8.2 International Trade Flashcards
(9 cards)
Which of the following is a form of barter?
A. Consignment.
B. Forfaiting.
C. Countertrade.
D. Cross-border factoring.
C. Countertrade.
Countertrade at its simplest is barter–the exchange of goods or services for other goods or services rather than merely for cash.
Which of the following is a benefit to the home country of international diversification by multinational companies?
A. Unions may be weakened.
B. Better international monetary system.
C. Jobs may be lost to foreign subsidiaries.
D. Reduced flexibility of operations in foreign political system.
B. A better international monetary system.
A better international monetary system, because of greater participation by many users, is a benefit of international diversification.
A company located in Belgium currently manufactures products at its domestic plant and exports them to the U.S. since it is less expensive to produce at home. The company is considering the possibility of setting up a plant in the U.S. All of the following factors would encourage the company to consider direct foreign investment in the U.S. except the
A. Widening of the gap in production costs between the United States and Belgium locations.
B. Changing demand for the company’s exports to the U.S. due to exchange rate fluctuations.
C. Expectation of more stringent trade restrictions by the U.S.
D. Depreciation of the U.S. dollar against Belgium’s currency.
A. Widening of the gap in production costs between the United States and Belgium locations.
Production costs in the home country are already lower than those in the U.S. Widening this gap would not serve the firm’s interests.
Which one of the following statements concerning American Depository Receipts (ADRs) is false?
A. ADRs allow foreigners to raise capital in the U.S.
B. ADRs facilitate the banking procedures for U.S. multinational firms.
C. ADRs allow Americans to invest abroad.
D. ADRs are securities issued by American banks acting as custodians of shares of foreign firms.
B. ADRs facilitate the banking procedures for U.S. multinational firms.
Ownership rights in foreign corporations are sometimes evidenced by ADRs. The foreign stocks are deposited with a large U.S. bank, which in turn issues ADRs representing ownership in the foreign shares. The ADR shares then trade on a U.S. stock exchange, whereas the company’s original shares trade in foreign stock markets. ADRs allow foreign companies to develop a U.S. shareholder base without being subject to many SEC restrictions.
The most likely benefit of a multinational company to its host country is
A. Establishment of transfer prices to minimize taxes.
B. Net capital outflow.
C. Increased tax revenues.
D. Formation of cartels.
C. Increased tax revenues.
Benefits to the host country include (1) new investment of capital, technology, and management abilities; (2) improvements in output and efficiency; and (3) stimulation of competition, increased tax revenues, and a higher standard of living.
Direct foreign investment allows firms to avoid
A. Exposure to political risk.
B. Domestic regulations on the use of foreign technology.
C. Trade restrictions imposed on foreign companies in the customers’ market.
D. The cost of exchange rate fluctuations.
C. Trade restrictions imposed on foreign companies in the customers’ market.
Reasons for international business expansion, known as direct foreign investment, can be both revenue-oriented (seeking new markets or avoiding trade restrictions) and cost-oriented (seeking cheaper inputs or favorable exchange rates).
A letter of credit is a(n)
A. Credit reference given by a bank.
B. Letter by a buyer or seller of goods that credit is due the other party for defective or returned goods.
C. Letter documenting a line of credit on which a customer may draw at its bank.
D. Engagement by a financial institution to pay drafts or other demands for payment for its customer.
D. Engagement by a financial institution to pay drafts or other demands for payment for its customer.
A letter of credit is a definite undertaking by an issuer (such as a bank) to a beneficiary (such as a seller) at the request or for the account of an applicant (such as a buyer who is a customer of the bank) to honor a documentary presentation by payment or delivery of an item of value. The holder of a letter of credit merely needs to present the required drafts or other documents (usually documenting a sale of goods to the issuer’s customer) and to receive payment from the bank or other issuer up to the limit specified.
XCo is an American company that wants to sell widgets to DCo, a Danish Corporation. XCo is unsure about DCo’s ability to pay. XCo should
A. Transact business with DCo because Danish law requires DCo to pay.
B. Transact business with DCo because American law requires DCo to pay.
C. Not transact business with DCo.
D. Require DCo to obtain a letter of credit.
D. Require DCo to obtain a letter of credit.
If a U.S. company sells goods to a foreign company, the U.S. company may not know whether the foreign company will pay the contract price, is solvent, or whether it will reject a delivery of the goods. Requiring a letter of credit addresses the problem. A letter of credit is an engagement by the issuing bank (DCo’s bank in Denmark) to pay on behalf of its customer when the requirements of the letter of credit are complied with. When the beneficiary (XCo) is in another country, the letter of credit is often sent to a confirming bank (in the U.S. in this case), which will pay the beneficiary directly upon presentation of a document of title. The confirming bank will then be paid by the issuing bank.
All of the following are valid reasons for expansion of international business by U.S. multinational corporations except to
A. Secure new sources for raw materials.
B. Protect their domestic market from competition from foreign manufacturers.
C. Minimize their costs of production.
D. Find additional areas where their products can be successfully marketed.
B. Protect their domestic market from competition from foreign manufacturers.
Reasons for international business expansion, known as direct foreign investment, can be both revenue-oriented (seeking new markets or avoiding trade restrictions) and cost-oriented (seeking cheaper inputs or favorable exchange rates). An attempt to protect the firm’s domestic market from foreign competition by expanding operations into foreign countries is unlikely.
