Unit 1- Part 1

I. TRUE/FALSE QUESTIONS
1. The purchase, sale, or exchange of goods and services across national borders is called domestic trade. f
2. The trade theory that nations should accumulate financial wealth, usually in the form of gold, by
encouraging imports and discouraging exports is called mercantilism. F
3. A trade deficit is the condition that results when the value of a nation’s exports is greater than the value
of its imports. F
4. The ability of a nation to produce a good more efficiently than any other nation is called a comparative
advantage. F
5. According to the comparative advantage theory, trade is still beneficial even if one country is less
efficient in the production of two goods, so long as it is less inefficient in the production of one of the
goods. T
6. The theories of comparative and absolute advantages assume that countries are driven only by the
-

+
maximization of production and consumption.
7. According to the factor proportions theory, factors in great supply relative to demand will be more
costly than factors in short supply relative to demand.
8. In the maturing product stage, production facilities are introduced in the countries with the highest
demand. T
9. According to the new trade theory, as a company increases the extent to which it specializes in the
production of a particular good, output rises because of gains in efficiency. T
10. According to Porter, a nation’s competitiveness in an industry depends on the capacity of the industry
to innovate and upgrade
T
II. MULTIPLE CHOICE QUESTIONS
1. Which of these refers to the purchase, sale, or exchange of goods and services across national borders?

2.
a. Domestic trade b. Foreign direct investment
O c. International trade d. Mercantilism
The trade theory that nations should accumulate financial wealth, usually in the form of gold, by
encouraging exports and discouraging imports is called
a. absolute advantage.
proportions theory.
Ob. mercantilism. c. comparative advantage. d. factor

3. The condition that results when the value of a nation’s exports is greater than the value of its imports is
called
a. trade deficit. b. mercantilism. O
c. trade surplus. d. absolute advantage.
4. The condition that results when the value of a country’s imports is greater than the value of its exports
is called

O a. trade deficit. b. mercantilism. c. trade surplus. d. absolute advantage.

5. Which of these refers to the ability of a nation to produce a good more efficiently than any other
nation?
 a. Mercantilism b. Comparative advantage O c. Absolute advantage d. Zero-sum game
6. When there are gains to be had by both countries party to an exchange, international trade is considered
as a

·
a. positive-sum game b. zero-sum game c. negative-sum game d. comparative
advantage
7. Both absolute and comparative advantage theories assume that ___________ is the only kind of
resource for the production process.
a. land o b. labor c. capital
8. The comparative advantage theory focuses on which of the following?
d. information

O
a. Productivity b. Transportation c. Resources d. Trade surplus
9. Under the factor proportions theory, a nation’s resources are broken into all of these except
a. labor b. land O c. information d. capital equipment.
10. During which stage of the product life cycle does the company keep the production volume low and
based in the home country?
a. Growth stage
product stage
O b. New product stage c. Maturing product stage d. Standardized

11. During which stage of the product life cycle does the company introduce production facilities in those
countries with the highest demand?
a. Innovation stage b. New product stage
product stage
O c. Maturing product stage d. Standardized

12. During which stage of the product life cycle are companies looking for low cost production bases in
developing nations?
a. Innovation stage b. New product stage
product stage
c. Maturing product stage
O d. Standardized

13. National competitive advantage theory states that a nation’s competitiveness in an industry depends on
O
a. the capacity of the industry to innovate and upgrade. b. the level of government subsidy available.
c. first-mover advantage. d. neo-mercantilism.

III. SHORT- ANSWER QUESTIONS international trade

1. The purchase, sale, or exchange of goods and services across national borders is called __________.
2. The trade theory that nations should accumulate financial wealth, usually in the form of gold, by
encouraging exports and discouraging imports is called __________.
mercantilism
3. Trade
___________
surples is the condition that results when the value of a nation’s exports is greater than the value
of imports.
4. A condition that results when the value of a country’s imports is greater than the value of its exports is
Trade deficits
called _________.
Zero-sum
5. When a nation can only increase its share of wealth at the expense of its neighbors, it is called a ______
game
6. ___________ is the ability of a nation to produce a good more efficiently than any other nation.
I
Absolute advantage
 Comparative Advantage
7. ___________ argues that trade is still beneficial even if one country is less efficient in the production of
two goods, so long as it is less inefficient in production of one of its goods.

