INTB Exam 2
Smooth-Hawley Tariff Act
(1930) a U.S. law that set extremely high tariffs on imports in an effort to protect American farmers and manufacturers; the result was a worsening of the Great Depression
Strategic Trade Policy
- Ensure the firm/firms get a first-mover advantage Substantial R&D grants: US-Boeing in the 50s and 60s - Help domestic firms overcome barriers to entry created by foreign firms who already have a competitive advantage
Porter's Diamond
- Factor endowments - Demand conditions - Related and supporting industries - Firm strategy, structure, and rivalry
Implications of New Trade Theory
- Nations may benefit from trade even when they don't differ in resource endowments or technology - A country may predominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce that good - Global demand may not be sufficient to profitably support another producer
Dumping
- selling goods internationally for less than their cost of production or below their "fair" market value - Unloading excess production into foreign markets - Use profits from your home country to starve out companies in other markets
NAFTA (North American Free Trade Agreement)
US, Canada & Mexico enter free trade agreement Low/no tariffs, intellectual property protection, open FDI, environmental standards
If one firm in an oligopoly cuts prices, then most likely, its competitors will: A. make profits. B. also respond with similar price cuts. C. correspondingly raise prices. D. capture additional market share. E. not be impacted by the price cuts.
also respond with similar price cuts.
FDI flow
amount of FDI undertaken over a timeframe
Tariff
A tax on imported goods
Political Union
A central political apparatus coordinates the economic, social, and foreign policy of the member-states
Only a totalitarian regime that is committed to which of the following is capable of promoting economic growth? A command economy A dictatorship Limiting human freedom A market system and strong protection of property rights Limiting individualism and privatization
A market system and strong protection of property rights
Radical view on FDI
A political view that sees FDI as an instrument of imperialism and a vehicle for foreign exploitation.
Which of the following is most likely to be the consequence of economic progress? A. Adoption of communism B. Adoption of democracy C. Adoption of a command economy D. Adoption of a totalitarian government E. Restriction on individual freedom
Adoption of democracy
Regional Economic Integration
Agreements among countries in a geographic region to reduce and remove trade barriers and promote the free flow of goods, services, and factors of production between each other
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.
Hierarchy factors
Basic factors: natural resources, climate, location, demographics Advanced factors: research facilities, comm tech, skilled labor, tech knowledge
Which of the following best exemplifies ethnocentrism? Sarah believes that her opinions and interests are superior to that of her siblings. Nicole is highly tolerant toward different cultures and is also keen on learning different languages. Bryan's belief in the superiority of his culture has resulted in conflicts with his colleagues from different countries. Emilio is in an ethical dilemma as he has been given the responsibility of deciding whether or not to hire his under-qualified cousin. Galaxy Inc. has been accused of using legal but unethical ways to gain access into the markets of less developed countries.
Bryan's belief in the superiority of his culture has resulted in conflicts with his colleagues from different countries.
Economic Union
Common Market plus common currency, tax rates, and monetary and fiscal policy Requires a lot of bureaucracy and countries to give up a certain level of sovereignty European Union
Heckscher-Ohlin Theory
Comparative advantage arises from differences in national factor endowments - A country's resources: land, labor, and capital - The more abundant a factor, the lower its cost
2 Reasons for Subsidies
Competing against foreign imports Gaining in export markets
Which of the following supports the economic case for regional economic integration? A. International institutions such as the World Trade Organization have been moving the world away from a free trade regime. B. The greater the number of countries involved in a free trade agreement, the fewer the perspectives that must be reconciled. C. Coordination and policy harmonization problems are largely a function of the number of countries that seek agreement. D. It is difficult to establish a free trade and investment regime among a limited number of adjacent countries as compared to the world community. E. Since most governments do not intervene, unrestricted free trade and FDI have become a reality.
Coordination and policy harmonization problems are largely a function of the number of countries that seek agreement.
