Trial Exam International Economics P3 2024-1 PDF

Exam CECECN2A.1, 09-01-2023 Part 1: Multiple Choice questions (20 points) 1. BigBrother, a Dutch data driven security company headquartered in Ede, is expanding its activities in Europe. In order to decrease its costs, BigBrother assigned part of its software development to a small...

Exam CECECN2A.1, 09-01-2023 Part 1: Multiple Choice questions (20 points) 1. BigBrother, a Dutch data driven security company headquartered in Ede, is expanding its activities in Europe. In order to decrease its costs, BigBrother assigned part of its software development to a small company in Romania. This action is an example of: a. Vertical FDI b. Outsourcing c. Horizontal FDI. d. Off-shoring 2. Lenovo is a Chinese multinational technology company, founded in Beijing in 1984 as Legend, and incorporated in Hongkong in 1988. In 2014, Lenovo acquired Motorola Mobility, an American consumer electronics and telecommunications company, from Google. This action is an example of: a. Offshoring. b. Vertical Foreign Direct Investment. c. Outsourcing. d. Horizontal Foreign Direct Investment. 3. One of the main principles of the WTO is the most-favoured nation principle. It means that: a. countries are allowed to grant their most-favoured nation special favours, like lower customs duties b. when a country grants another country a special favour, it has to do so to all other WTO members c. after entering the market, all imported and locally-produced goods and services should be treated equally d. after entering the market, goods and services imported from the most-favoured nation are allowed to be given preferential treatment  4. two products, shirts and wine. The only production factor is labor and it is measured in (employment) hours. The table below shows how many hours it takes each country to produce one unit of each product. Table 1: overview of production costs (in hours of labor/unit) Canada (CA) Italy (IT) Shirts 1 2 Wine 3 2 Assume that all the assumptions in the Ricardian theory hold (for instance, migration is not possible, but labor mobility from one production sector to another is possible within the same economy). Based on the information above: a. Canada has the absolute advantage in wine and the comparative advantage in wine; Italy the absolute advantage in shirts and the comparative advantage in shirts. b. Canada has the absolute advantage in shirts and the comparative advantage in shirts; Italy the absolute advantage in wine and the comparative advantage in wine. c. Canada has the absolute advantage in wine and the comparative advantage in shirts; Italy the absolute advantage in shirts and the comparative advantage in wine. d. Canada has the absolute advantage in shirts and the comparative advantage in wine; Italy the absolute advantage in wine and the comparative advantage in shirts. 5. Return to the information provided in Question 4 and assume that the two countries start trading. The Grubel-Lloyd Index for wine will be equal to: a. Zero for Canada and one for Italy. b. One for Canada and zero for Italy. c. Between zero and one for Canada d. Zero for both countries. 6. Return to the information provided in Question 4 and assume that the two countries have not started to trade yet, but they are negotiating the terms of trade. Assume further that Italy suggests the following terms of trade: ‘2 units of shirts should be traded for 1 unit of wine’. Canada will: a. Refuse to trade, because the terms of trade are not fair for Italy. b. Accept, because the terms of trade lie between the domestic prices. c. Refuse, because the terms of trade are not fair for Canada. d. None of the above.  7. The EU imposed market-access restrictions upon fish imported from the United Kingdom. The measures forbid UK fisherman to use small-sized fishing net technology that threatens the lives of new-born fish. Which of the following best represents this legislation? a. Voluntary export quotas. b. Import quotas c. Local content requirements. d. Technical, health or environmental standards. 8. the residents of a country receive the repayment of a previous provided loan to foreigners, it is counted as a a. credit in the current account. b. credit in the financial account. c. credit in the capital account. d. credit in net errors and omissions 9. Use the following table to answer MC-questions 9 and 10. All values are measured as a percentage of GDP. Table 2: Overview of saving and spending Savings by households 6 Saving by business 15 Private investment 22 Net taxes paid 24 Government spending on goods and services 26 Based on Table 2, total savings, private plus public, is equal to a. 6 percent of GDP. b. 19 percent of GDP. c. 21 percent of GDP. d. 23 percent of GDP. 10. Based on Table 2, the current account balance is a. -1 percent of GDP. b. +1 percent