Mid-Term Examination Review

1. Absolute Advantage and Comparative Advantage Absolute Advantage: A country has an absolute advantage in the production of a product when it is more efficient than any other countries at producing it. Comparative Advantage: The theory that countries should specialize in the production of goods and services they can produce mote efficiently. A country is said to have a comparative advantage in the production of such goods and services.

2. International Product Life-Cycle (1) New product is innovated and produced in the home country. All demand is met by exporting. (2) Foreign production begins. (3) Competition occurs in the export market. (4) Competition occurs in the home country.

3. Government Intervene International Trade Tariffs: Special Tariffs & Ad valorem Tariffs Special Tariffs levied as a fixed charge for each unit of good import. Ad valorem Tariffs levied as a proportion of the value of an imported good. Non-tariff barrier: Subsidy, Import Quota, Voluntary Export Restricts (VER), antidumping.

4. Term of Trade Term-of-Trade = % change in price of Export / % change in price of Import Term-of-Trade of a country >= 1 indicates an economic problem in this country.

5. Levels of International Integration (1) Free Trade Area Goods and services are moved freely inside the area. e.g. EFTA (2) Custom Union Same import/export tariffs e.g. Andean Pact between Bolivia, Colombia, Ecuador and Pero (3) Common Market Factors of production are moved freely among the member countries. e.g. MERCOSUR (4) Economic Union Same monetary policy and fiscal policy. e.g. EU (5) Political Union Same economic, social and foreign policy. EU is forwarding to this level.

6. Monetary Policy by Central Bank and Fiscal Policy by Central Government Monetary Policies: (1) change interest rates (2) change reserve requirement ratio (3) open market operation (4) closed window policy Fiscal Policies: (1) change tax duty rates (2) adjust government expenditure Money supply: All money in circulation plus demand deposit.

7. Spot Foreign Exchange Rate and Forward Foreign Exchange Rate Spot foreign exchange rate is the price of one unit of a foreign currency for immediate delivery. Forward foreign exchange rate is the price of one unit of a foreign currency for delivery at a certain time in the future. Forward premium = (FER - SPR) / SPR Forward discount Arbitrage Converted interest arbitrage NOT ALL CURRENCY HAVE FORWARD EXCHANGE RATE: Canada, Japan, Switzerland, U.K.

8. Foreign Exchange Market The purposes of Foreign Exchange Market: (1) to convert the currency of one country into the currency of another. (2) to provide some insurance against foreign exchange unpredictable risk. Eurocurrency Market: Eurocurrency is the currency deposits outside of its country which of origin. It has to be time deposit and interest bearing. Global Bond Market Euro-equity Market

9. Balance-of-Payments account Balance-of-payments is a very important document that records all transition between all resident of the country and the rest of the world. Current Account: (1) Trade account: goods import/export (2) Service account: traveling, consultant (3) unilateral account: government helps other countries Capital and financial account: borrowing, lending, FDI, FPI Official reserve account = Current Account + Capital & financial account Components of International Reserves: (1) gold (2) convertible foreign currency (3) SDR - Special Drawing Rights (4) Position in IMF Balance-of-payments measures flows Total international reserves measures stock

10. How exchange rates are determined? Fixed exchange rate system: (1) Gold standard (2) Bretton Woods (US $) Flexible exchange rate system: US(Dollar), UK(Pound), Japanese(Yen), European(Euro) Managed Exchange rate system: China, Korea, Indonesia Pegged Exchange rate system: Hong Kong, Singapore

11. How to forecast exchange rates? 1. PPP - Purchasing Power Parity theory: lower inflation will appreciate 2. International Fisher Effect theory: higher interest will depreciate

12. Price elasticity Price elasticity = (delta Q / Q) / (delta P / P) If price elasticity is greater than 1, the product is price elastic.

13. Abbreviation SAFE - State Administration Foreign Exchange WTO - World Trade Organization UNCATAD - United Nations Conference on Trade and Development NTDB - National Trade Data Bank EU - European Union IMF - International Monetary Fund FDI - Foreign Direct Investment FPI - Foreign Portfolio Investment EFTA - European Free Trade Association MERCOSUR - "Common market of the south" among Argentina, Brazil, Paraguay and Uruguay Japanese Yen U.K. Pound U.S. Dollar European Euro