If we assume that there is a perfect substitution between two assets with different currencies, the relationship between expected returns produces some important conclusions about the determination of foreign exchange rate between the two currencies. First, we should question the meaning and validity of this assumption. Today, depending upon the globalization process in the world economy, capital is a production factor with a very high mobility. The correct answer is " E ".

When countries come together and form economic collaborations, they may decide to go beyond a simple economic cooperation and pool their economic resources to get the benefits of an integrated economy. Nevertheless, the more the countries get integrated, the more they lose their domestic control over the economic decisions. Decisions to integrate the economies of countries are often taken in stages. Thus, the economic integration initiatives are examined by stages mostly referred as types of economic integration. Theory of economic integration examines the economic effects of each economic integration type.

• At the bottom of the economic integrations pyramid, there is the preferential trade agreement, referring to the first stage of economic integration. Preferential trade agreement is the loosest type of economic integration in which the areas that require common decisions and implementation of the participant countries are minimum. In this type of economic integration, the basic aim is to foster the international trade among the participant countries in some certain industries.
• The next stage within the economic integration is the free trade area. In a free trade area, member countries abolish all trade restrictions on each other’s commodities but continue to implement their own trade policies to the countries that are outside the free trade area.
• The third stage/type of economic integration is customs union. Member countries of a customs union abolish all trade restrictions among themselves and implement a common external trade policy toward the third countries. Moreover, the customs union member countries act together as a single entity during the negotiation and conclusion of trade agreements with other countries (third countries). The implementation of common external tariff avoids the possibility of trade deflection or transshipment. Certainly, it is one step further through a deeper integration. Member countries leave their independence in deciding and implementing their own tariff rates.
• The fourth stage/type of economic integration is common market. All trade restrictions are abolished among member countries. In addition to the free movement of goods, free movement of services, labor and capital are also achieved. In other words, there are four freedoms within a common market. There is no doubt that common market is a higher level of economic integration. Member countries give up their sovereignty in most of the economic policies related with the four freedoms. Common market also requires additional common economic policies that help well-functioning of the economic integration, such as common competition policy, common indirect taxation policy, common consumer policy, common environmental policy, common e-commerce policy, etc.
• The last stage/type of economic integration process is the economic and monetary union. Certainly, it is the most comprehensive type of economic integration. Economic and monetary union encompasses all the features of the common market and goes further to unify of all the economic institutions.

As also understood from the information given, the correct order of the economic integration types from the loosest to the most comprehensive is in the option E, so the correct answer is E.

Theory of Comparative Advantage

The comparative advantage law is one of the most important laws of economy, as it is useful for individuals as well as for nations, as well as for revealing many serious fallacies. Comparative advantage is the cornerstone of international trade theory. Origins of the theory Comparative advantage was first described by Robert Torrens in 1815 in an essay on the “Corn Laws”. He concluded it was England’s advantage to trade with Poland in return for grain, even though it might be possible to produce that grain at a lower cost in England than Poland. However the term is usually attributed to David Ricardo who explained it in his 1817 book “The Principles of Taxation and Political Economy”. To be simple, assumptions will initially refer to only two countries and two commodities like in absolute advantage theory. Trade can also rely on other causes, such as large-scale production and product differentiation. The theory of comparative advantage is an economic theory about the potential gains from trade for individuals, firms, or nations that arise from differences in their factor endowments. Moreover, the comparative advantage of nations may change over time as a result of technological change.

A question may arise here. If a country has absolute advantage in all products and the other country is absolutely less productive, then wouldn’t international trade occur? According to David Ricardo, there is no need to rely international trade on absolute advantages. The key word here is comparative, meaning ‘relative’ and ‘not necessarily absolute’. They both can gain by trading with each other as long as their relative disadvantages in making different goods are different. A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country; alternatively, when the relative productivity between goods  is the highest compared with another country.

The recession of 2008 in the USA is partly a result of banking crisis which started in 2007 including banking firms and other financial institutions like insurance companies. Banking sector in an economy carries out the primary function by transferring funds from savers who want to spend less than their income to debtors who want to spend more than their income. Therefore, the correct option is D.

