Question

What is a multinational firm? Please describe the theory of international trade that you can only consume what you can produce without trade and you can consume more than you produce with trade? What happens to the US dollar value of the UK pound if the US$/UK£ rises? The US dollar price of the euro rose from $1.15 to $1.30 - please explain using the demand and supply graph for a foreign currency and explain what is the main cause of changes in D and S.

Answer 1

An international corporation (MNC) has facilities and alternative assets in a minimum of one country apart from its home country. A international company typically has workplaces and/or factories in numerous countries and a centralized head office wherever they coordinate international management.

Without trade, every country consumes solely what it produces. However, attributable to specialization and trade, absolutely the amount of products on the market for consumption is over the amount that will be on the market underneath national economic independency.

Explanation :

The production possibility frontier (PPF) is a graph that shows the combinations of two commodities that can be produced with given resouces & technology. PPFs are drawn as extending outward around the origin & a straight line. An economy that is operating on the PPF is productively efficient.

If the economy is operating below the curve, it is inefficient, because resources can be reallocated in order to produce more without decreasing the quantity of another. Points outside the curve are unattainable with Current resources and technology. The PPF will shift outwards.An outward implies that more of one or both outputs can be produced without sacrificing the output of other good. Contrarily the PPF will shift inward if the labor force shrinks or a natural disaster occurs.

Without trade, each country consumes only what it produces. In this case, PPF is also the consumption possibilities frontier. Trade permits consumption outside the PPF. The world PPF is formed by combining countries’ PPFs. When countries’ independent productions are added (when there is no trade), total quantity of goods produced & consumed is less than the world’s PPF under free trade (when nations specialize according to their comparative advantage). This shows that in a free trade system, the total quantity of goods accessible for consumption is higher than the quantity available under autarky.

If the US$/UK£ rises

There would be an increment in the value of US currency against other UK. An appreciation makes

Effects of an appreciation on the US economy :

1. Exports more expensive

2. Imports cheaper.

3. lower export demand and greater spending causing lower economic growth.

Graphycally illustrated :

Main cause of changes in D and S : Import prices are cheaper.

The cost of imported goods and raw materials will fall after an appreciation. Lower AD leads to lower demand-pull inflation.

The supply of a currency is determined by the domestic demand for imports from abroad, therefore supply increases.