International Trade and Finance Flashcards
7 cards from real CEA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 International Trade and Finance flashcards as text
The 'gravity model' of international trade predicts that bilateral trade flows are:
Answer: Directly related to both country GDPs and inversely related to distance
The gravity model shows that trade between two countries increases with their economic sizes (GDPs) and decreases with the distance between them, analogous to Newton's law of gravity.
Trade diversion, a potential cost of a preferential trade agreement, occurs when:
Answer: Import sourcing shifts from an efficient non-member to a less efficient member due to tariff preferences
Trade diversion reduces welfare by shifting purchases from the lowest-cost global producer to a higher-cost partner that benefits from preferential tariff treatment.
A country's terms of trade improve when:
Answer: The price of its exports rises relative to its imports
Terms of trade equal export prices divided by import prices; an increase means the country can buy more imports per unit of exports, improving welfare.
The WTO's Most Favored Nation (MFN) principle requires that:
Answer: Any trade advantage granted to one member must be extended to all WTO members
MFN is the cornerstone of the WTO system, requiring non-discrimination: a tariff concession offered to any one WTO member must be applied equally to all members.
Foreign exchange reserves held by a central bank primarily serve to:
Answer: Intervene in currency markets and service external debt obligations
Foreign reserves allow central banks to defend the exchange rate through market intervention and provide liquidity to meet external debt obligations during stress.
The 'Triffin Dilemma' identified a fundamental problem with which international monetary system?
Answer: The Bretton Woods dollar-gold standard
Triffin showed that under Bretton Woods, the US had to run current account deficits to supply global liquidity, but this would eventually undermine confidence in dollar-gold convertibility.
A real effective exchange rate (REER) index is most useful for measuring:
Answer: A country's overall external price competitiveness adjusted for inflation differentials
REER is a trade-weighted average of a country's nominal exchange rates adjusted for relative price levels, making it the standard measure of international competitiveness.