International Finance: Questions and Answers

This document contains answers to five questions related to international finance. The first question discusses the importance of collaboration between national and international markets. The second question explains the theory of comparative advantage. The third question talks about the supporters and critics of multinational corporations. The fourth question explains the concept of an ideal currency. The fifth question discusses the differences between fixed and flexible exchange rates.

Running head: QUESTIONS 0
international finance
FEBRUARY 28, 2019
STUDENT DETAILS:

QUESTIONS 1
Question 1:
In the present environment, the collaboration of national and international markets are very
much essential. In the changing world, this is very necessary for the corporations to innovate
the new ideas, concepts, and technologies to make the advantages for the end customers. In
this scenario, it is very significant for all the entities to establish the solid partnership to
facilitate the advanced services and goods at the domestic level or at international level. The
collaboration between national-international markets is enhancing in different methods such
as merger and acquisition, strategic alliance and company’s takeover. The companies use
strategic alliance to do work jointly. In this way, it will be easy to get targets and aims in
proper manner. The example of Nokia and Microsoft is very popular. Nokia and Microsoft
created the strategic alliance for objective of making windows mobiles with good quality.
In the business, the takeover is the purchase of one entity like target company by other
company like the purchaser company. Moreover, acquisition happens, while the purchaser
company and Target Company both end their existence, and combined the corporations in
place of formation of new company. The example of acquisition is that British multinational
telecom corporation Vodafone Group acquired the German telecom company Mannesmann
AG (Rusko, 2017).
Question 2:
Famous economist David Ricardo makes the theory of comparative advantage. The
comparative advantage arises while one nation manufactures the goods or services for the
low opportunity cost in comparison of other nations. The trade-off can be evaluated by the
opportunity cost. The nation having comparative advantage create the trade-off worth it. It is
debated by David Ricardo that the nation improves mostly a financial progress by putting its
major focus on the sector, where it has very significant comparative advantage. For an

QUESTIONS 2
instance, England was capable to produce the clothes at cheap rate. On the other hand,
Portugal had capacity to manufacture the wine at cheap rate. In this situation, it was
forecasted by David Ricardo that Portugal will not make wine and England will not produce
clothes (Costinot, et. al, 2015). The perception of David Ricardo was correct. England had
earned more money by making trade of clothes for the wine of Portugal. Moreover, Portugal
had more earning by trading the wine for clothes of England. It was not possible for England
to make wine because of lack of climate. Also, it was not possible for Portugal to make the
clothes at cheaper rates. In this way, it was beneficial for both the countries by doing trade of
what they manufactured very proficiently (Costinot, Donaldson and Smith, 2016).
Question 3:
On the point of becoming the multinational corporations, the supporters of multinational
corporations said that they are not fiend. The multinational corporations give the more jobs
(Kostova, Nell and Hoenen, 2018). The multinational corporations reduce the problem of
unemployment. On the other hand, it is argued by various critics that the multinational
corporations create the gap at great level between poor and rich nations. Further, the
multinational corporations increase this gap in great manner by making secure the big returns
from developing nations and making transfer of the profits to the parent developed nations. In
the addition of this, the multinational corporations do not pay attention on crucial common
requirements, environmental requirements, and spiritual requirements. The multinational
corporations focus on the profits and returns instead of the requirements of individuals and
living conditions of human being. It is argued by labour union that the multinational
corporations avoid and damage the domestic industry’s interest in the surroundings of
cutthroat competition at international level. It is required by the followers and opponents of
multinational corporations to realize that they have made as commanding non-state

QUESTIONS 3
performers all attempts must be created to join these for serving as tool of foreign harmony,
protection and expansion (Ramondo, Rappoport and Ruhl, 2016).
Question 4:
An ideal currency is the imaginary idea publicised by John Nash. John Nash imagined this
concept of ideal currency to stable the foreign currencies. This is the resolution to a Triffin
problem. It is proposed by John Nash that the foreign exchange rate should be fixed by pining
the currency’s values to consistent set of supplies, known as industrial consumption process
index. This plan of ideal currency will limit or restrict the capacity of central bank to develop
the financial policies. It is also said by John Nash that an ideal currency can be organises
through the connection to the proper index of price of traded produces at the international
level (Corsetti, Kuester and Müller, 2017). Additionally, it is argued by John Nash that
provided these currencies as option with a formally identified position of an inflation in
respect of the cost’s domestic index, the user may be capable to require the their good quality.
In this way, the different currencies arranged with “inflation targeting” will be equivalent by
the user and reviewer, who will be capable to make the opinion in respect of the currency’s
quality (Holt, 2015).
Question 5:
The exchange rate is a rate that is useful to make conversion of the currency from one nation
to other nation. There are two types of the exchange rate like fixed exchange rate and flexible
exchange rate. There are some differences between flexible exchange rate and fixed exchange
rate. The fixed exchange rate states the insignificant exchange rate, which is set definitely by
the financial specialist regarding the foreign currency or the set of foreign currencies. On the
other hand, the flexible exchange rates are regulated by the foreign exchange markets based
on supply and demand. The flexible exchange rates normally vary continuously. In this way,
financial authority or apex bank regulates the fixed exchange rate. On the other hand, the

QUESTIONS 4
flexible exchange rate is regulated by supply and demand force. The fixed exchange rate has
the evaluation and devaluation of the currency. On the contradiction of this, the flexible
exchange rate has appreciation and depreciation of the currency’s value. In the flexible
exchange rate, hedging is useful in reducing risk related to currencies. However, in the fixed
exchange rate, hedging is not used (Ghosh, Ostry and Qureshi, 2015).

QUESTIONS 5
References
Corsetti, G., Kuester, K. and Müller, G.J. (2017) Fixed on flexible: rethinking exchange rate
regimes after the Great Recession. IMF Economic Review, 65(3), pp.586-632.
Costinot, A., Donaldson, D. and Smith, C. (2016) Evolving comparative advantage and the
impact of climate change in agricultural markets: Evidence from 1.7 million fields around the
world. Journal of Political Economy, 124(1), pp.205-248.
Costinot, A., Donaldson, D., Vogel, J. and Werning, I. (2015) Comparative advantage and
optimal trade policy. The Quarterly Journal of Economics, 130(2), pp.659-702.
Ghosh, A.R., Ostry, J.D. and Qureshi, M.S. (2015) Exchange rate management and crisis
susceptibility: A reassessment. IMF Economic Review, 63(1), pp.238-276.
Holt, C.A. (2015) John Nash: Flashes of Brilliance in Different Directions. Southern
Economic Journal, pp.1-4.
Kostova, T., Nell, P.C. and Hoenen, A.K. (2018) Understanding agency problems in
headquarters-subsidiary relationships in multinational corporations: A contextualized
model. Journal of Management, 44(7), pp.2611-2637.
Ramondo, N., Rappoport, V. and Ruhl, K.J. (2016) Intrafirm trade and vertical fragmentation
in US multinational corporations. Journal of International Economics, 98, pp.51-59.
Rusko, R. (2017) Strategic Turning Points in ICT Business: The Business Development,
Transformation, and Evolution in the Case of Nokia. In Driving Innovation and Business
Success in the Digital Economy (pp. 1-15). IGI Global.