Gap filling

Chapter 1
1. The purchase, sale, or exchange of goods and services across national borders is
called International trade.
2. The trade theory that nations should accumulate financial wealth, usually in the
form of gold, by encouraging exports and discouraging imports is called
mercantilism.
3. Trade surplus is the condition that results when the value of a nation’s exports is
greater than the value of imports.
4. A condition that results when the value of a country’s imports is greater than the
value of its exports is called trade deficit.
5. When a nation can only increase its share of wealth at the expense of its neighbors,
it is called a zero-sum game
6. Absolute advantage is the ability of a nation to produce a good more efficiently
than any other nation.
7. Comparative advantage argues that trade is still beneficial even if one country is
less efficient in the production of two goods, so long as it is less inefficient in the
production of one of its goods.
8. Factor proportion theory states that countries produce and export goods that
require resources that are abundant and import goods that require resources in short
supply.
9. The New Trade Theory states that (1) there are gains to be had from
specialization and increasing economies of scale, (2) those companies first to enter a
market can create barriers to entry, and (3) the government may have a role to play in
assisting its home-based companies.
10. The economic and strategic advantage gained by being the first company to enter
an industry is called First-mover Advantage
11. The National Competitive Advantage theory states that a nation’s
competitiveness in an industry depends on the capacity of the industry to innovate and
upgrade.

1. The pattern of imports and exports that would result in the absence of trade barriers
is called free trade.
2. First-mover advantages result because economies of scale limit the number of
companies that an industry can sustain.
3. Financial assistance to domestic producers in the form of cash payments, low-
interest loans, tax breaks, product price supports, or some other form is called
subsidy.
4. When a government guarantees that it will repay the loan of a company if the
company should default on repayment, it is called a loan guarantee.
5. A designated geographic region in which merchandise is allowed to pass through
with lower customs duties and/or fewer customs procedures is called a (n) foreign
trade zone.
6. A tariff is a government tax levied on a product as it enters or leaves a country.
7. A tariff levied by the government of a country that is exporting a product is called
an export tariff.
8. A transit tariff is a tariff levied by the government of a country that a product is
passing through on its final destination.
9. A tariff levied by the government in a country importing a product is called an
import tariff.
10. A tariff levied as a percentage of the stated price of an imported product is called
Ad valorem tariff.
11. A tariff levied as a specific fee for each unit (measured by number, weight, etc.) of
an imported product is called specific tariff.
12. A tariff levied on an imported product and calculated partly as a percentage of its
stated price, and partly as a specific fee for each unit is referred to as a (n) compound
tariff.
13. Restriction on the amount of a good that can enter or leave a country during a
certain period of time is called a quota.
14. Countries normally self-impose a voluntary export restraint in response to the
threat of an import tariff or total ban on a product by an importing nation.
15. A lower tariff rate for a certain quantity of imports and a higher rate for quantities
that exceed the quota is referred to as a (n) tariff-quota.
16. A complete ban on trade (imports and exports) in one or more products with a
particular country is called an embargo.
17. Laws stipulating that a specified amount of a good or service be supplied by
producers in the domestic market are called Local content requirements.
18. Regulatory controls or bureaucratic rules designed to impair the rapid flow of
imports into a country are administrative delays.
19. Currency controls can reduce imports by stipulating an exchange rate that is
unfavorable to potential importers.
20. The WTO is the only international body dealing with rules of trade between
nations.
21. A key component of the WTO that was carried over from the GATT is the
principle of nondiscrimination called normal trade relations.
22. When a company exports a product at a price lower than the price normally
charged in its domestic market, it is said to be dumping.
23. Countervailing duty is an additional tariff placed on an imported product that a
nation believes is receiving an unfair subsidy
24. Anti-dumping duty is an additional tariff placed on an imported product that a
nation believes is being dumped on its markets.

1. If a country can produce something more cheaply than anywhere else in the world,
it has an Absolute advantage
2. A country exporting more than it imports has a trade surplus
3. Autarky is the (impossible) situation in which a country is completely self-
sufficient and has no foreign trade.
4. Countries that export a lot of oil or manufactured goods tend to have a positive
Balance of trade
5. The WTO has established rules for trade between nations.
6. Balance of payments is the difference between what a country pays for all its
imports and receives for all its exports.
7. Many economists encourage governments to abolish import taxes and have
complete free trade
8. Importing and Exporting are the two aspects of foreign trade: a country spends
money on goods it imports and gains money through its exports
9. Unlike quotas, tariffs produce revenue for the government.