Factortions
theory
8. __________ states that countries produce and export goods that require resources that are abundant and
import goods that require resources in short supply.
New Trade Theory
9. The ___________ states that (1) there are gains to be had from specialization and increasing economies
of scale, (2) those companies first to enter a market can create barriers to entry, and (3) government
may have a role to play in assisting its home-based companies.
10. The economic and strategic advantage gained by being the first company to enter and industry is called
first-mover advantage
___________.
11. The ___________ theory states that a nation’s competitiveness in an industry depends on the capacity
of the industry to innovate and upgrade.

National Competitive

Advantage .
 absolute advantage

trade surplus
Autokey

balance of trade
WHO
Balance of payment

free trade
Importing / Exporting
imports exports
tariff
Caus 1
Free trade, the unrestricted exchange of goods and services between countries, has been a subject of much debate
and controversy. While proponents argue that it stimulates economic growth and fosters global cooperation, critics
contend that it exacerbates inequality and undermines local industries. This essay will examine both the advantages and
disadvantages of free trade.

One of the primary advantages of free trade is its potential to promote economic growth and development. By removing
barriers such as tariffs and quotas, free trade encourages competition, innovation, and efficiency. This leads to lower
prices for consumers, increased choices, and enhanced productivity, ultimately driving economic expansion and
prosperity.

Furthermore, free trade can foster global cooperation and peace by promoting interdependence and mutual benefit
among nations. Through trade, countries become economically interconnected, reducing the likelihood of conflict and
promoting diplomatic relations. Additionally, free trade agreements often include provisions for environmental protection
and labor rights, encouraging sustainable development and social progress.

Moreover, free trade can benefit developing countries by providing access to larger markets and foreign investment. By
exporting their goods and services to wealthier nations, developing countries can generate much-needed revenue,
create jobs, and improve living standards. Foreign investment can also bring in new technologies and expertise,
stimulating economic diversification and industrialization.

However, free trade is not without its drawbacks. One of the main disadvantages is its potential to exacerbate income
inequality within and between countries. While free trade may lead to overall economic growth, the benefits are not
always distributed equally. Wealthier individuals and corporations often benefit the most, while marginalized groups and
small businesses may struggle to compete in the global marketplace.

Additionally, free trade can undermine local industries and livelihoods, especially in sectors that are unable to compete
with cheaper imports. This can lead to job losses, economic dislocation, and social unrest, particularly in vulnerable
communities that rely heavily on traditional industries. Moreover, free trade agreements may limit governments' ability
to protect domestic industries and implement policies for social welfare and environmental sustainability.

In conclusion, free trade offers numerous advantages, including economic growth, global cooperation, and
opportunities for developing countries. However, it also presents challenges such as income inequality, job
displacement, and environmental degradation. Whether the benefits outweigh the drawbacks depends on the
effectiveness of policies to address these issues and ensure that the gains from free trade are shared equitably among
all members of society.

Call L
International trade, the exchange of goods and services between countries, plays a crucial role in today's global
economy. It offers numerous advantages that contribute to economic growth, development, and prosperity
worldwide. This essay will explore some of the key advantages of international trade.

One of the primary advantages of international trade is economic growth and prosperity. By engaging in trade with
other countries, nations can specialize in the production of goods and services in which they have a comparative
advantage, whether due to natural resources, technology, or skilled labor. This specialization leads to increased
efficiency and productivity, driving overall economic expansion and improving living standards for citizens.

Furthermore, international trade fosters innovation and technological advancement. Competition in the global
marketplace encourages firms to invest in research and development, leading to the creation of new products,
processes, and technologies. This innovation not only enhances the competitiveness of businesses but also
contributes to long-term economic growth and sustainability.

Moreover, international trade promotes consumer choice and welfare by providing access to a wider variety of goods
and services at competitive prices. Through imports, consumers can benefit from lower prices, higher quality
products, and greater diversity, enhancing their standard of living and satisfaction. Additionally, exports allow
countries to generate revenue and create jobs, further stimulating economic activity and prosperity.

Additionally, international trade facilitates the transfer of knowledge, skills, and expertise between countries. Through
trade partnerships and collaborations, nations can learn from each other, exchange best practices, and acquire new
capabilities. This knowledge transfer not only enhances the competitiveness of industries but also contributes to
human capital development and capacity building, empowering individuals and communities to thrive in the global
economy.

