Economics and Finance Quiz

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Questions and Answers

How do MNCs benefit from economy of scale?

By pooling global purchasing power over suppliers. (correct)

By maintaining high advertising costs.

By exclusively utilizing local resources.

By eliminating research and development expenditures.

What is privatization primarily aimed at addressing?

Encouraging bureaucratic inefficiency.

Enhancing state control over industries.

Reducing operational costs and inefficiencies. (correct)

Increasing government ownership.

What significant financial benefit does privatization provide to a country?

Retaining all state-owned enterprises.

Decreasing foreign investment.

Increasing hard-currency foreign reserves. (correct)

Eliminating competition in the market.

Which stock exchanges were launched in China to facilitate privatization?

Shanghai and Shenzhen Stock Exchanges. Signup and view all the answers

What is the principal argument for international trade based on?

Comparative advantage. Signup and view all the answers

What is meant by 'increasing-sum game' in the context of international trade?

Trade benefits all participating countries. Signup and view all the answers

What type of shares is primarily reserved for Chinese citizens in China's stock exchanges?

A-shares. Signup and view all the answers

What percentage improvement in efficiency is estimated from privatization by some economists?

Up to 20%. Signup and view all the answers

What is a major risk factor unique to international finance compared to domestic finance?

Foreign exchange risk. Signup and view all the answers

How does the globalization of the world economy impact investment?

It increases foreign exchange risk. Signup and view all the answers

What happens to profits made in a foreign currency if the local currency depreciates?

They may decrease in value when converted back. Signup and view all the answers

Which of the following is NOT one of the four major dimensions that differentiate international finance from domestic finance?

Interest rate fluctuations. Signup and view all the answers

If the yen depreciates from $1 = ¥100 to $1 = ¥120, what effect does that have on the value of a yen-denominated investment in dollar terms?

The value decreases. Signup and view all the answers

Which scenario illustrates the concept of foreign exchange risk?

Investing in a foreign stock whose currency depreciates post-purchase. Signup and view all the answers

What economic functions are influenced by exchange rate uncertainty?

Consumption, production, and investment. Signup and view all the answers

What is a consequence of fixed exchange rates being abandoned in the early 1970s?

Increased foreign exchange risk. Signup and view all the answers

What is the primary goal of sound financial management in many Western countries?

Shareholder wealth maximization Signup and view all the answers

How do managers in Japan typically prioritize their business interests?

By maximizing the value and growth of the keiretsu Signup and view all the answers

Which of the following is a significant issue related to corporate governance?

Agency problem Signup and view all the answers

What major trend has contributed to the emergence of globalized financial markets?

Deregulation of financial markets Signup and view all the answers

What do multinational corporations (MNCs) typically do?

Have production and sales operations in multiple countries Signup and view all the answers

In which regions are shareholders considered one among many stakeholders?

Continental Europe, such as France and Germany Signup and view all the answers

Which of the following factors is NOT a contributor to the emergence of globalized financial markets?

Political regulations Signup and view all the answers

What can exacerbate corporate governance problems?

Weak legal protection of shareholders Signup and view all the answers

What is a primary concern for multinational corporations operating in countries with low rule of law?

Increased political risk Signup and view all the answers

Which of the following best describes market imperfections?

They hinder the ideal functioning of markets. Signup and view all the answers

What was a significant change that Nestlé made regarding its share structure in 1988?

Lifted restrictions on foreigners holding registered shares Signup and view all the answers

How can investors benefit from internationally diversified portfolios?

Lower risk or higher returns compared to domestic portfolios Signup and view all the answers

Which of the following is NOT considered a form of political risk?

Changes in consumer preferences Signup and view all the answers

What motivates multinational corporations to locate production overseas?

To maximize performance and achieve economies of scale Signup and view all the answers

Which factor is considered a form of market imperfection that affects investment?

Transaction costs involved in trade Signup and view all the answers

What is one potential consequence of political risks for investors?

Unexpected losses due to unfavorable changes in regulations Signup and view all the answers

Which country exhibited the highest percentage of exports to GDP in 2020?

Thailand Signup and view all the answers

What major international agreement replaced the General Agreement on Tariffs and Trade (GATT)?

World Trade Organization Signup and view all the answers

Which event is largely attributed to the onset of the global financial crisis of 2008-2009?

The subprime mortgage crisis Signup and view all the answers

As of 2020, which country had the lowest exports to GDP percentage among those listed?

