International Economics Introduction

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Questions and Answers

What is one of the primary objectives of the IMF regarding its member countries?

  • To provide military assistance
  • To help member countries manage balance of payments deficits (correct)
  • To regulate international trade tariffs
  • To establish currency control over member nations

Which facility allows members to borrow up to 140% of their quota from the IMF?

  • Structural Adjustment Facility
  • Compensatory Financing Facility
  • Extended Fund Facility (correct)
  • Basic Credit Facility

What is the significance of Special Drawing Rights (SDRs) created by the IMF?

  • They are only allocated during crises.
  • They are used for foreign direct investments.
  • They function as a form of international reserves. (correct)
  • They serve exclusively as a loan mechanism.

What percentage of a member's quota can be borrowed unconditionally in a year through the Basic Credit Facility?

<p>25% (A)</p> Signup and view all the answers

Which function of the IMF involves providing technical consultancy to member countries?

<p>Consultative Counseling (B)</p> Signup and view all the answers

What are the Special Drawing Rights (SDRs) allocated based on?

<p>The Fund quotas of member nations (B)</p> Signup and view all the answers

Which of the following is NOT a function of the IMF?

<p>Establishing international trade laws (A)</p> Signup and view all the answers

How does the Basic Credit Facility assist member nations?

<p>By allowing members to exchange their currencies for SDRs (B)</p> Signup and view all the answers

What is the primary purpose of the Compensatory Financing Facility established by the IMF in 1963?

<p>To provide financial assistance to countries facing shortfalls in export earnings. (A)</p> Signup and view all the answers

Which facility was introduced by the IMF to help stabilize prices of primary goods like food grains?

<p>Buffer Stock Facility (B)</p> Signup and view all the answers

What was a significant feature of the Structural Adjustment Facility and Enhanced Structural Adjustment Facility?

<p>They mandate strong macroeconomic reforms in low income countries. (B)</p> Signup and view all the answers

What role does the IMF play in achieving monetary discipline and cooperation among member countries?

<p>It provides assistance only to countries making sincere reform efforts. (D)</p> Signup and view all the answers

How does the IMF assist member countries in meeting their foreign exchange requirements?

<p>By utilizing its stock of national currencies in a monetary reserve fund. (D)</p> Signup and view all the answers

What is one of the main focuses of the IMF regarding developing countries?

<p>To provide financial resources for solving their balance of payments problems. (C)</p> Signup and view all the answers

Which facility was implemented to provide temporary supplemental financial assistance related to members' quota sizes?

<p>Supplementary Financing Facility (C)</p> Signup and view all the answers

What is India's current quota in the IMF expressed in SDRs?

<p>5,821.5 million SDRs (A)</p> Signup and view all the answers

Which of the following is NOT an objective of the IMF?

<p>Restoration of Peace-time Economy (A)</p> Signup and view all the answers

What type of assistance is primarily provided by the IMF for Balance of Payments issues?

<p>Short-term loans to cover deficits (D)</p> Signup and view all the answers

Which of the following best describes Special Drawing Rights (SDRs)?

<p>Reserve asset created by the IMF (B)</p> Signup and view all the answers

How does the World Bank primarily differentiate its loan types?

<p>Through own funds, borrowed capital, and guarantees (D)</p> Signup and view all the answers

What is one of the main purposes of the International Bank for Reconstruction and Development (IBRD)?

<p>To ensure long-term financial assistance for development (B)</p> Signup and view all the answers

Which of the following statements about the IMF's role in international finance is incorrect?

<p>It directly funds infrastructure projects. (C)</p> Signup and view all the answers

What role does the IMF play when providing financial assistance to countries?

<p>It requires member countries to adopt specific policies. (B)</p> Signup and view all the answers

Flashcards

IMF Basic Credit Facility

A short-term financial assistance provided by the IMF to member nations facing balance of payments issues.

Reserve Tranche

The maximum amount a member nation can unconditionally borrow from the IMF in a year, equivalent to 25% of its quota.

Special Drawing Rights (SDRs)

An international reserve asset created by the IMF to address international liquidity issues.

SDR Allocation

SDRs are allocated to member countries based on their quotas in the IMF.

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IMF Extended Fund Facility

An IMF credit facility offering additional borrowing, up to 140% of a member's quota, beyond the basic facility, typically for up to 3 years.

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Balance of Payments (BOP)

A record of all economic transactions between a country and the rest of the world during a given period of time.

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IMF Financial Function

Assisting in correcting short-term and medium-term Balance of Payments (BOP) deficits of members.

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IMF Regulatory Function

Setting of global standards and code of conduct in international finance.

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IMF: What is it?

The International Monetary Fund (IMF) is a global organization that aims to stabilize the global economy, foster international monetary cooperation and facilitate international trade.

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IMF: What does it do?

The IMF provides financial assistance to countries experiencing balance of payments difficulties, promotes economic stability, and provides technical assistance to countries seeking to strengthen their economic policies.

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World Bank: What is it?

The World Bank (WB) is a global financial institution aiming to promote economic development and reduce poverty in low- and middle-income countries.

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World Bank: What does it do?

The World Bank provides loans, grants, and technical assistance to developing countries, focusing on projects related to infrastructure, education, healthcare, and environmental protection.

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IBRD: What is it?

The International Bank for Reconstruction and Development (IBRD) is one of the World Bank's institutions, specifically designed for middle-income countries.

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IBRD: What does it do?

The IBRD provides loans and guarantees to middle-income countries, focusing on projects that promote economic growth and sustainable development.

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IMF & World Bank: Connection?