Chapter 2:
1. The purchase of physical assets or a significant amount of ownership of a company
in another country to gain a degree of management control is called FDI.
2. PI is an investment that does not involve obtaining a degree of control in a
company.
3. The international product life cycle theory states that a company will begin by
exporting its product and later undertake foreign investment as a product moves
through its life cycle.
4. The Eclectic theory states that firms undertake foreign direct investment when the
features of a particular location combine with ownership and internalization advantage
to make a location appealing for investment.
5. The advantage of locating a particular economic activity in a specific location
because of the characteristics of that location is called Location advantage.
6. An internalization advantage is the advantage that arises from internalizing a
business activity rather than leaving it to a relatively inefficient market.
7. The extension of company activities into stages of production that provide a firm's
inputs or absorb its output is called vertical integration.
8. The market power theory states that a firm tries to establish a dominant market
presence in an industry by undertaking foreign direct investment.
9. The benefit of market power is greater profit because the firm is far better able to
dictate the cost of its inputs and /or the price of its outputs.
10. The greenfield investment refers to building a subsidiary abroad from the ground
up.
11. A system of production in which each of a product's components is produced in
that location in which the cost of producing the component is lowest is called
rationalized production.
12. A country's balance of payment is a national account that records all payments to
entities in other countries and all receipts coming into the nation.
13. The current account is a national account that records transactions involving the
import and export of goods and services, income receipts on assets abroad, and
income payments on foreign assets inside the country.
14. When a country imports more goods, services, and income than it exports, it is
called a current accounts deficit.
15. A current account surplus occurs when a country exports more goods, services,
and income than it imports.
16. The capital account is a national account that records transactions that involve the
purchase or sale of assets.
17. Performance demands influence how international companies operate in host
nations.
18. Ownership restrictions prohibit non-domestic companies from investing in
certain industries or owning certain types of businesses.

1. A cash grant is called an investment incentive whose purpose is to promote FDI

2. Most companies give foreign companies tax incentives to attract new investment.
3. What kind of ROI can I expect on my investment?

Chapter 3:
1. The market in which currencies are bought and sold and in which currency prices
are determined is called the Foreign exchange market.
2. The practice of insuring against potential losses that result from adverse changes in
exchange rates is called Currency hedging.
3. Currency arbitrage is the instantaneous purchase and sale of a currency in
different markets for profit.
4. Currency speculation is the purchase or sale of a currency with the expectation
that its value will change and generate a profit.
5. In a quoted exchange rate, the currency with which another currency is to be
purchased is called the Quoted currency.
6. In a quoted exchange rate, the currency that is to be purchased with another
currency is called the Base currency.
7. The exchange rate requiring delivery of the traded currency within two business
days is called the Spot rate.
8. The exchange rate at which two parties agree to exchange currencies on a specified
future date is called the Forward rate.
9. Forward contract is a contract requiring the exchange of an agreed-upon amount
of a currency on an agreed-upon date at a specific exchange rate.
10. A Currency swap is the simultaneous purchase and sale of foreign exchange for
two different dates.
11. Currency that trades freely in the foreign exchange market, with its price
determined by the forces of supply and demand is called a convertible currency/hard
currency.
12. Exchange of goods and services between two parties without the use of money is
called counter trade - barter.
13. An international monetary system in which nations linked the value of their paper
currencies to specific values of gold was called the Gold standard.
14. A system in which the exchange rate for converting one currency into another is
fixed by international agreement is called a Fixed exchange rate system.
15. The Bretton Woods Agreement was an accord among nations to create a new
international monetary system based on the value of the U.S. dollar.
16. The agency created by the Bretton Woods Agreement to provide funding national
economic development efforts is called the World Bank.
17. The IMF was the agency created by the Bretton Woods Agreement to regulate
fixed exchange rates and enforce the rules of the international monetary system.
18. An exchange-rate system in which currencies float against one another with
governments intervening to stabilize currencies at a particular target exchange rate is
known as a Managed float system.
19. Free float system is an exchange-rate system in which currencies float freely
against one another, without governments intervening in currency markets

