Question

Q1) Are there any hidden assumptions or price rigidities in the country or countries that might inhibit market force indicators from revealing the true economic health of the country, thereby either preventing government policy actions from correcting the problems or otherwise making them ineffective and counterproductive ?

Q2) What is the current domestic and international situation of each country relative to benchmark performance measures for that country?

Q3) Is the country currently following appropriate economic policies from a domestics as well as an international perspective? Provide supporting justification?

Q4) When the basic tool of country risk analysis are applied to the different countries being analyzed, which country is more likely to have what kind of crisis, and why?

Q5) If you recommend that TA proceed with a transaction in one of the selected countries, which strategy would you suggest they follow: a foreign exchange hedging strategy or a country risk crisis management strategy? Explain and justify your recommendation.

Answer 1

There are various assumpltions or we can say price rigidities, which prevent market force indicators from revealing the true economic health of a country. Some of these are:-

1. The national income calculates the income of the country and not it's wealth or development.
2. While calculating national income, the total amount of income is considered, which can also include inflation.
3. All types of illegal and household income is neglected while calculating national income.
4. Rise in national income does not mean the rise in welfare of the economy because the ruse may be due to inflation.
5. Increased expenditure of government does not mean the increase in living standards of people because this may include the increased expenditure due to wars or riots.
6. Rise in national income does not consider the factor of population. Hence it does not reflect the true health of an economy.
7. Fugures are silent about the distribution of income. So it does not reflect the true economic growth because the distribution may be unequal.

All these inhibit the market forces to reveal the true economic health of the country.