In conclusion, international trade offers a multitude of advantages, including economic growth, innovation, consumer
welfare, knowledge transfer, and diplomatic cooperation. By embracing the opportunities of global trade, nations can
unlock their full economic potential, improve the well-being of their citizens, and foster a more interconnected and
prosperous world.
 Unit 1- Part 2
I. TRUE/FALSE QUESTIONS.
1. The main cultural motives behind government intervention in trade include protecting jobs and
preserving national security. T
2. Financial assistance to domestic producers in the form of cash payments, low-interest loans, tax
breaks, product price supports or some other form is called export financing. F (subsidy)
3. Tariffs can be classified as export tariff, import tariff and domestic tariff. F
4. A tariff levied by the government of a country that a product is passing through on its way to its
final destination is called ad valorem tariff. f (transit tariff)
5. A compound tariff is levied on an imported product and calculated partly as a percentage of its
stated price and partly as a specific fee for each unit.
T
6. To protect domestic producers and to generate revenues are the two main reasons why countries
levy tariffs. T
7. Restriction on the amount of a good that can enter or leave a nation during a certain period of
time is called a tariff. F
8. A reason why a country imposes export quotas is to protect its domestic producers from
international competition.-
9. VERs refers to a quota that a nation imposes on its exports usually at the request of another nation.T
10. A hybrid form of trade restriction is called voluntary export restraints. f (tariff-quotal
11. The three main goals of the WTO are to help the free flow of trade, to help negotiate further
opening of markets and to provide insurance against social unrest to companies investing in a
member country. F
12. When a company exports a product at a price higher than the price normally charged in its
domestic market, it is said to be dumping.
F
II. MULTIPLE CHOICE QUESTIONS.
1. Which of these is the pattern of imports and exports that would result in the absence of trade
barriers?
O
a. Embargo b. Protectionism c. Infant industry argument d. Free trade
2. 4. Which of these is the main political motive behind government intervention in trade?
a. Promotion of a strategic trade policy O b. Protecting jobs c. Protection of national
identity d. Protecting young industries from competition
3. Which of these is not a political motive, according to your text, behind government
intervention in trade?
a. Responding to other nation's unfair trade practices b. Preserving national security.
c. Protecting jobs O d. Protecting young industries from competition
4. Which of these is not an instrument that government uses to promote trade?
Oa. Tariffs b. Subsidies c. Export financing d. Foreign Trade Zones

O
5. Which of these is common instrument used by government to promote trade?
a. Tariffs
O
b. Subsidies c. Export financing a. export financing. c. Quotas
6. Financial assistance to domestic producers in the form of cash payments, low-interest loans,
tax breaks, or product price supports is called a (n) _______.
a. export financing b. embargo.
O C. subsidy.
7. When a government guarantees that it will repay the loan of a company if the company should
d. tariff

O
default on repayment, it is called a (n) _______.
a. subsidy. b. loan guarantee. c. infant industry protection. d. loan repayment clause.
8. A designated geographic region in which merchandise is allowed to pass through with lower
custom duties and/or fewer customs procedures is called a (n) _________.
a. chaebol.
agency
b. subsidy. c. the WTO.
O d. foreign trade zone. e. Special government

9. All of these are methods of restricting trade except ______. a. tariffs. b. quotas. c. local

O
content requirements. d. subsidy e. embargo
10. Which of these is a method of restricting trade?
a. Export financing b. Local content requirements c. Subsidy d. Foreign
trade zones
11. Which of these add to the cost of imported products because they levy an additional tax upon
them?
O a. Tariffs
delays
b. Quotas c. Local content requirements d. Embargoes e. Administrative

12. Tariffs are classified into all of these except ______.

d. import.
O
a. transit. b. domestic c. export

13. A tariff levied by the government of a country that a product is passing though on its way to
a final destination is called a tariffs.
O a. transit b. domestic c. export d. import

O
14. Countries levy tariffs for which of these reasons?
a. To protect domestic producers b. To encourage trade c. To generate foreign competition
d. All of the above
15. Restriction on the amount of a good that can enter or leave a country during a certain period
of time is called a(n)________.