National factor endowments
Countries should specialize in production of goods that are intensive in abundant factors
Common market
Customs unit plus free flow of factors of production i.e. labor and capital move freely between countries Very difficult to pull off
Which of the following is of equal importance to both international and domestic businesses? Dealing with government restrictions on international trade and investment Developing policies for dealing with exchange rate movements Choosing the appropriate mode for entering a particular country for business Coordinating and controlling globally dispersed production activities Dealing with business attacks from foreign competitors
Dealing with business attacks from foreign competitors
Pragmatic Nationalism
FDI has both benefits (inflows of capital, technology, skills and jobs) and costs (repatriation of profits to the home country and a negative balance of payments effect)
1992 Maastricht Treaty
EU members to a common currency Called the Eurozone Must meet strong financial criteria: - price stability, sound financial situation, stable exchange rates, etc.
Greenfield Investment
Establishing a new operation in a foreign country
Single European Act
European Commission 1987 law removing all impediments to a single European market
Which of the following is most likely to lead to unethical behavior in a business setting? A strong sense of personal ethics exhibited by employees Expatriate managers working away from their ordinary social context and supporting culture Providing managers with a moral compass or an ethical algorithm Large business corporations making social investments in host countries Multinational corporations advocating the concept of noblesse oblige
Expatriate managers working away from their ordinary social context and supporting culture
Which of the following is most likely to be the reason behind the decline in the U.S. share of world output in 2012? Increasing share of world output accounted for by other developed nations Faster economic growth of developing economies, particularly in Asia Rising barriers to the free flow of goods, services, and capital throughout the globe Absolute decline in the health of the U.S. economy Rise in the share of FDI stock accounted for by the U S economy
Faster economic growth of developing economies, particularly in Asia
Limits of exporting
Find a native sales agent who will import and sell your product Transportation costs could make impossible
Multipoint Competition
Firms take each other on in multiple settings to keep each other in check
Which of the following is most likely to be advocated by individualism? Communal property is more highly productive than private property. Public good should be preferred over private profit. State-owned companies should monopolize certain industries. The welfare of society is best served by some collective body such as government. Free market ideologies should be followed for achieving better standards of living.
Free market ideologies should be followed for achieving better standards of living.
Demand Conditions
Gain a competitive advantage if their domestic consumers are sophisticated and demanding
Limits of Licensing
Give-away technical info to foreign competitors Lack of control over manufacturing, marketing, and strategy Some things don't work as licensed product
Repealed the corn laws
Great Britain
Which of the following is an example of concerns over national sovereignty acting as an impediment to regional economic integration? A. The Organization of the Petroleum Exporting Countries regulating the supply of petroleum as a cartel B. The Asia-Pacific Economic Cooperation failing to establish itself as a regional arrangement C. Admission of Eastern European nations into the European Union D. Great Britain refusing to adopt the common currency of the European Union, the euro E. The rise of the World Trade Organization
Great Britain refusing to adopt the common currency of the European Union, the euro
2 Forms of FDI
Greenfield investment Acquisition or merging
Who is often seen as the lender of last resort to nation-states whose economies are in turmoil and currencies are losing value against those of other nations? WTO UN G20 IMF
IMF
What is the most appropriate solution to the problem of slow real income growth among the unskilled workers in the United States? Limiting free trade and globalization Restricting exports of jobs Increasing society's investment in education Decreasing the wage rates of skilled workers Increasing the supply of unskilled workers
Increasing society's investment in education
According to which of the following, FDI has both benefits and costs and should be allowed only if the benefits outweigh the costs? A. Eclectic paradigm theory B. Free market view C. Pragmatic nationalist view D. Radical view E. Internalization theory
Pragmatic nationalist view
Free market view on FDI
International production should be distributed according to comparative advantage
Mr. X finds it hard to dine with his American colleagues as his religion prohibits the consumption of pork and alcohol. He also quit his previous job in a bank because his religion considers the payment or receipt of interest as exploitative and unjust. According to this information, Mr. X is a follower of: Protestantism. Hinduism. Judaism. Confucianism. Islam.
Islam
Which of the following statements is most likely to be true regarding private ownership? It reduces a nation's dynamism and its investments in innovation and creativity. It is most commonly found in command economies. It eliminates competitors and reduces pressure to lower production costs. It gives entrepreneurs an incentive to search for better ways of serving consumer needs. It is based on the philosophy that "the good of society is more important than the interests of an individual."
It gives entrepreneurs an incentive to search for better ways of serving consumer needs.
Which of the following is an argument against embracing strategic trade policy? It hampers the chances of a country's firms to effectively exploit the first-mover advantages. It is certain to be captured by special-interest groups within the economy, which will distort it to their own ends. It increases the prices of the products for the domestic consumers. It hampers the abilities of the domestic firms to achieve a dominant position in the global industry. It leads to a compromise in national sovereignty.
