Study Session # 6
Learning Outcome Statements
(Last revised 12/14/04)

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1. Gaining from International Trade
a) state the conditions under which a nation can gain from international trade, and describe the benefits of
international trade,
b) discuss the effects of international trade on domestic supply and demand;
c) describe commonly used trade-restricting devices including tariffs, quotas, voluntary export restraints, and
exchange-rate controls;
d) explain the impact of trade barriers on the domestic economy and identify who benefits and loses from
the imposition of a tariff;
e) explain why nations adopt trade restrictions;
f) discuss the validity of the arguments for trade restrictions.
2. A. Foreign Exchange
a) define direct and indirect methods of foreign exchange quotations;
b) calculate the spread on a foreign currency quotation;
c) explain how spreads on foreign currency quotations can differ as a result of market conditions,
bank/dealer positions, and trading volume;
d) convert direct (indirect) foreign exchange quotations into indirect (direct) foreign exchange quotations;
e) calculate currency cross rates, given two spot exchange quotations involving three currencies;
f) distinguish between the spot and forward markets for foreign exchange
g) calculate the spread on a forward foreign currency quotation
h) explain how spreads on forward foreign currency quotations can differ as a result of market conditions,
bank/dealer positions, trading volume, and maturity/length of contract;
i) calculate a forward discount or premium and express either as an annualized rate;
j) explain covered interest rate parity;
k) illustrate covered interest arbitrage.
B. Foreign Exchange Parity Relations
a) explain how exchange rates are determined in a flexible or floating exchange rate system;
b) explain the role of each component of the balance-of-payments accounts;
c) explain how current account deficits or surpluses and financial account deficits or surpluses affect an
economy;
d) describe the factors that cause a nation’s currency to appreciate or depreciate;
e) explain how monetary and fiscal policies affect the exchange rate and balance-of-payments components;
f) describe a fixed exchange rate and a pegged exchange rate system;
g) discuss absolute purchasing power parity and relative purchasing power parity.

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