·
a. export subsidy. b. local content requirement. c. quota. d. tariff.
16. A quota that a nation imposes on its exports, usually at the request of another nation, is referred
to as a (n) _________.
a. embargo. b. tariff-quota. c. tariff. d. voluntary export restraint
17. A ban on trade in one or more products with a particular country is called a (n) ______.
O a. embargo b. tariff-quota c. tariff. d. voluntary export
restraint
18. A treaty that was designed to promote free trade by reducing both tariffs and non-tariff barriers
O
to international trade is called the a. WTO b. GATT. C. OPEC
19. A key component of the WTO that was carried over from GATT is called the _______.
d. VER

a. the clear definition of intellectual property rights. b. GATS. c. TRIPS. d. normal trade
relations
20. Which of these is the main cultural motive behind government intervention in trade?
a. promotion of a strategic trade policy b. protecting jobs c. Protection of national identity
d. Protecting young industries from competition
21. A lower tariff rate for a certain quantity of imports and a higher rate for quantities that exceed
the quota is called _____.
a. embargo b. tariff-quota c. tariff. d. voluntary export
restraint

III. SHORT- ANSWER QUESTIONS

1. The pattern of imports and exports that would result in the absence of trade barriers is called
Free
_____. Trade
2. ______ advantages result because economies of scale limit the number of companies that an
industry can sustain.
3. Financial assistance to domestic producers in the form of cash payments, low-interest loans,
subsidy
tax breaks, product price supports, or some other form is called _______.
4. When a government guarantees that it will repay the loan of a company if the company should
default on repayment, it is called a ______.
Ivan-guarantee
5. A designated geographic region in which merchandise is allowed to pass through with lower
foreign Trade Zone [Fiz)
customs duties and/or fewer customs procedures is called a (n) _______.
tariff is a government tax levied on a product as it enters or leaves a country.
6. A _________
______.tariff
7. A tariff levied by the government of a country that is exporting a product is called an exporting
transit tariff is a tariff levied by the government of a country that a product is passing
8. A _______
through on its final destination.
importing tariff
9. A tariff levied by the government in a country that is importing a product is called an ______.
10. A tariff levied as a percentage of the stated price of an imported product is called ______ tariff. ad valorem
11. A tariff levied as a specific fee for each unit (measured by number, weight, etc.) of an imported
product is called _______. tariff
specific
12. A tariff levied on an imported product and calculated partly as a percentage of its stated price,
compound tariff
and partly as a specific fee for each unit is referred to as a (n) ______. -

13. Restriction on the amount of a good that can enter or leave a country during a certain period
of time is called a_______.
quota voluntary
14. Countries normally self-impose a _______
export restraint (VER)
in response to the threat of an import tariff or total
ban on a product by an importing nation.
15. A lower tariff rate for a certain quantity of imports and a higher rate for quantities that exceed
tariff-quota
the quota is referred to as a (n) ______.
16. A complete ban on trade (imports and exports) in one or more products with a particular
embargo
country is called an _______.
17. Laws stipulating that a specified amount of a good or service be supplied by producers in the
local content requirements
domestic market are called ________.
18. Regulatory controls or bureaucratic rules designed to impair the rapid flow of imports into a
Administrative delays
country are _______.
Currency
19. ___________ can reduce imports by stipulating an exchange rate that is unfavorable to
potential importers. controls
20. The _______ is the only international body dealing with rules of trade between nations.

GATT
21. A key component of the WTO that was carried over from the GATT is the principle of non-
normal trade relations
discrimination called _______.
22. When a company exports a product at a price lower than the price normally charged in its
dumping
domestic market, it is said to be _______.
23. _________ is an additional tariff placed on an imported product that a nation believes is
receiving an unfair subsidy.

