Economics: Balance of Trade and Currency Markets

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Questions and Answers

When describing the balance of trade, what is the key measurement used?

Number of goods traded

Volume of goods traded

Quantity of goods traded

Value of goods traded in a specific currency (correct)

Which of the following is NOT considered a factor influencing exchange rates?

Consumer confidence

The price of gold

The number of employees in a company (correct)

Government intervention policies

What is the primary purpose of foreign exchange markets?

To create a unified global financial system

To regulate the prices of goods and services globally

To provide a stable currency for international trade

To facilitate the exchange of goods and services between countries (correct)

What is the relationship between "Balance of Trade" and "Foreign Direct Investment (FDI)"?

FDI can influence the Balance of Trade by increasing exports and decreasing imports. (D) Signup and view all the answers

What is the key difference between foreign exchange and foreign direct investment (FDI)?

Foreign exchange involves currency exchange, while FDI involves physical assets (D) Signup and view all the answers

What is the main purpose of the "Balance of Payments"?

To track the flow of goods and services between countries (A) Signup and view all the answers

What is the impact of a stronger currency on a country's exports?

Exports become more expensive for foreign buyers, potentially decreasing demand (D) Signup and view all the answers

What is the primary motivation behind the push for de-dollarization?

Rivalry with China and the fallout from the Russia-Ukraine war (B) Signup and view all the answers

What does the text suggest about the feasibility of replacing the dollar as the dominant global currency?

It implies that replacing the dollar is a complex and challenging endeavor. (B) Signup and view all the answers

Which of the following events contributed to increased scrutiny of the dollar's dominance?

The implementation of new sanctions against Russia (D) Signup and view all the answers

What is the estimated daily volume of currency trading in the global market?

$8 trillion (D) Signup and view all the answers

Based on the text, who is seen as advocating for the continuation of the dollar's dominance?

Janet Yellen (C) Signup and view all the answers

Which of the following is NOT mentioned as a factor contributing to the potential decline of the dollar's dominance?

The growing popularity of the euro as a reserve currency (C) Signup and view all the answers

What is the primary implication of the phrase “sanctions-imposed exile from global financial systems”?

Russia's exclusion has spurred the development of alternative financial networks. (C) Signup and view all the answers

Which of the following best describes the text's overall tone towards the future of the dollar's dominance?

Neutral, presenting both sides of the argument (C) Signup and view all the answers

What is the meaning of “de-dollarisation” as used in the extract?

The process of reducing the use of the dollar in international transactions. (B) Signup and view all the answers

What is the significance of the “wrangling once again in Washington over the U.S. debt ceiling”?

It draws attention to the uncertainty surrounding the future of the US economy. (D) Signup and view all the answers

What defines a clean float currency system?

A system where currency value is determined solely by market forces. (A) Signup and view all the answers

Which of the following best describes a dirty float currency system?

A system that allows for some government intervention to maintain exchange rate stability. (B) Signup and view all the answers

What is the purpose of the Special Drawing Right (SDR) created by the IMF?

To serve as a benchmark for valuing a basket of currencies. (A) Signup and view all the answers

In which exchange rate system is government policy a crucial consideration?

Managed floating exchange rate system. (A) Signup and view all the answers

Which statement characterizes a fixed exchange rate system?

It uses government actions to maintain a set rate for its currency. (A) Signup and view all the answers

What is essential to evaluate when assessing a country's economic health?

Both trade and foreign direct investment (C) Signup and view all the answers

What factors can cause fluctuation in currency values?

Political stability and interest rates (C) Signup and view all the answers

Why is it necessary to protect against currency fluctuations in long-term transactions?

To mitigate potential business risks (D) Signup and view all the answers

What distinguishes the FOREX market from other markets?

It operates 24 hours a day in multiple global locations (B) Signup and view all the answers

Which of the following currencies is considered among the top traded currencies in the world?

Yen (D) Signup and view all the answers

What is a primary function of foreign currency exchange?

To facilitate trade transactions in various currencies (D) Signup and view all the answers

Which currency pair would involve the use of U.S. dollars when buying goods priced in Euros?

USD/Euro (A) Signup and view all the answers

Why is an increasing volume of international trade transactions significant?

It reflects a growing market for trading currencies (D) Signup and view all the answers

What is indicated by significant foreign direct investment and trade in a country?

A healthy and growing economy (B) Signup and view all the answers

What is the primary consequence of federal spending exceeding federal revenue?

Development of a budget deficit (C) Signup and view all the answers

How does the government fund a budget deficit?

Issuing public debt (bonds) (C) Signup and view all the answers

The growth of public debt can lead to which of the following outcomes?

Decreased investor interest in government bonds (A) Signup and view all the answers

What role do foreign investors play in the context of U.S. public debt?

They purchase U.S. issued debt (B) Signup and view all the answers

Which of the following is a possible effect of too much national debt on a country's currency?

Depreciation of the currency value (D) Signup and view all the answers

What does the phrase 'assess ability of USG to pay back debt' imply?

Speculation about U.S. government insolvency (B) Signup and view all the answers

What initiates the cycle of increasing national debt?

Budget deficits funded by public debt (D) Signup and view all the answers

What is the relationship between public debt and investor confidence?

Rising public debt can lead to diminished investor confidence (C) Signup and view all the answers

What is one of the results of investors losing confidence in a government’s ability to manage its debt?

Increased interest rates on government bonds (A) Signup and view all the answers

What can continued budget deficits lead to over time?

Mounting public debt (C) Signup and view all the answers

Study Notes

Introduction to Global Business - Chapter 4

This chapter covers the international flow of funds and exchange rates.
Key learning objectives include understanding balance of payments, foreign exchange markets, exchange rate influences, and current trends, including cryptocurrency and digital currency.