Japan Signup and view all the answers

What was the primary purpose of the North American Free Trade Agreement (NAFTA)?

To eliminate barriers to trade between Canada, Mexico, and the United States Signup and view all the answers

Which country joined the World Trade Organization (WTO) in 2001?

China Signup and view all the answers

What main factor contributed to the escalation of the financial crisis after the subprime mortgage crisis?

Securitization Signup and view all the answers

In 2020, which country had a higher percentage of exports to GDP, Argentina or Brazil?

Brazil Signup and view all the answers

Study Notes

Globalization and Multinational Firms

Globalization is the integration of markets for goods, services, and financial instruments.
The world economy is highly globalized and integrated.
Major economic functions (consumption, production, investment) are globalized.
Multinational corporations (MNCs) operate in multiple countries.
International finance differs from domestic finance due to several key factors.

International Finance

Four factors distinguish international finance from domestic finance:
- Foreign exchange risk: Profits from foreign currency may disappear due to exchange rate changes; exchange rates fluctuate.
- Political risks: Sovereign nations have the right to impose economic policies. Changes in tax rules, regulations, or policies can harm or benefit businesses.
- Market imperfections: Friction and impediments to free movement across national borders (e.g. legal restrictions, transaction and transport costs, information asymmetry, discriminatory taxation).
- Expanded opportunity set: Firms and investors gain from greater economies of scale, lower costs through global markets and increased return from diversification (lower risk, higher return).

Foreign Exchange Risk

Exchange rate uncertainty affects major economic functions.
Example of exchange rate impact: Initial investment in yen depreciates, resulting in a lower profit in dollar terms even if Toyota's share price appreciates.

Political Risk

Political risk arises from a sovereign nation's ability to change rules of the game.
It includes unexpected tax changes and outright expropriation of assets.
Political risks are particularly relevant in countries without a rule of law.

Market Imperfections

Market imperfections hinder free movement of people, goods, services and capital across national borders.
Legal restrictions, transaction and transport costs, information asymmetry and discriminatory taxation are examples.
MNCs are encouraged to locate in regions with advantages or lower costs whilst investors are limited in opportunities for portfolio diversification.
Example: Nestlé's use of two different stock classes (bearer and registered) with restrictions on foreigners owning bearer shares limited investor choice and potentially increased investment costs.

Expanded Opportunity Set

Firms may benefit by gaining greater economies of scale and raising capital at lower cost.
Investors gain from international portfolio diversification, reducing risk and potentially increasing returns.

Goals for International Financial Management

Maximize benefits of globalization while controlling political and exchange risks.
Fundamental goal is shareholder wealth maximization, meaning firms maximize their value for their owners.

Corporate Governance

Managers may prioritize their own interests over shareholders'.
This "agency problem" impacts public corporations.
Corporate governance is the framework and legal structure regulating relationships between a company and its shareholders.

Globalization of the World Economy

Key trends: The emergence of globalized financial markets, multinational corporations, privatization, trade liberalization and economic integration, and the global financial crisis of 2008 -2009.

Emergence of Globalized Financial Markets

Deregulation of financial markets, and innovations like currency futures, options, multi-currency bonds, cross-border stock listings, and international mutual funds advanced global markets.
Technology advances facilitated these changes.

Multinational Corporations

MNCs conduct operations across several countries and benefit from economies of scale (spreading R&D, advertising costs and obtaining cost effective materials).
MNCs utilize global technology and management knowledge.

Privatization

Privatization involves countries divesting themselves of business ownership and management to the free-market system.
This can be viewed as denationalization.
Selling state-owned businesses brings in hard currency, improving national treasuries.

Trade Liberalization and Economic Integration

Developed through the General Agreement on Tariffs and Trade (GATT), further enhanced by the World Trade Organization (WTO).
International trade is a positive, increasing-sum game; countries benefit from specializing in producing goods they can most efficiently create.
Liberalization and integration can face obstacles at the regional level (e.g. NAFTA or EU).

Global Financial Crisis of 2008 -2009

The subprime mortgage crisis in the U.S. led to a global financial crisis.
Factors like excessive risk-taking by households and financial institutions that leveraged enormous debt levels contributed.
Securitization allowed for risks to be distributed but potentially amplified the crisis.

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Description

Test your knowledge on the benefits of MNCs in economies of scale, the impact of privatization, and the dynamics of international finance. This quiz explores crucial concepts like stock exchanges, investment risks, and currency fluctuations within a global context.