of GDP. c. -3 percent of GDP. d. +3 percent of GDP. Part 2 (24 points) Before answering the question, first read the article ‘China Trade Slump in November’. The article was published on December 7, 2022, by ING-Think. China trade slump in November Both exports and imports continued to contract on a yearly basis, which is the result of supply disruption in China as well as weak demand from the US and Europe. Looking forward, weak external demand could drive China's exports even lower Trade slump China's exports and imports contracted by 8.7% and 10.6% year-on-year in November, respectively, after contracting by 0.3% and 0.7% in October. Not everything is so bad. China's exports to ASEAN, which is now the number one export destination for China, still grew 2.9% YoY in November. China's exports to Europe, another big destination after ASEAN and the US, grew 1.5% YoY. China's exports to the US fell 13.2% YoY in the month. Bear in mind that the role of ASEAN for China is more of a joint supply chain than a final goods export destination. This implies that production activity for exports grew slightly in November. But final exports to the US and Europe were weak, especially exports to the US. This could mean that inventory will start to pile up as final goods sales were weak. Early indicator hints that slump in exports may continue Smartphone exports contracted 9.6% YoY in November. This could be a combined effect of supply disruption in China as well as weak demand in the US and Europe. But if we look further, it could be more an issue of weak demand. Imports from Taiwan contracted by 10.4% YoY in November. Parts and raw material imports into China for the production of electronic parts and electronic goods contracted. As we use semiconductors as an early indicator of growth, we believe that exports in the coming months should continue to contract. Questions: The article discusses China’s trade balance, which is part of the country’s Current Account of the Balance of Payments. As you know, China is one of the countries in the world with the highest trade surpluses. And the country has had trade surpluses for years. 1. Explain in a clear way the difference between a country’s trade balance and a country’s Current Account. (3 points) 2. Did China’s trade surplus increase or decrease in November 2022, as compared to the same month the year before? Explain your answer. (2 points) 3. Come up with two reasons why ASEAN (Association of South East Asian Nations) is China’s main export destination. Explain your answer clearly. (4 points) 4. Come up with a possible/likely explanation for the fact that China’s exports to the US have fallen way more than China’s exports to the European Union. (3 points) The Association of South East Asian Nations (ASEAN) is an example of a Free Trade Agreement (FTA). This is a type of Regional Trade Agreements (RTAs). Another example of a RTA is the European Union (EU). The European Union is an example of an Economic Union. 5. What are the main differences between a Free Trade Agreement and an Economic Union? (3 points) In the text it can be read that ‘the role of ASEAN for China is more of a joint supply chain than a final goods export destination’. 6. Explain in a clear way what is meant by this. (3 points) Beside the Current Account, a country’s Balance of Payments consists of the Financial Account. On the Financial Account the two most important sub accounts are Foreign Direct Investments (FDI) and Portfolio Investments. 7. Explain in a clear way two important differences between Foreign Direct Investments and Portfolio Investments. Next to that, come up with a clear/concrete example of both of them. (4 points) 8. Does China have a surplus or a deficit on its Financial Account? Explain your answer clearly. (2 points) Part 3 (15 points) The EU is the world’s second biggest importer of soybeans, after China. Most of the soybeans imported by the EU come from Brazil, the USA and Argentina. As a consequence, soybean trade policy by the EU could have an impact on the world market for soybeans. Now assume that EU imports soybeans at a world market price of $12 per bushel (1 bushel = 0.035M3). The figure below represents the EU market for soybeans. (quantities in billions of bushels). Suppose that the European Union (EU) decides to place a tariff on soybeans such that it raises the domestic/EU price to $14 and lowers the world market price to $10. Questions: 1. Before introduction of the tariff, how much soybean is imported? (3 points) 2. How are the benefits and costs of this tariff distributed among consumers and producers? (So you have to calculate the change in consumer surplus and the change in producer surplus. Show your calculations.) (6 points) 3. Assuming that the EU is able to collect the full tariff revenues, calculate the direct government