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Questions and Answers
What primary effect do subsidies to local companies aim to achieve in the export market?
What primary effect do subsidies to local companies aim to achieve in the export market?
Which statement is true regarding fixed exchange rates?
Which statement is true regarding fixed exchange rates?
How do changes in exchange rates specifically affect exports?
How do changes in exchange rates specifically affect exports?
What economic impact can an increase in interest rates have on a country's attractiveness to investors?
What economic impact can an increase in interest rates have on a country's attractiveness to investors?
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What characterizes a hybrid exchange rate system?
What characterizes a hybrid exchange rate system?
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What can be a consequence of import controls in a country?
What can be a consequence of import controls in a country?
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In a floating exchange rate system, what determines the currency value?
In a floating exchange rate system, what determines the currency value?
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Which of the following best describes the effects of exchange rates on business investment?
Which of the following best describes the effects of exchange rates on business investment?
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What indirect effect can high-interest rates have beyond investment attraction?
What indirect effect can high-interest rates have beyond investment attraction?
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Which is NOT a characteristic of a floating exchange rate?
Which is NOT a characteristic of a floating exchange rate?
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Study Notes
Specialization
- Countries should specialize in the production of goods where they have a competitive advantage.
- Country A excels in producing product F; Country B excels in producing product H.
- Complete specialization is rare due to strategic considerations.
Restrictions to International Trade
- Quotas: Limits on the quantity of specific imports.
- Tariffs: Taxes levied on imported goods.
- Exchange Controls: Restrictions on currency purchases that inhibit imports.
- Subsidies: Financial aid to local businesses to enhance competitiveness by lowering production costs.
- Qualitative Controls: Regulations focused on product quality rather than quantity or price.
Balance of Payments
- Records a country's international trade transactions over a specified period, typically one year.
- Money flows are noted: imports negatively impact the balance (money out), while exports positively impact it (money in).
- Comprised of current transactions (goods and services) and capital transactions (investments).
Current Transactions
- Comprises the current account tracking money flows for goods and services.
- Visible Trade: Involves tangible goods (exports and imports).
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Invisible Trade: Involves services and includes:
- Services like banking and hospitality.
- Financial transactions (interests, profits, dividends).
- Transfers, such as donations and payments to international organizations.
Capital Transactions
- Represent funds moving for investment purposes between countries.
- Include public and private sector funds as well as both long-term and short-term monetary movements.
Equilibrium in the Balance of Payments
- Surplus: Occurs when exports outstrip imports in the current account.
- Deficit: Happens when imports exceed exports.
- Surplus in the current account can offset a capital account outflow.
Methods of Correcting Balance of Payments Deficits
- Authorities can address deficits where outflows exceed inflows by:
- Lowering the exchange rate to make exports cheaper and imports costlier.
- Providing subsidies to local firms to boost exports.
- Implementing import controls to limit incoming goods.
- Raising interest rates to attract investors and mitigate current account deficits.
Exchange Rates
- Defined as the price of one currency in terms of another.
- Exchange is necessary for international trade, e.g., exchanging US dollars for Omani riyals.
Types of Exchange Rates
- Floating Exchange Rate: Influenced by market conditions without government intervention.
- Fixed Exchange Rate: Remains unchanged over time.
- Hybrid Exchange Rate: A combination of floating and fixed rates.
Exchange Rates and Business
- Fluctuations in exchange rates can:
- Impact the competitiveness of exports.
- Affect the ease with which foreign competitors enter domestic markets.
- Create uncertainty in trading and investment environments.
- Change the cost structure for imports.
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Description
This quiz assesses understanding of international trade, specializing in producing products where countries have a comparative advantage. It explores the concept of comparative advantage and its application in international trade.