It is certain to be captured by special-interest groups within the economy, which will distort it to their own ends.
Free trade area
all trade barriers are dropped 90% of regional agreements Can still put barriers on non-members European Free Trade Association
Infant industry argument
New industries in developing countries must be temporarily protected from global competition until they reach a point where they can compete
first-mover advantage
Occurs when an organization can significantly impact its market share by being first to market with a competitive advantage
Which of the following practices should be avoided by a company to ensure ethical decision making? Auditing past decisions made in the company Protecting the fundamental rights of stakeholders Taking care of the interests of external stakeholders Placing its economic interests before its moral principles Adopting the moral principles specified in the code of ethics of the company
Placing its economic interests before its moral principles
Palladia specializes in the production of beef and produces beef more efficiently than any other country. It buys wheat, which it produces less efficiently than beef, from Rhodia, even though it also produces wheat more efficiently than Rhodia. Which of the following theories of international trade supports Palladia's decision to buy wheat from Rhodia? The Samuelson critique Mercantilism Ricardo's theory of comparative advantage Adam Smith's theory of absolute advantage The Leontief paradox
Ricardo's theory of comparative advantage
Which of the following generally permits individual economic freedom, but restricts individual political freedom on the grounds that it would lead to the rise of communism? Pure democracy Right-wing totalitarianism Free market capitalism Representative democracy Communist totalitarianism
Right-wing totalitarianism
Euro Debt Crisis
Some countries raised national debt to finance public spending Private investors worried the countries couldn't pay back their loans 2010: IMF steps in with bailouts
In the Republic of Lantharia, the state-owned telephone company enjoys a monopoly. The government of Lantharia Republic wants to maximize the operating efficiency of this company by privatizing it. Which of the following is most likely to help the government succeed in this endeavor? Imposing high corporate taxes on the company immediately after its privatization Increasing barriers to foreign direct investment Intervening in the company's operations by exercising price controls Splitting the company into independent units to compete with each other Prohibiting foreign companies from entering into the field of telecommunication in the Republic of Lantharia
Splitting the company into independent units to compete with each other
Two Truths of Tariffs
Tariffs are generally pro-producer and anti-consumer Tariffs reduce overall efficiency of the world economy
Which of the following identifies an attribute of tariffs? Tariffs reduce the price of foreign goods for domestic consumers. Tariffs reduce the overall efficiency of the world economy. Tariffs increase exports from a sector. Tariffs increase foreign competition for domestic producers. Tariffs increase efficient utilization of resources.
Tariffs reduce the overall efficiency of the world economy.
According to the free market view, how does FDI increase the efficiency of the world economy through multinational enterprises (MNEs)? A. The MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe. B. MNEs extract profits from the host country and take them to their home country and help all countries realize economies of scale. C. When an MNE produces products, profits from the investment go abroad, and hence the MNE helps foreign exchange to rotate. D. A foreign-owned manufacturing plant may import many components from its home country, thus improving the balance of payments of the host country. E. MNEs increase the efficiency of the world economy by increasing the flow of capital in the world market.
The MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe.
Buy American Act
The US government must give preference to American products "American": 51% materials by value produced domestically
The Leontief Paradox
The US is relatively abundant in capital compared to other nations The US should export capital-intensive goods and import labor-intensive goods
The United Republic emphasizes individual performance and achievements in every sphere of society. Which of the following statements is true about the society of this country? The country suffers from a low degree of dynamism and innovation. The country has a low degree of managerial mobility. There is a low degree of entrepreneurial activity in the country. The employees in this country will lack loyalty and commitment to a company. Managers in such a country have highly developed company-specific skills but they lack general skills.
The employees in this country will lack loyalty and commitment to a company.