Multilateral trading system conducted by the WTO might be persumed as a quite confusing system dealing with pages long legal texts, numerous trade deals, tough negotiations with one hundred sixty-four member countries which are not similar in economic terms. Essentially, the multilateral trading system is run by five basic principles. It should be mentioned that these principles of the multilateral trading system have been the main guidelines since the GATT 1947. In other words, these principles are the main principles of both the GATT and the WTO:

1. Free Trade without Discrimination Principle: Free trade without discrimination principle is composed of two sub-principles: Most-Favored Nation Principle (MFN) and National Treatment Principle.
2. Freer Trade Principle: Obviously, the best way of encouraging international trade is to lower the trade restrictions. The GATT/WTO have been trying to abolish trade restrictions in order to achieve freer multilateral trading system via negotiations. In other words, the GATT/ WTO negotiation rounds have been the unique platform to reduce the existing trade restrictions and make the world trade freer. In spite of the benefits and positive welfare effects, reduction within the trade restrictions or in other words, trade liberalization, can be painful. Due to the adjustment requirements, abolishment of the trade restrictions might be time demanding. Thus, the GATT/WTO allows member countries to implement the required trade liberalization gradually, leading to a progressive trade liberalization. In this respect, least developed and developing countries are given longer periods to implement their necessary progressive trade liberalization.
3. Predictability Principle: This principle is about not to raise a trade restriction that is decreased or abolished before. The countries that decide to open up their markets bind their commitments. These commitments take the form of import tariff ceilings on commodities trade. In this case, the bound commitment refers to bound tariff. Countries can change their bindings if they take the assent of all the other GATT/WTO member countries. It means that they have to persuade them via companseting their probable losses. Although there is a probability to alter the bindings, it is not that easy to put it into practice.
4. Promoting Fair Competition Principle: Multilateral trading system is not just a free trade system but also a system of fair competition. Fair competition can be distorted by dumping and subsidies. The additional duties charged by the countries that are exposed to dumping and subsidized exports can be very unfair, as well. Promoting Fair Competition Principle helps in avoiding unfair anti-dumping duties and countervailing duties.
5. Encouraging Economic Development and Reform Principle: The multilateral trading system has various goals, rules and implementations. Nevertheless, the countries within the multilateral trading system are not homogeneous in economic terms. Thus, they should not be treated equally in adopting the rules and implementing the decisions of the system. Thus, least developed and developing countries are subject to a time flexibility in adopting and implementing the requirements of the multilateral trading system.

As also understood from the information given, all of the principles in the options are the main principles of both the GATT and the WTO, so the correct answer is E.

Short term capital movements are capital flows based on debt instruments with a maturity less than one year. Frequently this type of capital flows is realized by using currency, demand deposits and treasury bills. Therefore, the correct option is C.

Income terms of trade are as important as the commodity terms of trade for a developing nation. Doğru yanıt " D " dir.

Small country

It is a nation which cannot affect the global market by trade restrictions. In other words, small nation cannot affect the world commodity prices.

There are four basic groups (accounts) summarizing a nation’s balance of payments: Current account, capital account, financial account and reserve assets. There is an additional balancing item known as statistical discrepancy.

The rate of change in the nominal exchange rate is explained by two factors: the rate of change in the real exchange rate and the inflation differential between two countries. If we accept that the real exchange rate is constant, the difference between inflation rates of domestic and foreign countries is the basic factor that determines the rate of change in the nominal foreign exchange rate. Provided that the domestic inflation is higher than the foreign inflation, the change in the nominal exchange rate will be positive indicating an increase. The correct answer is " A ".

Determination of the equilibrium level of $/T exchange rate in the long run is not different from the price determination process. The correct answer is " B ".

countries like Britain, United States, Canada and Australia has been realized on a large scale by the advantages of international capital. The one hundred-year period before the First World War is generally known as the golden age of private investments.

The interest parity condition  states that the domestic interest rate is equal to the total of foreign interest rate and to the expected rate of change in the foreign exchange rate.

Theory of Comparative Advantage

The theory of comparative advantage is an economic theory about the potential gains from trade for individuals, firms, or nations that arise from differences in their factor endowments. Moreover, the comparative advantage of nations may change over time as a result of technological change.

A question may arise here. If a country has absolute advantage in all products and the other country is absolutely less productive, then wouldn’t international trade occur? According to David Ricardo, there is no need to rely international trade on absolute advantages. The key word here is comparative, meaning ‘relative’ and ‘not necessarily absolute’. They both can gain by trading with each other as long as their relative disadvantages in making different goods are different. A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country; alternatively, when the relative productivity between goods  is the highest compared with another country.

Import tariffs hurt consumers who would like to buy products made in abroad. The consumers may want to save money over domestically produced products, or they may comprehend a degree of quality that is missing in domestically produced products.

Short term capital flows generally do not come to a country to utilize its economic development potential; they generally move into a country to benefit the high return possibilities in financial assets and to obtain extra profit by using interest rate-foreign exchange rate arbitrage. Therefore, it is possible to say that this type of capital flows is largely speculative. The correct answer is A.

Net foreign investments in a country are measured by subtracting the increase in financial liabilities from the increase in financial assets. This value is also equal to current account balance. The correct answer is D.

General Agreement on Tariffs and Trade (GATT).

Predatory dumping is the temporary sale of a commodity at below cost or at a lower price abroad as a way to drive overseas producers out of enterprise, and then prices are raised to take advantage of the newly obtained monopoly energy overseas.