Exam 2

NAFTA

free trade are between Canada, Mexico, and the United States

A zero-sum game is one in which a __________ by one country results in a _______ by another.

gain / loss

Subsidy

government financial assistance to a domestic producer

Law of one price

in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in the same currency

Current Account

in the balance of payments, records transactions involving the export or import of goods and services

Externalities

knowledge spillovers

Factor endowments refers to the extent to which a country is?

land, labor, and capital

Tariff Rate Quota

lower tariff rates applied to imports within the quota than those over the quota

Name a group (industry) opposed to Free Trade?

manufacturers

Internalization Theory

marketing imperfection approach to foreign direct investment

Bandwagon Effect

movement of traders like a herd, all in the same direction at the same time, in response to each other's perceived actions

externally convertible

non-residents can convert their holdings of domestic currency into a foreign currency, but when the ability of residents to convert currency is limited in some way

Ad Valorem Tariffs

a tariff levied as a proportion of the value of an imported good

Administrative Trade Policies

administrative policies, typically adopted by government bureaucracies, that can be used to restrict imports or boost exports

First Mover Advantage

advantages accuring to the first to enter a market

Location-Specific Advantages

advantages that arise from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets (such as the firm's technological, marketing, or management know-how)

Mercantilism

an economic philosophy advocating that countries should simultaneously encourage exports and discourage imports

Oligopoly

an industry composed of a limited number of large firms

Eclectic Paradigm

argument that combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI; it requires the firm to establish production facilities where those foreign assets or resource endowments are located

Multipoint Competition

arises when two or more enterprises encounter each other in different regional markets, national markets, or industries

non-convertible

both residents and non-residents are prohibited from converting their holdings of domestic currency into a foreign currency

Capital Flight

converting domestic currency into a foreign currency

Quota Rent

extra profit producers make when supply is artificially limited by an import quota

(t/f) Regional economic integration is only beneficial if the amount of trade it creates is less than the amount it diverts

false

(t/f) a negative relationship exists between the inflation rate and the level of money supply

false

What does FDI mean for managers?

**slide 19 - ch 8; diagram**

Free Trade Area

a group of countries committed to removing all barriers to the free flow of goods and services between each other, but pursuing independent external trade policies

Discuss the benefits and costs of FDI from the perspective of a host country and from the perspective of the home country.

4 main benefits: 1) Resource Transfer Effects- FDI brings resources like tech 2) Employment Effects- can bring jobs 3) Balance of Payments effects- can help country achieve a current account surplus 4) Effects on competition and economic growth 3 main costs: 1) Adverse effects of FDI on competition within the host nation- international companies can do better than local ones 2) Adverse Effects on the balance of payments 3) Perceived loss of national sovereignty and autonomy

What are the main uses of foreign exchange markets for international business?

A foreign exchange market is a market for converting the currency of one country into that of another country. Its uses include providing insurance against foreign exchange risk and to convert the currency of one country into one country of another.

What is a Greenfield investment? How does it compare to an acquisition? Which form of FDI is a firm more likely to choose? Explain your answer.

A greenfield investment involves the establishment of a new operation in a foreign country, while an acquisition involves acquiring or merging with an existing firm in a foreign country. A firm is more likely to do an acquisition because they are faster to execute, foreign firms have valuable strategic assets, and because firms think they can increase the efficiency of the acquired unit by transferring capital, technology, or management skills

"Every coercive monopoly was create by government intervention into the economy: by special privileges, such as franchises or subsidies, which closed the entry of competitors into a given field, by legislative action."

Ayn Rand

What Is The Status Of Regional Economic Integration In Europe?

Europe has 2 trade blocs: the European Union (EU) and the European Free Trade Area (EFTA)

ASEAN

Formed in 1967, an attempt to establish free trade area between Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Vietnam, and Thailand

Explain the concept of free trade (include the thought of the invisible hand)

Free trade is when the government does not attempt to influence what its citizens can buy from another country. Adam Smith argues that the invisible hand of the market mechanism, rather than government policy, should determine what a country imports and what it exports.

Compare and contrast a free trade area and a common market. Provide examples.

In a free trade area, all barriers to the trade of goods and services among member countries are removed. In a common market, there are no barriers to trade among member countries, a common external trade policy, and factors of production to move freely among members.

"We know that investment causes growth. But it is also true that growth causes investment."

Jim Stanford

Leontief Paradox

Leontief postulated that because the US was relatively abundant in capital compared to other nations, the US would be an exporter of capital-intensive goods and an importer of labor-intensive goods Found out US exports were less capital intensive than US imports

"The glorious thing about free trade is that if the conditions are in place to allow it to flourish, no-one needs to lose out. We all can benefit in the long run"

Liam Fox

"In a system of free trade and free markets poor countries - and poor people - are not poor because others are rich. Indeed, if others became less rich the poor would in all probability become still poorer."

Margaret Thatcher

"Unity is strength... when there is teamwork and collaboration, wonderful things can be achieved."