Membership in the IMF is a prerequisite for becoming a member of the World Bank.

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World Bank Objectives: What are they?

The World Bank's objectives include promoting economic reconstruction, development, capital investment, international trade, establishing peace-time economies, and environmental protection.

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Compensatory Financing Facility

An IMF program established in 1963 to help countries facing shortfalls in export earnings, especially primary producing nations. In 1981, the facility was expanded to cover payment issues caused by fluctuating cereal input costs.

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Buffer Stock Facility

An IMF program launched in 1969 to support countries producing primary goods, like food grains, by financing their contributions to buffer stock arrangements aimed at stabilizing prices.

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Supplementary Financing Facility

An IMF program providing temporary financial assistance to countries facing payment difficulties due to their current IMF quota restrictions.

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Structural Adjustment Facility (SAF)

An IMF program established in 1986 to provide concessional loans to poorer member countries experiencing balance of payments problems. It focuses on promoting economic growth by encouraging strong macroeconomic and structural reforms.

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Enhanced Structural Adjustment Facility (ESAF)

An IMF program introduced in 1987, building upon the SAF, to increase concessional resources for low-income countries. Similar in purpose to SAF, aiming for stronger economies.

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IMF's Role in Monetary Reserve

The IMF plays a key role in building up a sizable stock of national currencies from different countries. This stock serves as foreign exchange reserves to assist member nations in meeting their international financial obligations.

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IMF and Monetary Discipline

The IMF promotes monetary discipline and cooperation among member countries by providing assistance only to those making genuine efforts to address their economic challenges.

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IMF's Focus on Developing Countries

The IMF has a special focus on assisting developing countries, providing financial assistance to address balance of payments issues and promote economic development.

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Study Notes

International Economics Introduction

  • International Economics evolved from a simple theory of international trade.
  • It originated in Western Europe due to increasing importance of foreign trade.
  • Key figures in shaping International Economics include Adam Smith, David Haberler, Ricardo, F.W. Taussig, Haberler, J.S. Mill, and Bela Balassa.

Meaning of International Economics

  • International Economics is the branch of economics focusing on the exchange of goods and services between two or more countries.
  • It examines economic interdependence among countries and its impact.

Subject Matter of International Economics

  • The subject matter is vast and categorized into different parts.

1. Pure Theory of Trade

  • Explains the reasons for foreign trade, trade composition, volume, and direction.
  • Details the determination of terms of trade and exchange rates.
  • Discusses trade balances and balance of payments.

2. Policy Issues

  • Examines free trade vs. protectionism and methods of trade regulation.
  • Covers capital and technology flows, taxation, subsidies, dumping, exchange control, convertibility, foreign aid, and correcting disequilibria in the balance of payments.

Meaning of Trade

  • Trade refers to the exchange of goods and merchandise.
  • It's of two types: internal and international trade.

1. Internal Trade

  • Exchange of goods and services within a country's borders.
  • Also called domestic or intra-regional trade.

2. International Trade

  • Exchange of goods and services between two or more countries.
  • Synonymous with external trade or foreign trade or inter-regional trade.

Theories of International Trade

  • Adam Smith introduced the theory of absolute cost advantage.
  • David Ricardo developed the theory of comparative cost advantage.

Classical Trade Theories

  • Mercantilism (pre-16th century)
  • Absolute advantage (Adam Smith)
  • Comparative advantage (David Ricardo)

International Cartels and Trade Blocs

  • Focuses on economic integration, such as international cartels, customs unions, monetary unions, trade blocs, and MNCs (multinational corporations).

International Financial and Trade Regulatory Institutions

  • Financial institutions such as IMF, IBRD, WTO that influence international economic transactions.

International Economics - Summary

  • International Economics analyses the exchange of products and services across countries.
  • It investigates the various facets of international trade, like tariffs, regulations, and investments.
  • It also explores the impacts of these interactions on the global economy and individual countries.

Foreign Direct Investment (FDI)

  • FDI is a significant aspect in the global economy.
  • It's closely related to foreign trade and is influential in developing economies.
  • FDI can lead to increased trade volume, substitute foreign trade, and accelerate economic growth.

Objectives of FDI

  • Sales expansion
  • Acquisition of resources
  • Diversification
  • Minimization of competitive risk.

Advantages of FDI

  • Increase investment level, income, and employment in the host country
  • Facilitates technology transfer to the recipient country

Disadvantages of FDI

  • Prioritizing high-profit areas over other sectors
  • Technologies may not be appropriate for the country's needs
  • Adverse balance of payments
  • Impact on national politics and fair trade practices
  • Possible destruction or weakening of small and medium enterprises

International Monetary Fund (IMF)

  • Aims to promote international monetary cooperation.
  • Facilitates trade and balance growth.
  • Eliminates exchange depreciations.
  • Establishes multilateral trade/payment systems
  • Promotes capital flow from developed to developing nations.
  • Addresses the problem of international liquidity.

Functions of IMF

  • Brings exchange rate stability.
  • Corrects balance of payment disequilibria
  • Sets par values for currencies.
  • Balances currency demand/supply.

International Bank for Reconstruction and Development(IBRD) or World Bank

  • Aims for reconstruction/development of war-torn countries
  • Encourages capital investment.
  • Fosters international trade.
  • Establishes a peacetime economy.
  • Protects the environment.

World Trade Organization (WTO)

  • Supports multilateral trade.
  • Sets guidelines for goods and services trade
  • Reduces tariffs and other barriers to trade
  • Eliminates trade discrimination
  • Facilitates optimal use of global resources
  • Enables developing countries to participate in world trade.

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