Basics of an Open Economy
What is an economy called when it allows free movement of goods, services, and capital across borders?
An open economy
What is a tax imposed on imported or exported goods called?
A tariff
What does FDI stand for?
Foreign Direct Investment
Q: What is the main purpose of taxation in an economy?
To generate government revenue for public services
What is the price of one country's currency in terms of another currency called?
Exchange rate
Name one advantage of an open economy.
Access to foreign markets, more investment opportunities, or economic growth
High tariffs protect local industries but may lead to what international problem?
Trade disputes or retaliation
Why do countries compete to attract FDI?
To create jobs, boost the economy, and increase capital inflow
Q: What is the name of agreements between countries to prevent double taxation?
Tax treaties
A system where exchange rates are determined by supply and demand is called what?
A floating exchange rate
What is one potential disadvantage of an open economy?
Vulnerability to global economic shocks or loss of domestic industries
What type of tariff is imposed to protect domestic industries from foreign competition?
A protective tariff
Name one factor that influences FDI decisions.
Tax rates, political stability, infrastructure, or labor costs
Q: What is the difference between tax evasion and tax avoidance?
Tax evasion is illegal; tax avoidance is legal but exploits loopholes
What happens when a country’s currency depreciates?
Exports become cheaper, imports become more expensive
True or False: A completely closed economy does not engage in any trade with other countries.
True
True or False: Lower tariffs always benefit domestic producers.
False
Q: What is it called when a company builds new operations in a foreign country instead of buying an existing one?
Greenfield investment
A tax that is applied at every stage of production but refunded for exports is called what?
Value-Added Tax (VAT)
What organization helps regulate international trade and resolve disputes?
The World Trade Organization (WTO)
Give an example of a country with an open economy.
USA, Germany, China, or any country with international trade
What is the term for when two or more countries agree to reduce or eliminate tariffs between them?
A trade agreement
Q: True or False: FDI only benefits the foreign company, not the host country.
False
What happens if a country lowers corporate tax rates too much to attract businesses?
A "race to the bottom"
True or False: A strong currency always benefits a country’s economy.
False (it makes exports more expensive)