Mattie Stephanek

Infant Industry Argument

New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations

Fisher Effect

Nominal interest rates (i) in each country equal the required real rate of interest (r) and the expected rate of inflation over the period of time for which the funds are to be lent (l). That is, i = r + l

Discuss the economic reasons for government intervention in markets

Protecting jobs and Industries- protecting local jobs from unfair foreign competition Protecting National Security- protecting defense related industries (aerospace, advanced electronics, etc.) because it would be dangerous to rely on foreign competitors Retaliating- bargaining tool Protecting Consumers- protect consumers from unsafe products Furthering Foreign Policy Objectives- can grant preferential trade terms to a country with which it wants to build strong relations or use trade policy to pressure "rogue states" Protecting Human Rights- use trade policy to improve human rights policies of trade partners

Carry Trade

a kind of speculation that involves borrowing in one currency where interest rates are low, and then using the proceeds to invest in another currency where interest rates are high

Efficient Market

a market where prices reflect all available information

Voluntary Export Restraint (VER)

a quota on trade imposed from the exporting country's side, instead of the importer's; usually imposed at the request of the importing country's government

Explain the North American Free Trade Agreement and then debate (show both sides) its ratification.

Supporters said: Mexico will benefit from increased jobs, and U.S. and Canada would benefit from larger market, lower prices, lower cost labor, and increased imports from Mexico Critics said: Jobs would be lost and wage levels would decline in U.S. and Canada, pollution would increase due to Mexico's more lax standards, and Mexico would lose its sovereignty

Customs Union

a group of countries committed to (1) removing all barriers to the free flow of goods and services between each other and (2) the pursuit of a common external trade policy

Local Content Requirements (LCR)

a requirement that some specific fraction of a good he produced domestically

Where is the foreign exchange market located? What is the nature of the market? Is the market growing or shrinking on a global basis?

The foreign exchange market is not located in one place; rather, it is located everywhere. The market never sleeps, and the U.S. dollar plays an important role in transactions. The market is growing.

Economic Union

a group of countries committed to (1) removing all barriers to the free flow of goods, services, and factors of prodcution between each other; (2) the adoption of a common currency; (3) the harmonization of tax rates; and (4) the pursuit of a common external trade policy

(t/f) About 56 percent of the world's engineering degrees awarded in 2008 were in Asia compared with 4 percent in the U.S.

True

(t/f) Common sense suggests that some international trade is beneficial?

True

(t/f) the mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade.

True

Zero-sum game

a situation in which an economic gain by one country results in an economic loss by another

"The stock market is a device for transferring money from the impatient to the patient."

Warren Buffet

Forward Exchange

When two parties agree to exchange currency and execute a deal at some specific date in the future

Political Union

a central political apparatus coordinates economic, social, and foreign policy

Absolute Advantage

a country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it.

Freely Convertible

a country's currency is freely convertible when the government of that country allows both residents and nonresidents to purchase unlimited amounts of foreign currency with the domestic currency

Import Quota

a direct restriction on the quantity of a good that can be imported into a country

Licensing

occurs when a firm (the licensor) licenses the right to produce its product, use its production processes, or use its brand name or trademark to another firm (the licensee). In return for giving the licensee these rights, the licensor collects a royalty fee on every unit the licensee sells

Mercosur

pact between Argentina, Brazil, Paraguay, and Uruguay to establish a free trade area

What are the two main arguments for government intervention in the market?

political and economic

What is the opposite of a zero-sum game?

positive-sum game

Optimal Currency Area

region in which similarities in economic activity make a single currency and exchange rate feasible instruments of macroeconomic policy

Exporting

sale of products produced in one country to residents of another country

Dumping

selling goods in a foreign market for less than their cost of production or below their "fair" market value

Specific Tariffs

tariff levied as a fixed charge for each unit of good imported

How do governments intervene in markets?

tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, anti-dumping policies

Free Trade

the absence of barriers to the free flow of goods and services between countries

CAFTA

the agreement of the member states of the Central American Common Market joined by the Dominican Republic to trade freely with the United States

Flow of FDI

the amount of foreign direct investment undertaken over a given time period (normally one year)

Greenfield Investment

the establishment of a new operation in a foreign country

Arbitrage

the purchase of securities in one market for immediate resale in another to profit from a price discrepancy

Spot exchange rate

the rate at which a foreign exchange dealer converts one currency into another currency on a particular day

Exchange Rate

the rate at which one currency is converted into another

Stock of FDI

the total accumulated value of foreign-owned assets at a given time

Countertrade

the trade of goods and services for other goods and services

Protectionist

to guard against

What does "Protectionism" stand for?

to guard against

Trade Creation

trade created due to regional economic integration; occurs when high-cost domestic producers are replaced by low-cost foreign producers within a free trade area

Trade Diversion

trade diverted due to regional economic integration; occurs when low-cost foreign suppliers outside a free trade area are replaced by higher-cost suppliers within a free trade area

(t/f) Consumers absorb the costs of subsidies

true

(t/f) Since WWII, the US has been the largest source country for FDI

true

Define "Economies of Scale"

unit cost reduction - large scale output