Which of the following is NOT a technological change that affects globalization? The development of microprocessors that led to large amounts of information processing The introduction of containerization to simplify transshipment The development of the Internet into the information backbone of the global economy The introduction of tougher environmental and labor laws The development of commercial jet aircraft and super-freighters
The introduction of tougher environmental and labor laws
The Samuelson Critique
The low prices you pay for goods imported, may not offset the expenses incurred from the US labor force (retraining, unemployment) The effect on middle-class wages in the US may be similar to mass inward migration into the country
Product Life Cycle Theory
The wealth and size of the US Market gave US firms a strong incentive to develop new consumer products High cost of US labor incents development of cost-saving process innovations
According to the new trade theory: the ability to capture first-mover advantages is restricted in a world that disallows trade. differences in labor productivity between nations underlie the notion of comparative advantage. a country may predominate in the export of a good because it has firms that were among the first to produce that good. to ensure economic progress, countries should implement several trade barriers. different goods use resources in different proportions and this leads to constant returns to specialization.
a country may predominate in the export of a good because it has firms that were among the first to produce that good
voluntary export restraint
a quota on trade from the exporter's side instead of the importer's side
Local content requirements
a specific portion of a good must be produced in-country
In the Republic of Cedia, people are extremely conscious about their social backgrounds. This in turn regulates their relationships with members of other classes. As a result of the heightened class consciousness: the mobility between the social classes of the Cedian society will increase. the level of industrial disruption and industrial disputes will be low. most of the population will perceive itself to be middle class. an antagonistic relationship will exist between management and labor classes. successful individuals, irrespective of their origins, will be highly respected.
an antagonistic relationship will exist between management and labor classes.
beggar thy neighbor
an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries
Oligopoly
an industry is controlled by a limited number of large firms
The difference between Ricardo's theory and the Heckscher-Ohlin theory is that the Heckscher-Ohlin theory: makes more simplifying assumptions. cannot be subjected to empirical tests. actually predicts trade patterns with greater accuracy. argues that the pattern of international trade is determined by differences in national factor endowments. suggests that trade is a positive-sum game in which all countries that participate realize economic gains.
argues that the pattern of international trade is determined by differences in national factor endowments
administrative trade policies
bureaucratic policies to make it difficult to import
acquisition or merger
buying or combining with an existing firm in a foreign country
In 2012, if the PPP per capita of China was $9,040 and the PPP per capita of the United States was $52,340, this means that the: GNI per capita was greater in China. percent of goods and services consumed in the United States was lower. standard of living in China was better. cost of living was lower in China. annual average GDP growth rate was lower in China.
cost of living was lower in China
Green Quantum Inc. has research and production units all across the globe. The company expects its expatriate managers to adopt the ethics propagated by the culture in which they operate their respective units. Even in situations when others consider certain actions as unethical, the company allows its managers to pursue such actions if they are permitted in the host nation. Green Quantum is most likely following: the Friedman doctrine. Sullivan's principles. righteous moralism. Kantian ethics. cultural relativism.
cultural relativism.
import quotas
direct restriction on a good that can be imported to a country Usually through issuing import licenses to a select number of firms or individuals
Black economy is most likely to be prevalent when: large amounts of economic activity are in the form of legally recorded cash transactions. people engage in barter agreements to avoid paying taxes. a country's GNI per capita exceeds $30,000. the expenses of the government are less than its income. a country is in trade surplus with another foreign country.
people engage in barter agreements to avoid paying taxes.
One of the main reasons why many economists remain critical of the infant industry argument is its reliance on the assumption that: protection of manufacturing from foreign competition is harmful. absolute advantage cannot sustain productivity of an industry. foreign firms too come under the definition of infant industry when they newly enter a foreign market. firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital markets. foreign competition will eventually cause domestic firms to improve the quality of their products.
firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital markets.
Specific Tariff
fixed charge for each unit
FDI Inflows
flow of FDI into a country
FDI Outflows
flow of FDI out of a country
FDI
foreign direct investment when a firm invests directly in production facilities or marketing in a foreign country At least 10% investment in a foreign business
The WTO was encouraged to extend its reach to encompass regulations governing foreign direct investment, something the GATT had never done. Two of the first industries targeted for this reform were: global telecommunication and financial services industries. scientific research and defense sector. pharmaceuticals and heavy metal industry. pharmaceuticals and biotechnology. scientific research and global telecommunication.
global telecommunication and financial services industries.
Subsidies
government payments to producers
Trade Creation
high-cost producers are replaced by low-cost
An inconsistency in the mercantilist doctrine, as pointed out by David Hume, is that: the volume of a country's imports increases as an indirect consequence of mercantilism. the exclusion of government influence in matters pertaining to trade is not ideal. in the long run, no country could sustain a surplus on the balance of trade. it was not backed by either sound political principles or social ideologies. trade is a zero-sum game rather than a positive-sum game as postulated by the theory.
in the long run, no country could sustain a surplus on the balance of trade.