countervailing duty
 Unit 2: Exercises
I. TRUE/FALSE QUESTIONS

1. Portfolio investment is the purchase of physical assets or a significant amount of ownership of a

company in another country to gain a degree of management control. F
2. There are two main reasons for the rising tide of foreign direct investment flows over the past decade
- globalization and diversity. f
3. The eclectic paradigm theory states that a company will begin by exporting its products and later under
take FDI as a product moves through its life cycle. f (International
pro duct lifecycle)
4. In the standardized product stage, a good is produced in the home country because of uncertain
domestic demand and to keep the production close to the research department for new development. f
5. One common market imperfection in international business is trade barriers.T
6. When a company's specialized knowledge is embodied in its employees, the only alternative to exploit
a market opportunity in another nation is to undertake FDI. T
7. An ownership advantage is the advantage of locating a particular economic activity in a specific
location given its characteristics. f(location advantage)
8. Vertical integration is the extension of company activities into stages of product ion that provides a
-
firm's inputs (forward integration) -
or absorbs its
(f)
out puts (backward integration).
9. In foreign direct investment, a 100 percent ownership does not guarantee control for the company. T
10. Benefits of investments by multinationals include increased unemployment, increased tax revenues,
highly skilled workforce training, and transfer of technology. f
11. Building a subsidiary abroad from the ground up is called a greenfield investment.T
12. Factors that reduce the appeal of purchasing existing facilities include obsolete equipment, poor
relations with workers, and an unsuitable location. T
13. Rationalized production is a system of production in which each of a product's components is produced
in that location in which the cost of producing that component is lowest. T
14. The practice of "following clients" can be expected in industries where many component parts are
obtained from suppliers with whom a manufacturer has a close working relationship. f
15. Governments often intervene in international trade to protect their cultural heritages and jobs;
however, they never intervene in the flow of FDI since it brings jobs to the country. f
16. A country's balance of payment s is a national account that records all payments to entities in other
countries and all receipts coming into the nation. T
17. Any nation's balance of payments consists of two major components- the current account and the past-
due account. f
18. The capital account is a national account that records transactions involving the import and export of
goods and services, income receipts on assets abroad, and income payments on foreign assets inside
the country. f (current account)
19. A current account deficit occurs when a country exports more goods, services, and income than it
imports.
f
20. When a country imports more goods, services and income than it exports, it is called a trade deficit. T
21. The two main reasons countries intervene in FDI flows are the balance of payments and to obtain
resources and benefits. T
22. One method used by host countries to restrict incoming FDI is ownership restrictions. T
23. Tax incentives and infrastructure improvements are financial incentives used by host countries to
--

encourage outflow of FDI.

·

f
24. To limit the effects of outbound FDI on the national economy, home governments may impose
differential tax rates that charge income from earnings abroad at a higher rate than domestic earnings.
T
II. MULTIPLE CHOICE QUESTIONS

1. Today, all of these factors of production are internationally mobile except _____
a. labor b. financial capital c. capital equipment. d. land.
2. The purchase of physical assets or a significant amount of ownership of a company in another country
to gain a degree of management control is referred to as _____
a. foreign direct investment. b. portfolio investment. c. mergers. d. vertical integration.
3. Which of these refer to investment that does not involve obtaining a degree of control in a company?
a. Foreign direct investment b. Portfolio investment c. Mergers d. Vertical integration
4. Which of these are main reasons that account for the growth of FDI flows over the past decade?
a. Diversity and telecommunications b. Telecommunications and transportation c. Globalization and
mergers and acquisitions d. Diversity and globalization
5. Which of these refers to the theory stating that a company will begin by exporting its products and later
undertake FDI as a product moves through its life cycle?
a. Eclectic theory b. Market imperfections cycle
c. International product life cycle d. Market power life cycle theory
6. In which of these stages is a good produced in the home country because of uncertain domestic demand
and to keep production close to the research department?
a. The standardized product stage. b. The maturing product stage.
c. The declining product stage. d. The new product stage
7. In the _______ product stage, the company directly invests in production facilities in those countries
where demand is great enough to warrant its own production facilities.
a. standardized b. maturing c. declining d. new
8. During which of these product stages does a company build production capacity in low-cost developing
nations? a. Standardized b. New c. Maturing d. Emerging
9. Which of these is a market imperfection?
a. FDI b. Trade barriers c. Portfolio investment d. Greenfield barrier
10. Which of these theories states that firms undertake FDI when the features of a particular location
combine with ownership and internalization advantages to make a location appealing for investment?
a. Market power b. International product life cycle
c. Market imperfections d. The eclectic theory
11. According to the eclectic theory, which of these advantages must be present for a company to undertake
FDI? a. Location b. Ownership c. Internalization d. AII of these
12. The _____ theory states that a firm tries to establish a dominant market presence in an industry by
undertaking FDI.
a. market power b. eclectic c. market imperfections d. trade barriers
13. Which of these is the extension of company activities into stages of production that provide a firm's
inputs or absorb its outputs?
a. Horizontal integration b. Vertical integration
c. Market penetration d. Collaborative diversification
14. A complete ownership of a business in another country
a. guarantees profits. b. does not count as FDI.
c. does not guarantee control. d. guarantees government support.
 15. All of these are benefits of investments by multinationals except _____.
a. transfer of technology. b. decreased tax revenues.
c. decreased unemployment. d. training to create a more highly skilled workforce.
16. Building a subsidiary abroad from the ground up is called a (n)
a. portfolio investment. b. vertical integration investment
c. acquisition. d. greenfield investment.
17. Which of these factors reduce the appeal of purchasing existing facilities?
a. Obsolete equipment b. Unsuitable location c. Poor relations with workers d. All of these.
18. A system of production in which each of a product's components are produced in that location in which
component is lowest is called
a. rationalized production. b. the greenfield investment
c. centralized production. d. the market power production.
19. Which of these represent a country's national account that records all payments to entities in other
countries and all receipts coming into the nation?
a. Balance of payments b. Trade deficit c. Capital account d. Current account
20. A nation's balance of payments consists of two major components: ____account and _____ account.
a. current ; past-due b. capital; fixed c. current; capital d. merchandise; services
21. Which of these records transactions involving the import and export of goods and services, income
receipts on assets abroad, and income payment on foreign assets ins ide the country?
a. Income receipts account b. Capital account c. Income payments account d. Current account
22. Which of these occurs when a country exports more goods, services and income than it imports? a. A
current account deficit b. A capital account surplus c. A current account surplus d. A capital account deficit
23. Which of these is a national account that records transactions involve the purchase or sale of assets?
a. Current account b. Merchandise account c. Service account d. Capital account
24. Which of these is a reason for host country intervention in FDI flows?
a. It sends resources out of the home country b. Loss of jobs
c. Balance-of -payments d. Loss of technology to other countries
25. Reasons for home nations to discourage outflows of FDI include all of these except ____.
a. investing in other nations sends resources out of the home country. b. loss of jobs at home.
c. it may destroy the "sunset" industries. d. it may damage a nation's balance of payments.
26. Which of these methods can a host county use to restrict incoming FDI?
a. Differential tax rate b. Sanctions c. Flexible ownership requirement d. Performance demands
27. When a country provides tax breaks and low- interest loans, it is using which of these to encourage
inflows of FDI?
a. Financial incentives b. Sanctions c. Infrastructure improvements d. Performance demands

