The
greater the trade integration between the two countries, the more vulnerable is the impact of the
financial distress of the other economy.

Let’s consider an example of Chile

Chile has large reserves of copper which is more than what it can use. Thus it trades it, so that it
can buy other things which need by selling its surplus of copper. So, it provides 20% of GDP and
60% of exports (the bulk of which goes to china). Now, what happens if china experiences a
slowdown on its economy? It will all at once downsizes the economy of Chile too.

In fact, copper demand boomed when China’s rural population started moving to cities and then
in the recent slowdown it caused the copper prices to slide by 15%. Assuming that China imports
less copper which directly affects Chile’s exports. Now it doesn’t have enough reserves of forex
to go and purchase some of its other imports. And after that Chile had less reserves to pay for
their other imports. Hence, this affected the other countries which used to export goods to Chile
and thus a chain reaction based on the degree of impact of monetary policy can be affected as
well. Thus, bringing within its preview all the aspects of the economy such as purchasing power
or currency rates. [ CITATION quo17 \l 1033 ]

B. Explain official reserve account of BOP and its major components?

The balance of payments (BOP) is a statement of account that lists all financial transactions that
a country has with other nations. The official reserve account is a foreign currency and securities
owned by the government, generally through its central bank, which is used year after year to
balance the payments. Official reserves rise when there is a trade surplus, and fall when there is a
deficit. Official reserve assets are foreign currency assets that are readily available and controlled
by monetary authorities to meet balance of payment financing needs, takes action in currency
exchange markets to affect currency exchange rates, and other related purposes. In other words,
it can be defined as it records or lists all the financial transactions which a country has with other
nations through the help of a statement of account. The major components of official reserve
account of BOP are given below:

1) Monetary gold: Monetary gold is made up of gold bullion and unallocated gold deposits,
viewed in both quantity and value (market price).

2) Reserve position in the international monetary fund (IMF): The International

Monetary Fund (IMF) reserve status consists of the funds that the country has provided to
the IMF, such as the reserve tranche and/or any IMF loan which is readily available to the
member country.
 3) Special drawing right (SDR): The special drawing right (SDR) is an IMF-created
international reserve asset to supplement existing assets reserve assets which are
distributed to IMF members annually in proportion to their respective quotas.

4) Financial derivatives: Financial derivatives covered by official reserve assets are

financial instruments associated with a further specific financial instrument, indicator or
commodity where by particular financial risks (such as interest rate risk, foreign
exchange risk) Can be traded on the financial markets in its own right and linked to
reserve asset management.

5) Other claims: Certain statements include loans to non-resident banks and long-term
lending to non-residents to an IMF Trust account and other unreported financial assets
but this does meet the concept of reserve assets.[ CITATION Sta20 \l 1033 ]

References
quora, 2017. quora. [Online]
Available at: https://www.quora.com/How-does-the-economy-of-one-country-affect-another
[Accessed 20 06 2020].

Statistical data warehouse, 2020. Statistical dataa warehouse. [Online]

Available at: https://sdw.ecb.europa.eu/browse.do?
node=9691487&fbclid=IwAR29jkypXIQwZ699qntBrJ-2wTBeqSz4HMYEc1lAlpFURzaKkovuHyFx9MM
[Accessed 04 06 2020].

whitehouse, 2020. whitehouse. [Online]

Available at: https://www.whitehouse.gov/about-the-white-house/presidents/james-carter/?
fbclid=IwAR1PboxvY3iYAIIEoGhtvUB_H66BkhjA68XglP9DuQJDZDzLxLvDQ9vQt6Y
[Accessed 02 06 2020].