CHAPTER 53
International Trade, Investment, and Finance
How Instability Spreads Around the World
LEARNING OBJECTIVES
Explain the mechanisms of global trade, investment, and finance by which instability in
one country spreads to other countries.
OUTLINE OF CHAPTER
I. How Trade Spreads Instability
II. How Investment Spreads Business Cycles
VI. Summary
KEY TERMS
foreign investment
spending by foreign citizens on plant and equipment in a country
international finance
ANSWERS TO END OF CHAPTER REVIEW QUESTIONS
Explain the mechanisms of global trade, investment, and finance by which instability in one
country spreads to other countries.
1. How does international trade transmit expansions and recessions from one country to
another?
2. How does international investment transmit expansions and recessions from one country
to another?
3. How does international finance transmit expansions and recessions from one country to
another?
The integration of financial markets means that trillions of dollars of financial capital
4. Explain why foreign investment is subject to wider fluctuations than domestic –
investment.
Compare and contrast the impact of global trade, investment, and finance on small and
large economies.
5. What is the impact of changes in patterns of trade, investment and finance on smaller
countries? Larger countries?
Large countries can have an especially large effect on smaller countries, if the smaller
6. What explains the differences in the impact on large and small economies?
The difference relates to the relative size of foreign trade and investment in the economy.
Discuss why capitalist economies in the global economy rise and fall roughly at the same
time.
7. How are business cycles transmitted from one country to another? Explain.
International trade, investment, and finance are highly integrated; as a result, the global