1. Foreign exchange market is a market in which currencies are bought and sold and
in which currency prices are determined.
2. Dealer using two foreign exchange markets to benefit from rate differentials are
said to engage in Currency Arbitrage
3. speculators buy currencies when they expect their value to increase.
4. Increasing currency speculation is making exchange rates more volatile.
5. Hedging is the attempt to reduce risks: speculating is the opposite.
6. The Bretton Woods Agreement stipulated that all members would express their
currencies in US dollars
7. Gold standard is an international monetary system in which nations linked the
value of their paper currencies to a specific amount of gold.
8. Bretton Woods Agreement was an accord among nations to create a new
international monetary system based on the value of the dollar.
9. Hedging is the attempt to reduce risks; speculating is the opposite.
10. Bartering is based on the exchange of goods for goods.
11. When central banks intervene in the foreign exchange markets at the intervention
points, this is called the system of fixed exchange rates. The opposite is called the
system of floating exchange rates.
12. Central Banks of the member countries were required to intervene in the foreign
exchange markets to keep the value of their currencies within I percent of the par
value.
13. A Forward contract means that delivery of a currency is specified to take place at
a future date.
14.Arbitrage is the practice of transferring funds from one currency to another to
benefit from rate differentials.
15. Another verb for fixing exchange rates against something else is to peg them.
16. A currency can appreciate if lots of speculators buy it.
17. In fact we have managed floating exchange rates, because governments and
Central banks sometimes intervene on currency markets.
18. Commodities are raw materials such as agriculture products and metals that are
traded
19. If you hedge you make transactions that are designed to reduce risks regarding a
particular price, interest rate or exchange rate.
20. A speculator anticipates future changes in a market and makes risky transactions,
hoping to make a gain.
21.The forex is the mechanism through which foreign currencies are traded.
 Q&A
Chapter 1:

1. What brings the absolute advantage or comparative advantage to a country?

● Abundant natural resources and raw materials: These can give a country an
absolute advantage in producing goods that require these inputs, such as oil,
metals, or agricultural products. They can also lower the opportunity cost of
producing these goods, giving a country a comparative advantage over others
that have to import these resources or use more expensive alternatives.
● Climate: This can affect the productivity and quality of certain goods, such as
crops, tourism, or renewable energy. A favorable climate can give a country an
absolute or comparative advantage in these sectors, depending on the
availability and cost of other factors of production.
● Cheap or skilled labor: This can affect the cost and efficiency of producing
goods and services. Cheap labor can give a country an absolute or comparative
advantage in labor-intensive sectors, such as textiles, manufacturing, or
services. Skilled labor can give a country an absolute or comparative advantage
in knowledge-intensive or high-tech sectors, such as software, biotechnology,
or engineering.
● High technology: This can enhance the productivity and quality of goods and
services, as well as create new products and markets. High technology can give
a country an absolute or comparative advantage in sectors that rely on
innovation, research and development, or digitalization, such as aerospace,
robotics, or e-commerce.
● Technical expertise: This can improve the efficiency and effectiveness of
production processes, as well as the design and development of new products
and services. Technical expertise can give a country an absolute or comparative
advantage in sectors that require specialized skills, knowledge, or experience,
such as pharmaceuticals, finance, or education.

2. What are the reasons for imposing tariffs?

● To generate revenues for the government budget
● To protect domestic/ infant industries
● To protect local jobs from foreign competition
● To protect domestic consumers from unsafe or low-quality products
● To protect national interests and security from foreign threats
● To reduce the BOP deficit
● To protect the environment from pollution or overexploitation
● To retaliate against unfair trade practices or policies of other countries
5. What is the difference between the balance of trade and the balance of
payment?
BOT includes imports and exports only. BOP considers all business
transactions with other countries including imports and exports of goods and services
money earned from and paid for services and money earned from and paid for services
and investments.

6. Why would the government impede free trade?

*Cultural motives:

+ Preserve national identity.

*Political motives

+ Protect jobs.

+ Preserve national security.

+ Respond to "unfair" trade.

+ Gain influence

* Economic motives

+ Protect infant industries.

+ Pursue strategic trade policy.