receipts from the tariff. Show your calculations. (3 points) 4. Is the overall impact of the tariff on EU welfare positive or negative? Explain your answer. (3 points) Part 4 (21 points) Before answering the questions below, first read the article ‘SNB preview: 50bp rate hike expected as inflation moves in the right direction’. The article was published by ING-Think on December 9 2022. SNB preview: 50bp rate hike expected as inflation moves in the right direction The Swiss National Bank (SNB) meets on 15 December and is expected to decide on a third rate hike, this time probably by 50bp, in the context of a stabilisation of inflation at 3%. A further rate increase could then take place in March 2023, after which rates are likely to remain unchanged. We forecast further nominal CHF appreciation in the first half of 2023. New tightening to come After years of fighting deflation with a very accommodating monetary policy, including interventions in the foreign exchange market to weaken the Swiss franc and the lowest policy interest rate in the world, the SNB began a normalisation of monetary policy in June 2022 to fight inflation. After a 50bp increase in June and a 75bp increase in September, the Swiss policy rate returned to positive territory at 0.5%. In November, inflation in Switzerland stabilised at 3%, down from the August peak of 3.5%. Inflation is therefore still above the SNB's target of between 0-2%, but well below that of neighbouring countries, thanks to a more favourable energy mix, a lower share of energy in consumption and the strength of the Swiss franc, which Economic and Financial Analysis FX 9 December 2022 Article limits imported inflation. As a result, we expect the SNB to raise its policy rate by 50bp at the December meeting, leading to a total rate increase over the year 2022 of 175bp in Switzerland, against probably 250bp in the eurozone and 425bp in the US over the same period. Going forward, we expect price growth to decelerate gradually but slowly, remaining above target for the first half of the year, before falling back below 2% by the end of 2023. We expect the SNB to make a final 50bp hike at its March 2023 meeting, bringing the rate to 1.5% and leaving it there for an extended period. FX: Does the SNB still want a firmer Swiss franc? EUR/CHF goes into the December SNB meeting not far from second-half highs at 0.9900/9950. Recent trading ranges have been relatively subdued after the volatility seen throughout the summer. While the SNB will say that it does not target the exchange rate, earlier this year it had been happy to announce it had backed nominal appreciation in the Swiss franc. And a core piece of communication during this second half has been that the SNB is prepared to intervene on both sides of the market. Historically it had only been happy to sell the Swiss franc as it battled deflation. Its stance on intervention is now more equivocal. On the basis of the above analysis, a further nominal CHF appreciation is our call in the first half of 2023. Our forecast for EUR/CHF is that it will be at 0.95 next spring. Questions: The article discusses the development of the Swiss franc over the last half year/few months. During that time, the Swiss franc has appreciated against several other currencies among which the euro. 1. Explain in a clear way, and explicitly based on the information in the text, that the rise in Swiss interest rates CANNOT explain the recent appreciation of the Swiss franc. (4 points) 2. State and explain, based on the exchange rate theories you studied, two factors that CAN explain the recent appreciation of the Swiss franc. (4 points) The strong Swiss franc is mentioned in the article as one of the factors contributing to the (relatively) ‘low’ inflation rate in Switzerland. 3. Explain in a clear way how a strong currency can help reduce/keep down the inflation rate in a country. (3 points) Even though the Swiss franc is officially under a system of flexible/floating exchange rate, the Swiss National Bank (SNB) intervenes on the currency market every once in a while, as can be read in the article. 4. What does it mean that a currency is under ‘flexible exchange rates’? And what alternative exchange rate system(s) can countries choose for? Explain your answer in a clear way. (3 points) 5. Explain in a clear way WHAT is meant by ‘currency market intervention’ and explain HOW exactly the Swiss National Bank should intervene to appreciate the Swiss franc. (4 points) As can be read in the article, currently the exchange rate between the euro and the Swiss franc is: EUR 1 = CWF 0.9950. According to ING, the exchange rate of the EUR/CHF will be 0.95 next spring. 6. By what percentage is the Swiss franc expected to appreciate over the next half year, according to the forecast of ING? Show your calculations. (3 points)