According to internalization theory, one of the drawbacks of licensing is that: A. it may result in a firm's technological know-how being restricted to a limited knowledge base and stifles any future development. B. it does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. C. when a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks. D. its use is restricted by the government through the imposition of tariffs and quotas. E. it is less cost-effective than FDI.
it does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.
The common law system enjoys a degree of flexibility not found in other systems because: it is usually found in democratic republics. it originated from Great Britain and can be found in almost all of its former colonies. it is interpreted by the law courts with regard to tradition, precedent, and custom. it is based on a detailed set of laws organized into codes. it has originated recently—just a decade ago.
it is interpreted by the law courts with regard to tradition, precedent, and custom.
Ad Valorem Tariff
levied as a proportion of the value of the imported good
The threat of antidumping action: helps the firm raise capital in the primary market. limits the ability of a firm to raise prices in response to high demand. enhances the firm's ability to disperse its productive activities in an efficient manner. limits the ability of a firm to use aggressive pricing to gain market share in a country. enhances a firm's competitive advantage to indigenous competitors in that country.
limits the ability of a firm to use aggressive pricing to gain market share in a country.
Trade Diversion
low-cost producers are replaced by high-cost
Tariff rate quota
lower tariff rates for imports within the quota than for those outside the quota
To encourage inward FDI, it is increasingly common for governments to: A. offer tax concessions to foreign firms that invest in their countries. B. exclude foreign companies from specific industries. C. require that local investors own a significant proportion of the equity in a joint venture. D. impose high custom duties on foreign firms. E. prohibit MNEs from joining a cartel.
offer tax concessions to foreign firms that invest in their countries.
Under John Rawls's concept of veil of ignorance, people are imagined to be ignorant of their: fundamental duties. fundamental rights. particular characteristics such as race, sex, and nationality. political and economic freedom. social responsibilities.
particular characteristics such as race, sex, and nationality.
The philosophy behind intellectual property laws is to: reward the originator of a new invention, book, musical record, and the like for his or her idea and effort. protect consumers from being subjected to business malpractice. safeguard a firm and its officers from being responsible for injury, death, or damage caused by the firm's product. eliminate monopoly in international trade. ensure that the rights to manufacture, use, or sell an invention are made available to the whole society.
reward the originator of a new invention, book, musical record, and the like for his or her idea and effort.
Porter argues that a nation's firms gain competitive advantage if their domestic consumers are: sophisticated and demanding. price insensitive and trusting. accommodating and flexible. nationalistic and protective of their domestic industries. biased toward foreign products.
sophisticated and demanding.
quota rent
the extra profit companies make from supply is artificially limited by an import quota
FDI Stock
total accumulated value of foreign-owned assets at a time
New Trade Theory
trade theory stating that (1) there are gains to be made from specialization and increasing economies of scale, (2) the companies first to market can create barriers to entry, and (3) government may play a role in assisting its home companies
Money grab
use capital, tech, or management skills to increase efficiency
Managers at the Blue Dragon Inc., an international company with operations in China and the United States, are often heard complaining about the difficulties in achieving synergy and cooperation between the employees of both the countries. On extensive research it was concluded that the cultural differences between these countries, which resulted in different work-related values, caused the lack of cooperation. In order to effectively tackle this problem, Blue Dragon Inc. should: vary its management processes and practices to account for these differences. adopt the host country's management processes and practices in both countries. opt to exit one of the countries to avoid a conflict. provide incentives to the employees based only on their individual performance. adopt the home country's management processes and practices in both countries.
vary its management processes and practices to account for these differences.
Ten years after he proposed what came to be known as Sullivan's principles, Leon Sullivan concluded that following his principles: A: was the most ethical way of doing business in South Africa. B: was not sufficient to ethically justify the existence of Western businesses in South Africa. C: would be effective only when companies opposed democracy in South Africa. D: had led international companies to successfully combat the apartheid regime in South Africa. E: would safeguard the citizens and businesses in South Africa from Western businesses.
was not sufficient to ethically justify the existence of Western businesses in South Africa.