IB Test 2

It is common for governments to offer incentives to foreign firms to invest in their countries. Such incentives take many forms, but the most common are tax concessions, low-interest loans, and grants or subsidies. The two most common types of control exercised by host governments to restrict FDI are:

(1) ownership restraints, often in the form of excluding foreign firms from specific fields or limiting foreign ownership stake in local subsidiaries, and (2) performance requirements related to local content, exports, technology transfer, and local participation in top management.

A customs union is a group of countries committed to what two things?

(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.

By the end of the 1980s, the radical position was in retreat almost everywhere due to:

(1) the collapse of communism in Eastern Europe; (2) the generally abysmal economic performance of those countries that embraced the radical position, and their growing belief that FDI can stimulate economic growth; and (3) the strong economic performance of those developing countries that embraced capitalism.

According to the _________________ argument, many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. To allow manufacturing to get a toehold, the argument is that governments should temporarily support new industries (with tariffs, import quotas, and subsidies) until they have grown strong enough to meet international competition.

infant industry

A branch of economic theory known as ___________ theory seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets (this approach is also known as the market imperfections approach). It argues that firms prefer FDI over licensing to retain control over know-how, manufacturing, marketing, and strategy or because some firm capabilities are not amenable to licensing.

internalization

In a free trade area, all barriers to the trade of goods and services among member countries are removed. Each country, however, is allowed to determine what in regards to nonmembers?

its own trade policies.

Factor endowments refer to the extent to which a country is endowed with such resources as?

land, labor, and capital.

A ________________ is a requirement that some specific fraction of a good be produced domestically. The requirement can be expressed either in physical terms or in value terms.

local content requirement

There are now _____ trade blocs on the African continent. Many countries are members of more than one group. Although the number of trade groups is impressive, progress toward the establishment of meaningful trade blocs has been _____.

nine,slow

Even when trade barriers do not exist, why would a firm still want to locate some production activities in a given country?

reduce the threat of trade barriers being imposed in the future

Linking neighboring economies and making them increasingly dependent on each other create incentives for political cooperation between the neighboring states like? And by grouping their economies, the countries can also enhance their ___________ in the world.

reduction of the potential for violent conflict. political weight.

Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the others' markets. During the 1980s and 1990s, What country was often the favorite target for FDI inflows?

the United States

A _______________________ is a quota on trade imposed by the exporting country, typically at the request of the importing country's government. A common hybrid of a quota and a tariff is known as a tariff rate quota. Under a tariff rate quota, a lower tariff rate is applied to imports within the quota than those over the quota. An import quota is a direct restriction on the quantity of some good that may be imported into a country.

voluntary export restraint (VER)

Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. According to the U.S. Department of Commerce, FDI occurs whenever a U.S. citizen, organization, or affiliated group takes an interest of __________ in a foreign business entity.

10 percent or more

According to _________________, countries differ in their ability to produce goods efficiently. A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. _____________ demonstrates that, by specializing in the production of goods in which each has an absolute advantage, both countries benefit by engaging in trade.

Adam Smith

What trade policies are bureaucratic policies designed to make it difficult for imports to enter a country.

Administrative

____________ is viewed as a method by which firms unload excess production in foreign markets. For example, two South Korean manufacturers of semiconductors, LG Semicon and Hyundai Electronics, were accused of selling dynamic random access memory chips (DRAMs) in the U.S. market at below their costs of production. This action occurred in the middle of a worldwide glut of chip-making capacity. It was alleged that the firms were trying to unload their excess production in the United States. Some ____________ may be the result of predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market. Once this has been achieved, so the argument goes, the predatory firm can raise prices and earn substantial profits.

Dumping

__________ involves producing goods at home and then shipping them to the receiving country for sale.

Exporting

Inadequate protections for intellectual property reduce the incentive for innovation. Because innovation is a central engine of economic growth and rising living standards, the argument has been that a multilateral agreement is needed to protect intellectual property. Without such an agreement it is feared that producers in a country might market imitations of patented innovations pioneered in a different country. This can affect international trade in what two ways?