III. SHORT-ANSWER QUESTIONS

1. The purchase of physical assets or a significant amount of ownership of a company in another country
FDE
to gain a degree of management control is called ______.
Portfolio 2. ______ is an investment that does not involve obtaining a degree of control in a company.
management3. The_____ theory states that a company will begin by exporting its product and later undertake foreign
investment as a product moves through its life cycle. International Product Life cycle
4. The _____ states that firms undertake foreign direct investment when the features of a particular
location combine with ownership and internalization advantage to make a location appealing for
investment. eclectic
theory
5. The advantage of locating a particular economic activity in a specific location because of the
location
characteristics of that location is called ______.
advantage
6. An ______ is the advantage that arises from internalizing a business activity rather than leaving it to a
advantage.
internalizing
relatively inefficient market.
7. The extension of company activities into stages of production that provide a firm's inputs or absorb its
Vertical ,
output is called ______.
8. The _____ theory states that a firm tries to establish a dominant market presence in an industry by
undertaking foreign direct investment. Market Power
9. The benefit of ______ is greater profit because the firm is far better able to dictate the cost of its inputs
and /or the price of its outputs. market power
10. The _____ refers to building a subsidiary abroad from the ground up. greenfield investment
11. A system of production in which each of a product's components is produced in that location in which
rationalized
the cost of producing the component is lowest is called ______. production
12. A country's _____ is a national account that records all payments to entities in other countries and all
receipts coming into the nation. balance of
current account
payments
13. The _____ is a national account that records transactions involving the import and export of goods and
services, income receipts on assets abroad, and income payments on foreign assets inside the country.
14. When a country imports more goods, services, and income than it exports, it is called a Rade____. deficit
15. A ____ occurs when a country exports more goods, services, and income than it imports. trade surplus
account
Capital is a national account that records transactions that involve the purchase or sale of assets.
16. The ______
17. _______ influence how international companies operate in host nations.
Performance demands
18. ______ prohibit non-domestic companies from investing in certain industries or owning certain types
of businesses.
ownership restrictions
 FDI
incentive promote
investment incentives
Cant chia
bit )
?
 Unit 3 – Exercises
I. TRUE/ FALSE QUESTIONS
1. The rate at which one currency is exchanged for another depends on the size of the
transaction, the trader conducting it, and general economic conditions. T
2. The practice of insuring against the potential losses that result from adverse changes in
exchange rates is called currency arbitrage. F (currency hedging)
3. There are two components of every quoted exchange rate: the debt currency and the equity
currency. f
4. If an exchange rate quotes the number of Indian Rupees needed to buy one U.S. dollar, the
dollar is the quoted currency and the Rupee is the base currency. f(nquiclai)
5. When you designate any exchange rate, the quoted currency is always the numerator and
the base currency the denominator. T
6. Exchange rate requiring delivery of the traded currency within two business days is called
cross rate. -
(Spot exchange rate)
f(premium)
7. If a currency's forward rate is higher than its spot rate, it is trading at a discount.
8. A currency swap is the simultaneous purchase and sale of foreign exchange for two
different dates. T
9. A convertible currency, also called soft currency, is traded freely in the foreign exchange
market, with its price determined by the London banks.
- supply a demand
10. One goal of currency restriction is to preserve hard currencies to pay for imports and to
finance trade deficits. T
11. One way to get around national restrictions on currency convertibility is to use barter
transactions.
12. Because the gold standard fixed nations’ currencies to the value of gold, it is called a
fundamental disequilibrium. f
(par value)
13. The Bretton Woods Agreement was an accord among nations to create a new international
