Escape clause - is a part in any contract that specifies the conditions in which one or more parties involved in the contract may avoid performing its duties as specified in the contract.

14. The import substitution is a policy through which countries decide to substitute some of the imported products with others manufactured locally. The advantage of this policy is the import limitation, which in some instances may turn out to be positive for the trade balance and national value-added creation. The disadvantage is that national products lose export competitiveness because they are protected by the state. The export promotion is a policy through which countries decide to develop measures meant to increase the exports of national products. The advantage of this policy is that exports represent the ideal way to generate growth. One of the criticisms brought to this policy has to do with the depreciation of exchange rates, which is one tool used for export promotion. This method may increase the inflation of one country.

15. Balance of payments contains the payments flow between one country and its trade partners. The current account contains the flow of incomes, goods and services plus the financial aid received from governments outside the country.

The GDP has 4 components: private consumption -, business investment capital (I), government expenditure (G) and the gross difference between exports and imports.

16. The capital account reflects the net result of private and public investments which are made both inside and outside the country. Short-term flows include bank deposits and treasury bills, which are also known as "hot money." Long-term flows include foreign direct investment (overseas investment) and portfolio investment (stocks and shares). The purchase of securities falls into the inflow category and represents an accumulation of cash, whereas the sales of securities fall into the outflow category.

17. It is said that a positive balance of payments is a desirable situation. A positive balance is given by capital, current and financial accounts having positive results. Conversely, a negative balance reflects that the sum of these three accounts is a deficit. A positive balance means no debt and no debt related costs, whereas a negative one means the opposite and from this point-of-view a positive balance is desirable. However, a negative balance is not necessarily a negative aspect. It is important to know what exactly generated the sign of the balance. Thus, higher imports than exports may have a positive impact on an economy that is looking to upgrade its technological level by importing products meant to do just that. A negative capital account suggests that domestic investors purchase more assets abroad, which may return a higher value in the future and in the long run have a positive impact on the country's finances.

18. Price arbitrage reflects a situation in which an entity takes advantage of price difference for the same category of good/service in different countries. Suppose that in NY 3$=2€=1£ and in London 4$=2€=1£. If we were to convert 3$ into 1£ in NY and buy 4$ in London, the 1$ difference is considered arbitrage. Hedging is an investment undertaken to limit risk. Suppose the oil price is 5$/barril and is expected to rise. A company which has high oil-related costs may chose to buy in two months from now, 10 barills of oil for 6$/oil. If the oil price in 2 months is 7$/barill, the company saved costs worth of $10 = (7-6)*10. Speculations refer to the situation when an investor is taking advantage of the price fluctuations of any financial instrument. Suppose that the $ exchange rate is expected to rise compared to euro, from $2: €1 to $2: €1.5....

An investor may choose to buy stocks in U.S. before the rate rises and sell these after the rise - 100 stocks worth $100. The $ value of those stocks in euro will be increased from 50 euros to 75 euros.
19. Purchasing power parity is comparing the purchasing power of various currencies for a given number of goods. The absolute variation reflects the change of the ratio between 2 currencies whereas the relative variation compares the inflation changes to the exchange rate changes. The problem with the purchase power parity is that exchange rates usually fluctuate more than PPPs, so the latter one is not always an accurate reflection of the reality.

20. The interest rate parity condition states that the returns of purchasing and holding interest-bearing financial instruments in one currency should be equal to borrowing money in this currency, exchanging it, investing in interest-bearing financial instruments in the 2nd currency while using futures contracts to convert these return into the 1st currency. A change in the exchange rate could offset the returns obtained in one the currencies and make the returns in the other currency considerably higher.

The condition is theoretical and in practice the returns are not always equal. Thus, if the returns of the first part of the condition are higher, it would increase the inflows and if the returns of the second part of the condition are higher, it would increase the outflows.

21. The Eurocurrency market represents the market in which Eurocurrency is lent and borrowed by banks located in Europe. This market increased with the integration of more emerging markets and the strengthening of the euro. This complicates FED's policy as U.S. is now undertaking an export promotion policy by devaluating the $, which makes this currency less desirable for investors, which translates into lower capital inflows.

A pA1

PA0 and PB0 represent the price combination at moment 0. if, at moment 1, the price increases from PA0 to PA1, the income line will rotate downwards from PB0 to PB1 and the curve becomes steeper.

PB1

PB0

PB2 pA2 pA0

The production possibility frontier shows the feasible production combination of 2 goods given budget restrictions.

A point outside PPF is impossible to reach due to budget restrictions - you can't produce more than the Outside PPF - impossible

Food

Inside PPF - inefficiency

Computers

CB

CA

FA

FB

Country I has absolute advantage in the production of good X and country II has absolute advantage in the production of good Y as each of the countries that have absolute advantage in the production of a good produces more of that good than the other country.

FIG. 5 - OUTPUT CONSUMPTION TABLE

Fig. 4 illustrates the situation in which each country produced the good in which it has a comparative advantage. If country I decides to the consumer's surplus equals the benefit generated by consumers purchasing a product with a lower price than they would be willing to pay. The producer's surplus

Market price

Producer surplus

Consumer surplus

Equilibrium quantity

The equilibrium before trade is in B. After trade the supply curve switched to Sworld as theoretically the supply is unlimited. The price falls from a to F, which Y4

Y3

Y2

Y1

Y0

G

C

Sworld+Tariff

Sworld companies, one from U.S., one from Japan decide to produce chips. If they both produce, the profit is -10, if only one produced, the profit is 100.