Voluntary Export Restraint and Economic Implications of Trade Restrictions Quiz

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Questions and Answers

Which term refers to the situation where a country's exports are less than its imports?

Foreign direct investment

Terms of trade

Multinational corporation

Trade deficit (correct)

What does the terms of trade represent?

The quantity of goods a country produces for export

The ratio of export volume to import volume

The ratio of a country's export prices to import prices relative to a base value (correct)

The amount of goods a country exports compared to what it imports

What does foreign direct investment involve?

Collaborating with multinational corporations

Selling products in foreign markets

Owning productive resources like land and factories in a foreign country (correct)

Importing goods from foreign countries

Which term describes a company that has invested in production facilities and subsidiaries in foreign countries?

Multinational corporation Signup and view all the answers

Why is international trade important for our standard of living according to the text?

To provide access to products not produced domestically Signup and view all the answers

Which sector benefits significantly from international trade according to the text?

Retail Signup and view all the answers

Why might foreign firms be unable to pay even if they are willing to?

Unexpected currency exchange restrictions imposed by their government Signup and view all the answers

What is one of the trade risk-reducing instruments mentioned in the text?

Special foreign exchange contracts for hedging exchange rate risk Signup and view all the answers

Why do some economists support the concept of protection for infant industries?

To protect new industries from foreign competition and allow them to grow Signup and view all the answers

What is the purpose of export credit insurance mentioned in the text?

To reduce the risks of nonpayment when granting trade credit to foreign buyers Signup and view all the answers

What potential benefits do some economists believe trade restrictions can bring to a country?

Supporting new industries to grow and become competitive Signup and view all the answers

How do evolving practices and market developments help firms in international trade?

By reducing risks associated with doing business abroad Signup and view all the answers

Which of the following can result from imperfections in the market according to the text?

Bubbles Signup and view all the answers

What might happen if investors speculate against a currency due to perceived unsustainable exchange rates?

Self-fulfilling balance of payments crisis Signup and view all the answers

How can moral hazard affect investors or countries according to the text?

Lead to over-borrowing syndromes Signup and view all the answers

What impact can sudden shifts in foreign capital flows have on a country dependent on external factors?

Create financing difficulties and economic downturns Signup and view all the answers

What aspect of economic performance can globalization affect?

Frequency of economic crises Signup and view all the answers

Why does international financial cooperation become more important in a more integrated world according to the text?

Governments have fewer policy instruments Signup and view all the answers

What is the purpose of a Voluntary Export Restraint (VER)?

To avoid tariffs or quotas imposed by trading partners Signup and view all the answers

What happens to the quantity imported when a tariff is placed on an imported good?

It decreases Signup and view all the answers

Who gains from a tariff placed on an imported good?

Domestic producers Signup and view all the answers

What is the main impact of a quota on a good imported to a country?

Increase in domestic price Signup and view all the answers

What does the domestic government gain if it charges for import licenses to foreign countries?

Revenue from the license charges Signup and view all the answers

What is an equivalent quota in relation to a given tariff?

Leads to an equivalent decrease in quantity imported as the tariff Signup and view all the answers

What are 'global funds'?

Funds that include US as well as foreign assets Signup and view all the answers

Why have mutual funds become popular among investors?

They provide a low-cost method for portfolio diversification Signup and view all the answers

What factor has led to the growth in the buying of foreign securities directly by individuals?

Rapid increase in income levels Signup and view all the answers

Why do investors prefer investing in 'emerging country funds'?

They provide low-cost investment options Signup and view all the answers

What has been the trend in US investments outside the country since the mid-1970s?

Increased over ten times Signup and view all the answers

How has globalization impacted investment trends?

Dependence on specific timing and locations for advantages Signup and view all the answers

Study Notes

International Trade and Investment

Trade deficit occurs when a country's exports are less than its imports
Terms of trade: ratio of export prices to import prices, expressed relative to a base value of 100
Foreign direct investment: ownership of productive resources in a foreign country
Multinational corporation: a firm with foreign direct investment in one or more foreign countries

Importance of International Trade

International trade is essential for our standard of living and daily activities
Examples of international trade include:
- Toys and electrical equipment from Japan
- Clothing from India and UK
- Vehicles from Germany, Japan, and France using petrol from Saudi Arabia and India
- Tea from India, coffee from Brazil, whiskey from Scotland, and wine from various countries

Risks in International Trade

Country risks include:
- Imposition or change of import tariffs or non-tariff barriers
- Quotas and subsidization of local producers
Risk-reducing instruments and practices:
- Foreign exchange contracts to hedge against exchange rates risk
- Export credit insurance and letters of credit to reduce risks of nonpayment

Types of Trade and Capital Restrictions

Reasons for trade restrictions:
- Infant industry protection
- Voluntary export restraint
Economic implications of trade restrictions:
- Tariffs increase domestic price, decrease quantity imported, and increase domestic supply
- Quotas restrict quantity imported, increase domestic price, and grant import licenses to foreign countries

Mutual Funds and Globalization

Mutual funds provide:
- Low-cost method for private investors to achieve portfolio diversification
- Opportunity to invest in foreign assets
Growth in popularity of mutual funds due to:
- Increased income and desire for alternative investments
- Ability to reduce contracting and information costs
Globalization of investment:
- US investments abroad increased over ten times since the mid-1970s
- Challenges and advantages of globalization, including bubbles, herding behavior, and speculative attacks

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Test your knowledge on voluntary export restraints and the economic effects of trade restrictions such as tariffs and subsidies. Explore how countries restrict exports voluntarily and the impact of tariffs on prices, imports, and domestic supply.