7. What are the methods used by the government to restrict trade?

● Tariffs are taxes imposed on imported goods and services, which raise their
prices and make them less competitive in the domestic market.
● Quotas are limits on the quantity (measured in units or weight) of goods that
can be imported or exported during a certain period.
● Embargoes are complete bans on trade (imports and exports) in products with
a particular country or region.
● Local Content Requirements are laws stipulating that producers in the
domestic market supply a specified amount of a good or service.
● Administrative Delays are regulatory controls or bureaucratic rules designed
to impair the rapid flow of imports into a country.
● Currency Controls are restrictions on the convertibility of a currency into
other currencies.
8. Explain the different ways of promoting international trade.
● Subsidy is financial assistance to domestic producers in the form of cash
payments, low-interest loans, tax breaks, product price supports, or some other
form.
● Export financing - loans to exporters that they would not otherwise receive or
loans at below-market interest rates.
● Foreign trade zone (FTZ) is a designated geographic region in which
merchandise is allowed to pass through with lower customs duties (taxes) and
fewer customs procedures.
● Special Government Agencies are agencies that organize trips abroad for
trade officials and businesspeople and open offices abroad to promote home
country exports.

Chapter 2:
1. What are the differences between FDI and FPI?
● Foreign direct investment (FDI): Purchase of physical assets or a significant
amount of the ownership (stock) of a company in another country to gain a
measure of management control.
● Portfolio investment (PI): Investment that does not involve obtaining a degree
of control in a company.

2. What are some financial considerations in making a foreign direct investment?

● Exchange rates
● Rate of returns on investment
● Production Costs
● Investment incentives
● Interest Rates
● Cash flow
● Sources of working capital
● Tax rales

3. What are the important management issues in the FDI decision?

● Control: controlling activities occurring in the local market
● Purchase-or-Build Decision: purchase an existing business or build an
international subsidiary from the ground up
● Production Costs: the firm's costs of production: Labor regulations
● Customer Knowledge: gain valuable knowledge about the behavior of buyers
that it could not obtain from the home market.
● Following Clients: putting them close to firms for which they act as a supplier
 ● Following Rivals: Companies engage in FDI simply because a rival does

4. For what reason do host countries intervene in FDI?

● To protect their Balance of Payment: a nation also gets a balance-of-payments
boost from an initial FDI inflow.
● Obtain Resources and Benefits:
○ Access to Technology: Local investment in technology also tends to
increase the productivity and competitiveness of the nation.
○ Management skills: By encouraging FDI, nations can also bring in
people with management skills who can train locals and thus improve
the competitiveness of local companies.
○ Employment: Many local jobs are also created as a result of incoming
FDI.

5. For what reasons do home countries intervene in FDI?

● Investing in other nations sends resources out of the home country - lowering
the balance of payments.
● Outgoing FDI may ultimately damage a nation's balance of payments by taking
the place of its exports.
● Jobs resulting from outgoing investment may replace jobs at home that were
based on exports to the host country.

6. What are the methods used by host countries to restrict and promote FDI?
Restriction
● Ownership restrictions: Governments can impose ownership restrictions that
prohibit nondomestic companies from investing in businesses in cultural
industries and those vital to national security.
● Performance demands: Performance demands can take the form of stipulations
regarding the product's content originating locally, the portion of output that
must be exported, or requirements that certain technologies be transferred to
local businesses.
Promotion
● Financial incentives: Host governments can also grant companies tax
incentives such as lower tax rates or offer to waive taxes on local profits for a
period of time. A country may also offer low-interest loans to investors.
● Infrastructure improvements: Some governments prefer to lure investment by
improving local infrastructure - better seaports suitable for containerized
shipping, improved roads, and increased telecommunications systems.

7. What methods do home countries use to restrict and promote FDI?

Home countries: Restriction
● Differential tax rates: Impose differential tax rates that charge income from
earnings abroad at a higher rate than domestic earnings
● Outright sanctions: Impose outright sanctions that prevent domestic firms from
making investments in certain nations
Home countries: Promotion
● Offer insurance to cover the risks of investments abroad.
● Grant loans to firms wishing to increase their investments abroad. A home-
country government may also guarantee the loans that a company takes from
financial institutions.
● Offer tax breaks on profits earned abroad or negotiate special tax treaties,
● Apply political pressure on other nations to get them to relax their restrictions
on inbound investments
Chapter 3:
1. For what four reasons do investors use the foreign exchange market?
First, individuals, companies, and governments use it, directly or indirectly, to convert
one currency into another.
Second, it offers tools with which investors can insure against adverse changes in
exchange rates.
Third, it is used to earn a profit from arbitrage - the purchase and sale of a currency, or
other interest-paying security, in different markets.
Finally, it is used to speculate about a change in the value of a currency.