monetary system based on the value of the U.S. dollar.
T
14. To provide funding for countries' efforts toward economic development the Bretton
Woods Agreement created the International Bank for Reconstruction and Development.
T
II. MULTIPLE CHOICE QUESTIONS
1. Which of these is the market in which currencies are bought and sold and in which
currency prices are determined?
a. The Eurocurrency market b. The international capital market
c. The international bond market d. The foreign exchange market
2. For which of these reasons do investors use the foreign exchange market?
a. Currency hedging b. Currency speculation c. Currency arbitrage d. All of these.
3. Which of these refers to the practice of insuring against potential losses that result from
adverse changes in exchange rates?
a. Currency hedging b. Currency arbitrage c. Currency speculation d. Currency conversion
4. Which of these refers to the instantaneous purchase and sale of a currency in different
markets for profits?
a. Currency hedging b. Currency arbitrage c. Currency speculation d. Currency conversion
5. In a quoted exchange rate, the currency with which another currency is to be purchased
is called the ____.
a. base currency. b. forward currency. c. Cross currency. d. quoted currency.
6. In a quoted exchange rate of $I.69/British pound, the British pound is called the ____.
a. base currency b. forward currency. c. cross currency. d. quoted currency.
7. In designating any exchange rate, the quoted currency is always the ______.
a. fraction. b. denominator. c. numerator. d. indirect quote.
8. Which of these refers to exchange rates requiring delivery of the currency within two
business days?
a. Derivative rate b. Spot rate c. Discount rate d. Forward rate
9. Exchange of rate at which two parties agree to exchange currencies on a specified future
date is called a _____.
a. forward rate. b. bid and ask quote. c. spot rate. d. arbitrage rate.
10. If the forward rate of a currency is higher than its spot rate, the currency is trading at a
a. discount. b. swap rate. c. derivative rate. d. premium.
11. Which of these is the simultaneous purchase and sale of foreign exchange for two
different dates?
a. Forward contract b. Bid and ask quotes c. Currency swap d. Securitization
12. ______ specialize(s) in currency futures and options transactions.
a. Securities exchanges b. Eurocurrency c. Interbank d. Over- the-counter
13. A _____ currency is traded freely in the foreign exchange market.
a. barter b. hard c. totalitarian d. soft
14. Governments impose currency restrictions for which of these goals?
a. To protect the currency from speculators
b. To preserve hard currencies to finance trade deficits.
c. To keep resident individuals and businesses from investing in other nations
d. All of these.
15. In the earliest days, which of these was the internationally accepted currency for
payment of goods and services?
a. Yen b. Gold c. Alcohol d. Dollar
16. The international monetary system in which nations linked the value of their paper
currencies to specific values of gold is referred to as ______.
a. the bartered system. b. the floating exchange-rate system.
c. the gold standard. d. the managed float system.
17. Because the gold standard fixed nations' currencies to the value of gold, it is called a
_______.
 a. managed float system. b. floating exchange-rate system.
c. bartered system d. fixed exchange-rate system.
18. Which of these was the advantage(s) of the gold standard?
a. Correcting trade imbalances b. Imposing strict monetary policies
c. Reducing exchange-rate risk d. All of these.
19. Which of these was an accord among nations to create a new international monetary
system based on the value of the U.S. dollar?
a. Plaza Accord b. Bretton Woods Agreement c. Louvre Accord d. Jamaica Agreement
20. The new system under Bretton Woods Agreement incorporated all of these features
except _____.
a. funds for economic development. b. enforcement mechanism.
c. floating exchange rates. d. built-in flexibility.
21. The World Bank was created by _____.
a. the Jamaican Agreement. b. the Bretton Woods Agreement.
c. the Smithsonian Agreement. d. the Plaza Accord.
22. A system in which currencies float against one another, with government intervening
to stabilize their currency at a particular target exchange rate is called a (n) _____.
a. managed float system. b. the Bretton Woods system.
c. free float system. d. fixed exchange-rate system.

