INTERNATIONAL FINANCE

International Finance: SMN 349, 2011 Past Paper Exam

International Finance: SMN 349, 2011 Past Paper Exam

Short Questions

1) The US-China Balance Of Payments Issue

The international trade involves vast movements of payments amongst the trading countries. Through visible trade (imports and exports) and invisible trade (tourism and remittances), countries take a watch on their payments in the form of balance of payment accounting. When more payments are made than are received, countries face a balance of payment issue. The US-China relations as a whole and in the sphere of economy and trade are at a crossroads as it relates to balance of payments. Despite the fact that last year the volume of U.S. exports to China compared with 2009 increased by 34% by the end of the year may come close to the mark of $ 100 billion, however, the average annual trade deficit between the two countries on over the past several years, kept within the $ 200 billion.

Many countries, including China, are beginning to realize that there are objective limits and limitations for further development of the economy solely through increased exports. Proceeding from this, both sides are increasingly aware of the need to establish equitable trade relations, and it became one of the main issues on the agenda in the ongoing negotiations in Washington between U.S. President Barack Obama and President Hu Jintao. According to statistics, every dollar spent in the U.S. for computers and related equipment account for 88 cents spent by consumers on software operation of this equipment. In China, a similar figure is only 8 per cent spent on software. The mystery of the phenomenon is rather prosaic - the majority of computer programs in China are pirated origin.

China has the potential market for US export and investment. On the other hand it would be in the interest of both countries to increase cooperation in export and investment sectors. China is also seeking and to some extent has captured the large share of American market, giving it a competitive advantage as China is one of the major exporters to US and have entered in the US market. On the contrary US require an entry point to enter in Chinese market. In 2006 one of the strategies that China used to increase its international reserves was buying gold with their foreign exchange reserves. With this transaction, it diversified its investments, reducing financial risks, as the falling dollar and rising oil prices will encourage the rise of gold prices in international markets during the second half of this year. It also aims to reduce the amount of dollars in foreign exchange reserves, increasing the proportion of foreign currency into another currency like the Euro.

2) The International Monetary System

A country cannot achieve economic growth and stability unless it monetary system is capable of providing the necessary liquidity to the economy. The monetary system must be able to monitor and control the various indicators that reflect economic ...