AGB 302 QUIZ 5 Latest Version Already Passed

AGB 302 QUIZ 5 Latest Version Already Passed all barriers to the trade of goods and services among member countries are removed. In the theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or administrative impediments are allowed to distort trade between mem-bers. Each country, however, is allowed to determine its own trade policies with regard to nonmembers. Thus, for example, the tariffs placed on the products of nonmember coun-tries may vary from member to member. free trade area eliminates trade barriers between member countries and adopts a common external trade policy. customs union has no barriers to trade among member countries, includes a common external trade policy, and allows factors of production to move freely among members. Labor and capital are free to move because there are no restrictions on immigration, emigration, or cross-border flows of capital among member countries. common market involves the free flow of products and factors of production among member countries and the adoption of a com-mon external trade policy, but it also requires a common currency, harmonization of mem-bers' tax rates, and a common monetary and fiscal policy. economic union in which a central political apparatus coordinates the economic, social, and foreign policy of the member states. political union occurs when high-cost domestic producers are replaced by low-cost pro-ducers within the free trade area. It may also occur when higher-cost external producers are replaced by lower-cost external producers within the free trade area. Trade creation occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area. Trade diversion represents the interests of member states. It is clearly the ulti-mate controlling authority within the EU because draft legislation from the commission can become EU law only if the council agrees. The council is composed of one representa-tive from the government of each member state. T European Council The parliament, which meets in Strasbourg, France, is primarily a consultative rather than legislative body. European Parliament which is comprised of one judge from each country, is the su-preme appeals court for EU law rt of Justice involves borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high. carry trade typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates. Currency speculation the rate at which a foreign exchange dealer converts one currency into another currency on a particular day spot exchange rate occurs when two parties agree to exchange currency and execute the deal at some specific date in the future A forward exchange simultaneous purchase and sale of a given amount of foreign exchange for two different value dates A currency swap the process of buying a currency low and selling it high arbitrage, in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in the same currency law of one price which links changes in the exchange rate between two countries' currencies to changes in the countries' price levels. By comparing the prices of identical products in different currencies, it would be possible to determine the "real" or PPP exchange rate that would exist if markets were efficient. (An efficient market has no impediments to the free flow of goods and services, such as trade barriers.) purchasing power parity (PPP) states that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two coun-tries. international Fisher effect (IFE) states that a country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). Fisher effect when the country's government allows both residents and nonresi-dents to purchase unlimited amounts of a foreign currency with it. freely convertible when only nonresidents may convert it into a foreign currency without any limitations. externally convertible when neither residents nor non-residents are allowed to convert it into a foreign currency. nonconvertible ost likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation or when a country's economic prospects are shaky in other respects. Under such circumstances, both residents and nonresidents tend to believe that their money is more likely to hold its value if it is converted into a foreign currency and invested abroad. capital flight. refers to a range of barter-like agreements by which goods and services can be traded for other goods and services. Countertrade is the extent to which the income from indi-vidual transactions is affected by fluctuations in foreign exchange values. Transaction exposure is the impact of currency exchange rate changes on the reported financial statements of a company. Translation exposure is the extent to which a firm's future international earning power is affected by changes in exchange rates. Economic exposure