Question 1

a) What are the contributing factors of global competitive environment?

The contributing factors are Social, technological, economic and political. The development of technology has allowed nations advance rapidly with economies booming over the years, the political status of countries has also stabilized, and social factors such as nations being allies have significantly contributed to a competitive economic environment.

b) What is the motivation for international expansion of firms?

The factors driving international expansion of firms are several.Competitive reasons include, opening up new markets, obtaining greater profits, acquisition of products from the home market, satisfying management’s desire for expansion. Defensive motives include protection of domestic markets, protection of foreign markets, and guaranteed supply of raw materials, acquisition of technology and management know-how, and lastly co-existence of political stability (Alkhafaji, 1994)

c) What are Multinational Corporations?

These are organizations that produce market and obtain the components of production from one or multiple countries for the purpose of increasing benefits for the overall enterprise.

d) What are the criticisms of the Multinational Corporation?

The most salient criticism is exploitation of the raw materials and unskilled labor of developing countries without being part of the development of a modern economic infrastructure. Second, their vast power, the high financial strength, and investment capabilities of the MNC put them in control of individual national economies to some degree creating a genuine fear and distrust by many government officials.

Question 2

a) Define the term exchange rate?

The term is defined as foreign currency per unit of domestic currency or domestic currency per unit of foreign currency. Exchange rate expresses the price of a good or service in a single (Krugman & Obstfeld, 2006).

b) What is equilibrium exchange rate and how can it be determined?

It is when the quantity supplied equals the quantity demanded of foreign currency at a particular local price.Thisinvolves combining uncovered interest parity (UIP) and purchasing power parity (PPP). This approach is referred to as capital enhanced equilibrium exchange rate (CHEER). The approach captures the essential Casselian view of PPP that an exchange rate may be away from its PPP determined rate because of non-zero interest differentials (MacDonald 2000).

c) Briefly, explain the difference between appreciation and depreciation currency?

The difference is that appreciation is an increase in the value of a currency relative to another currency. An appreciated currency is more valuable and therefore can be exchanged for a larger amount of foreign currency. Depreciation, on the other hand, is the decreased valuations of a currency about another currency. A depreciated currency is less valuable and therefore can be exchanged for a smaller amount of foreign currency (Krugman and Obstfeld, 2006).

d) Explain the impact of expectations and assets on foreign exchange rate equilibrium?

The impact is an increase in the interest rate on a currency’s deposit leading to an increase in the rate of return and to an appreciation of the currency. The rates of return on domestic currency deposits and foreign currency deposits using the forward exchange rate will be the same.

e) What are central banks and their roles in the global financial market?

They are public institutions that manage the currency of a nation or group of nations. They oversee monetary policy, ensure currency stability, low inflation, issue currency, regulate the credit system, monitor commercial banks, manage exchange reserves, act as lender of last resort and function as the bank of the government.

Question 3

a) Define the term international monetary system?

This is the framework within which countries borrow, lend, buy, sell and make payments across political frontiers. The structure determines how balance of payments disequilibrium is resolved and the consequences that the adjustment process will have on the countries involved (Clark, 2002).

b) List alternative exchange rate systems and explain two of them?

The alternatives are (i). Managed float (ii).Crawling peg (iii).Fixed rates with wider bands (iv).Fixed rate system with controls

The managed float also called “dirty float” is employed by governments to maintain an orderly form of exchange rate changes and is designed to get rid of excess volatility. The rationale is to improve the economic and financial environment by reducing uncertainty. However, the crawling peg is an automatic system for reviewing the exchange rate. It involves establishing a par value around which the rate can vary up to a given percentage. The authorities determine formula that revises the par value regularly (Clark,2002)

c) Explain the European Monetary System and the European Monetary Union?

The EMS was the framework for monetary policy cooperation among EU countries. Its goal was to create stability between currencies of participating countries with exchange rates that were fixed but adjustable. The EMU is a successor of the EMS as a result of a treaty in between the EU countries agreeing to harmonize their economic and monetary policies. It coordinates economic and fiscal policies, implements a common monetary policy and a common currency, the Euro.

d) What are the advantages and disadvantages of Euro?

The benefits are first the disruption of the high dues that finance institutions charge when one country buys or sells other currencies. Second, the euro improves the efficiency of companies and allows them to sell their goods cheaper to the customers. Third, it applies a positive impact on the interest rate, which is independent of the decreasing exchange rate risk. Fourth, the Euro-controls and holds down inflation. Lastly, it enhances the ability to compare prices and the ease of the facilitation of a buy decision for durable products, due to loss of exchange rate fluctuations that increase economic growth. The disadvantages are the political shock; there lacks a single voice to speak for all euro countries which a problem and Economic shock, there is a potential risk that a member country could collapse financially and adversely affect the entire system.

References

Alkhafaji, A. (1994). Competitive Global Management-Principles and Strategies. Florida, FL: St. Lucie Press.

Clark, E. (2002). International Finance (2nd Ed.). London, UK:THOMSON.

Krugman, P.R. and Obstfeld, M. (2006). International Economics: Theory and Policy(7th Ed.). Addison-Wesley series in economics.

MacDonald, R. (2000). Concepts to Calculate Equilibrium Exchange Rates: An Overview ( No.2000, 03).Discussion paper series 1/Volkswirtschaftliches Forschungszentrum der Deutschen Bundesbank.