Learning Objectives

Explain the balance of payments for a country.
Describe the foreign exchange market and its components.
Identify key items influencing exchange rates.
Summarize trends in foreign exchange markets, including cryptocurrency and digital currencies.

Balance of Payments (BOP)

BOP represents all transactions between a country and the rest of the world over a specific period.
Transactions causing money inflow are credits; outflow are debits.
Components include the current account and financial account.

Current Account

Tracks trade balance, services balance, income balance, and net transfers.
Trade balance: Exports minus imports.
Services balance: Services exported minus services imported.
Income balance: Income earned from abroad minus income paid abroad.
Net transfers: Payments received from abroad minus payments made abroad.

Financial Account

Tracks capital flows (foreign direct investment - FDI).
FDI: Domestic and foreign investments in assets of another country.
Includes U.S. assets abroad, foreign assets in the U.S., and net financial derivatives.
The statistical discrepancy reconciles any imbalances between current and financial accounts.

Measuring Trade Success - Balance of Trade

Balance of trade measures a country's exports versus imports.
Exports minus imports equals a balance of trade.
Measured in currency units.

Foreign Exchange Markets

A global market for currency trading.
Involves multiple currencies and transactions in pairs.
Functions 24 hours a day in key financial centers.

Currency Summary

Trade involves various currencies.
Currency exchange pairs are used in trade transactions.
Market volume is large, with daily turnover reaching trillions of dollars.
Most transactions are speculative moves for currency arbitrage.
Fluctuating currency values are linked to macroeconomic factors.
Business risk is inherent in currency fluctuations.

Components of the Forex Market

Spot market: Immediate delivery of currencies.
Forward market: Delayed currency delivery at an agreed-upon future date.
Futures market: Similar to forward market, but standardized contracts.

Forex Trading Terms

Forward rate: The price at an earlier time for a currency in terms of another currency that is set for future delivery.
Discount: The selling of a currency at a spot rate lower than the forward rate.
Premium: The selling of a currency at a spot rate higher than the forward rate.
Hedge: Reduces future risk by locking in an exchange rate.

Hedging

Important risk mitigation tool for businesses involved in international trade.
Businesses use hedging to protect against currency fluctuations.
Hedging involves locking in a future currency exchange rate.

Key Factors Affecting Exchange Rates

Inflation
Interest rates
Current account deficits
Public debt
Political stability and economic performance
Terms of trade

Summary - Business Risks with Foreign Currency

Analyze the level of risk.
Take appropriate action (e.g. hedging, using spot/forward markets).
Be aware of macro-level economic stability, political stability, interest rates, and potential government intervention.

Trends in Foreign Exchange Markets

Growth of FOREX is expected to continue.
Cryptocurrencies are increasingly important.
Asian currencies are gaining prominence.
Cryptocurrency trading, backed or unregulated by governments, influences the market.

Volatility of Russian Ruble

In 2022-2023, the Russian Ruble experienced high volatility.
Fluctuations were impacted by multiple factors from global events.

Cryptocurrency

Cryptocurrency (e.g., Bitcoin) is a digital, encrypted, and decentralized currency.
Blockchain technology underpins cryptocurrency.
Volatility is high.
Transactions are easy, making universal currency attractive.
It can eliminate the need for traditional financial institutions.

Cryptocurrency Acceptance

Some companies are accepting cryptocurrency as payment (e.g., athletes receiving wages).
High volatility of cryptocurrency can lead to issues including angry protests from citizens.
Potential use in international trade may be undermined by the volatility and legal concerns associated with the technology.

Crypto & Crime

Cryptocurrency has been used in criminal activities, including money laundering.
The US Treasury has imposed sanctions on some platforms used for these activities.

IMF Debt

IMF debt outstanding is high in certain countries (e.g., Argentina, Pakistan).
Geopolitical priorities and a lack of domestic accountability often fuel these large debts.

Example of Public Debt & Currency Impact - United States

Excessive Federal spending frequently leads to budget deficits.
Public debt (bonds) is used to fund deficits.
Foreign investors participate in funding the national debt.
Over time, large debt levels can impact an investor's confidence causing currency issues.

How did we obtain so much debt? (USA)

Federal spending, exceeding revenues (taxes), often leads to budget deficits.
Budget deficits have been funded via borrowing.
COVID-related stimuli (e.g. the CARES Act spending) resulted in substantial increases in debt.

Debt Purchased by Foreign Investors - US

Foreign investors own a significant portion of US government debt.
Large international holdings are influenced by trade.
Foreign investment is linked to the stability (i.e. or volatility) of the dollar.

Setting Exchange Rates

Independant floating exchange rate system: Exchange rates are determined by the market forces including supply and demand of each currency.
Managed floating exchange rate system: Government intervention in the economy manipulates the values of the individual currencies.
Fixed exchange rate system: Currency is pegged to another currency or a basket by the government.

US Dollar Impact

A strong US dollar can lead to lower import prices and higher export prices (making USD-denominated exports less competitive).
A weak US dollar can increase import costs and decrease export costs (making USD denominated exports more competitively priced).

Currency Fluctuations

Fluctuations in currency rates create inherent business risk for international transactions.
Businesses using foreign currency will need to analyze their level of risk and adopt mitigating strategies (hedging, spot/forward markets).
Macroeconomic factors, political stability, and possible government intervention all play a role in exchange rates.

Key Terms - Continued

Several key terms are defined for clarity in reading financial reports concerning currency and trade.

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Description

Test your knowledge on key concepts related to the balance of trade, foreign exchange markets, and currency dynamics. This quiz explores factors influencing exchange rates, the role of foreign direct investment, and the implications of currency strength. Dive into these essential topics in international economics!