2. SHORT-ANSWER QUESTIONS
1. The market in which currencies are bought and sold and in which currency prices are
foreign
determined is called the _____. exchange market
2. The practice of insuring against potential losses that result from adverse changes in
exchange rates is called _____.
currency hedging
3. ______ is the instantaneous purchase and sale of a currency in different markets for
profit.
Currency arbitrage
4. _____ is the purchase or sale of a currency with the expectation that its value will change
and generate a profit.
Currency speculation
5. In a quoted exchange rate, the currency with which another currency is to be purchased
quoted
is called the _____. currency
6. In a quoted exchange rate, the currency that is to be purchased with another currency is
base currency
called the _____.
7. The exchange rate requiring delivery of the traded currency within two business days is
rate
spot
called the _____.
exchange
8. The exchange rate at which two parties agree to exchange currencies on a specified
forward exchange
future date is called the _____. rate
forward
9. _____ is a contract requiring the exchange of an agreed-upon amount of a currency on
an agreed-upon date at a specific exchange rate.
contract
 10. A _____ is the simultaneous purchase and sale of foreign exchange for two different
dates. currency swap
11. Currency that trades freely in the foreign exchange market, with its price determined by
convertible currency
the forces of supply and demand is called a _____.
12. Exchange of goods and services between two parties without the use of money is called
_____.
Bartering
13. An international monetary system in which nations linked the value of their paper
currencies to specific values of gold was called the _____. standard
gold
14. A system in which the exchange rate for converting one currency into another is fixed
fixed exchange-rate
by international agreement is called a _____. system
Bretton 15. The _____ was an accord among nations to create a new international monetary system
Woods based on the value of the U.S. dollar.
Agreement
16. The agency created by the Bretton Woods Agreement to provide funding national
World Bank
economic development efforts is called the _____.
17. -F
t_____ was the agency created by the Bretton Woods Agreement to regulate fixed
exchange rates and enforce the rules of the international monetary system.
18. An exchange-rate system in which currencies float against one another with
governments intervening to stabilize currencies at a particular target exchange rate is
Managed float system
known as a ____.
19. _____ is an exchange - rate system in which currencies float freely against one another,
without governments intervening in currency markets.
float system
free
Match up the terms with the definitions:

Bet
1. futures A contract giving the right, but not the obligation, to buy
2. options or sell a security, a currency, or a commodity at a
3. commodities fixed price during a certain period of time.
4. derivatives B contracts to buy or sell fixed quantities of a
5. hedging commodity, currency, or financial asset at a future
6. speculation C date, at a price fixed at the time of making the contract
C a general name for all financial instruments whose
price depends on the movement of another price
D buying securities or other assets in the hope of making
a capital gain by selling them at a higher price (or
selling them in the hope of buying them back at a
lower price)
E making contract to buy or sell a commodity or
financial asset at a pre-arranged price in the future as
F a protection or “insurance” against price changes
 raw materials or primary products (metals, cereals,
coffee, etc.) that are traded on special markets

Match up the half-sentences below

1. To ‘peg’ a currency A. the amount of a country’s money that residents were able
against something to change into foreign currencies
means to B B. fix its value in relation to it.
2. A clean floating C. make a profit by making capital gains or by investing
exchange rate D at higher interest rates
3. Exchange controls D. is determined by supply and demand
used to limit A E. trying to insure against unfavorable price movements by
4. Speculators buy or way of futures contract
sell currencies in F. the determination of price by supply and demand (the
order to C quantity available and the quantity bought and sold).

5. ‘Market forces’
means
f
6. ‘Hedging’ means E
 foreign exchange market

Arbitrage currency
Speculaters
speculation
reduce risk

US dollar
Gold standard

Bretten Woods Agreement

Hedging speculating
goods
 fixed
floating
Center bank
forward transaction
Arbitrage

Central

Commodities