Voluntary Export Restraint and Economic Implications of Trade Restrictions Quiz

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

Trade deficit

What does the terms of trade represent?

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

What does foreign direct investment involve?

Owning productive resources like land and factories in a foreign country

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

Multinational corporation

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

To provide access to products not produced domestically

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

Retail

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

Unexpected currency exchange restrictions imposed by their government

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

Special foreign exchange contracts for hedging exchange rate risk

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

To protect new industries from foreign competition and allow them to grow

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

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

Supporting new industries to grow and become competitive

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

By reducing risks associated with doing business abroad

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

Bubbles

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

Self-fulfilling balance of payments crisis

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

Lead to over-borrowing syndromes

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

Create financing difficulties and economic downturns

What aspect of economic performance can globalization affect?

Frequency of economic crises

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

Governments have fewer policy instruments

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

To avoid tariffs or quotas imposed by trading partners

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

It decreases

Who gains from a tariff placed on an imported good?

Domestic producers

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

Increase in domestic price

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

Revenue from the license charges

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

Leads to an equivalent decrease in quantity imported as the tariff

What are 'global funds'?

Funds that include US as well as foreign assets

Why have mutual funds become popular among investors?

They provide a low-cost method for portfolio diversification

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

Rapid increase in income levels

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

They provide low-cost investment options

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

Increased over ten times

How has globalization impacted investment trends?

Dependence on specific timing and locations for advantages

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

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.

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