2. What is the foreign exchange market?

The foreign exchange market is the market in which currencies are bought and sold
and in which currency prices are determined.
The foreign exchange market is the mechanism through which foreign currencies are
traded. It is not an actual marketplace but a system of telephone or telex
communications between banks, customers, and middlemen (foreign exchange
brokers, acting for a client vis-à-vis the bank). It is an extremely valuable mechanism
for world trade. Its main function is to reduce the risk of fluctuating exchange rates or
a change in the parity of currencies (devaluation or revaluation)

3. Distinguish between spot rate and forward rate. low is each used in the foreign
exchange market?
A spot rate is an exchange rate that requires delivery of the traded currency within two
business days. This rate is normally obtainable only by large banks and foreign
exchange brokers. The forward rate is the rate at which two parties agree to exchange
currencies on a specified future date. Forward exchange rates represent the markets'
expectation of what the value of a currency will be at some point in the future.
5. Describe the three main institutions in the foreign exchange market.
The world's largest banks exchange currencies in the interbank market. These banks
locate and exchange currencies for companies and sometimes provide additional
services.
Securities exchanges are physical locations at which currency futures and options are
bought and sold (in smaller amounts than those traded in the interbank market).
The over-the-counter (OTC) market is an exchange that exists as a global computer
network linking traders to one another.

6. Why are restrictions placed on currency conversion: What policies can

governments use to restrict currency conversion?
There are four main goals of currency restriction:
First, a government may be attempting to preserve the country's hard currency
reserves for repaying debts owed to other nations.
Second, convertibility might be restricted to preserve hard currency to pay for needed
imports or to finance a trade deficit.
Third, restrictions might be used to protect a currency from speculators.
Finally, such restrictions can be an attempt to keep badly needed currency from being
invested abroad.
Policies used to enforce currency restrictions include government approval for
currency exchange, imposed import licenses, a system of multiple exchange rates, and
imposed quantity restrictions.

Essay
Chapter 1:
1. What are the pros and cons of free trade?
2. What are the advantages and disadvantages of international trade? (to businesses)

Chapter 2
1. What are the advantages and disadvantages of FDI in VN?

Chapter 3:
1. What are ways of making money on the foreign exchange market?
What are the pros and cons of free trade?

In the era of rapid globalization, free trade has emerged as a cornerstone of

international trade. It represents the pattern of imports and exports that would occur in
the absence of trade barriers. While free trade offers numerous benefits, it is not
without its drawbacks. This essay will explore both the advantages and disadvantages
of free trade.

Free trade agreements are instrumental in fostering economic growth. By

eliminating tariffs and reducing barriers, countries can specialize in producing goods
where they have a comparative advantage, leading to increased efficiency and
productivity. This specialization often results in a boost to economic growth. Another
significant advantage is the reduction in government spending. Free trade eliminates
the need for costly subsidies and other forms of financial support that governments
typically provide to protect domestic industries. The savings can then be redirected to
other areas such as education and infrastructure. Moreover, free trade facilitates
technology transfer. Developing countries, in particular, can benefit from the influx of
new technologies, which can lead to innovation and development within their
industries.

However, free trade also has its downsides. One of the most contentious issues
is job outsourcing. As companies seek to minimize costs, they may move production
to countries where labor is cheaper, leading to job losses in their home countries. Poor
working conditions can also be a consequence of free trade. In the pursuit of lower
production costs, some companies may operate in countries with less stringent labor
laws, resulting in exploitation and unsafe working environments. Lastly, free trade can
lead to the degradation of natural resources. The increased demand for products can
put a strain on the environment, as countries may overexploit their resources to meet
global market needs.

In conclusion, free trade has the potential to bring both positive and negative
impacts, largely dependent on a country's ability to adapt to the changing economic
landscape. To reap the maximum benefits from trade liberalization agreements, both
governments and businesses must evolve and develop strategies that align with the
new era of global trade. The balance between embracing the benefits of free trade and
mitigating its risks is delicate and requires careful consideration and policy-making.