First, it reduces the export opportunities for the original innovator. Second, to the extent that the producer is able to export its pirated imitation to additional countries, it also reduces the export opportunities in those countries for the inventor.

_____________ advantages are the economic and strategic advantages that accrue to early entrants into an industry. The ability to capture scale economies ahead of later entrants, and thus benefit from a lower cost structure, is an important first-mover advantage.

First-mover

_______________ refers to a situation in which a government does not attempt to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country.

Free trade

The _______________ theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. Thus, the __________________ theory attempts to explain the pattern of international trade that we observe in the world economy.

Heckscher-Ohlin

__________ involves granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit sold.

Licensing

____________ makes a crude case for government involvement in promoting exports and limiting imports. The main tenet of ________________ is that it is in a country's best interests to maintain a trade surplus, to export more than it imports.

Mercantilism

Who's model suggests that in certain cases, the lower prices that consumers in rich countries pay for goods imported from poor countries following the introduction of a free trade regime may not be enough to produce a net gain for the richer economy if the dynamic effect of free trade is to lower real wage rates in the rich country.

Paul Samuelson's

What suggests that it is in the best interest of business for a firm to invest in upgrading advanced factors of production; for example, to invest in better training for its employees and to increase its commitment to research and development.

Porter's theory

The European Commission is responsible for ___________, ____________, and ____________ with EU laws by member-states. Headquartered in Brussels, Belgium, the commission has more than 24,000 employees. The European Commission has a monopoly in proposing European Union legislation. The commission makes a proposal, which goes to the Council of the European Union and then to the European Parliament.

Proposing EU legislation, implementing it, and monitoring compliance

potential world production is greater with unrestricted free trade than it is with restricted trade as consumers in all nations can consume more if there are no restrictions on trade. what does this describe?

The basic message of the theory of comparative advantage.

During the 1980s and early 1990s, the world trading system erected by the GATT came under strain as pressures for greater protectionism increased around the world. What was one of the reasons for the rise in such pressures during the 1980s?

The world trading system was strained by the persistent trade deficit in the world's largest economy, the United States.

What is it when high-cost domestic producers are replaced by low-cost producers within the free trade area. This may also occur when higher-cost external producers are replaced by lower-cost external producers within the free trade area

Trade creation

Who's theory was based on the observation that for most of the twentieth century a very large proportion of the world's new products had been developed by U.S. firms and sold first in the U.S. market. To explain this, they argued that the wealth and size of the U.S. market gave U.S. firms a strong incentive to develop new consumer products.

Vernon's

Like the common market, an economic union involves the free flow of products and factors of production between member countries and the adoption of a common external trade policy, but it also requires what?

a common currency, harmonization of members' tax rates, and a common monetary and fiscal policy.

A country has an absolute advantage in the production of a product when it is more efficient than?

any other country in producing it.

Paul Krugman argues that a strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry is a __________________ policy that boosts national income at the expense of other countries. A country that attempts to use such policies will probably provoke retaliation.

beggar-thy-neighbor

The main gains from subsidies accrue to ________________, whose international competitiveness is increased as a result.

domestic producers

Propagated in the sixteenth and seventeenth centuries, mercantilism advocated that countries should simultaneously?

encourage exports and discourage imports.

The four factors in Porter's diamond are? Porter recognizes hierarchies among factors, distinguishing between basic factors (e.g., natural resources, climate, location, and demographics) and advanced factors (e.g., communication infrastructure, sophisticated and skilled labor, research facilities, and technological know-how).

factor endowments, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry.

Several levels of economic integration are possible in theory. From least integrated to most integrated, the levels of economic integration are?

free trade area, a customs union, a common market, an economic union, and, finally, a full political union.

Many economic studies have looked at the relationship between trade and economic growth. In general, these studies suggest that, as predicted by the standard theory of comparative advantage, countries that adopt a more open stance toward international trade enjoy ____________ than those that close their economies to trade.

higher growth rates

A common market has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members. Labor and capital are free to move because there are no restrictions on _____________, ____________, or____________ of capital between member countries.

immigration, emigration, cross-border flows