International marketing chapter 16

16. In cost-based transfer pricing, which cost is used to determine the price? a. Fixed costs c. Total costs b. Marginal costs d. Opportunity costs

ANS: D In cost-based transfer pricing, the costs do not reflect the cost incurred by the company. They reflect the estimated opportunity cost of the product. This is found in the "Political and Legal Environment" section (16-2b).

5. A firm is vulnerable to competition from parallel imports if it a. Engages in differential pricing. b. Distributes through unauthorized channels. c. a and b. d. None of the above.

ANS: A A firm engaging in a differential pricing strategy could be vulnerable to competition from unauthorized channels. In fact, differential pricing by the manufacturer has been identified as a main cause of parallel importing. This is found in the "Competitive Environment" section (16-2a).

27. Which type of countertrade is the only type of exchange that does not involve monetary exchange? a. Barter c. Switch Trading b. Clearing Agreements d. Counterpurchase

ANS: A Barter can be traced for centuries as a form of exchange. It involves a simple, non-monetized exchange of goods and/or services between two parties. While no money is involved in the exchange, the parties calculate the value of the goods in a particular currency and attempt to achieve value parity for the exchanged goods. This is found in the "The Economic and Financial Environment" section (16-2c).

19. In the late 1960's Pepsi agreed to an exchange of Pepsi syrup and bottling equipment in return for distributing Stolichnaya vodka. This is an example of a: a. countertrade agreement c. transfer pricing mechanism b. gray market d. product dumping loophole

ANS: A Countertrade involves selling a product to a buyer and agreeing to accept, in return for payment, products from the buyer's firm or from the trade agency/institution of the buyer. This exchange was an example of successful countertrade conducted over decades. This is found in the "The Economic and Financial Environment" section (16-2c).

17. Which type of currency is accepted for payment by any international seller? a. Hard currency c. Pegged currency b. Soft currency d. Swing credits

ANS: A Hard currency is currency that is accepted for payment by any international seller. Soft currency is currency that is kept at a high artificial exchange rate and is controlled by the national government. This is found in the "The Economic and Financial Environment" section (16-2c).

13. What loophole do international firms take advantage of in circumventing anti-dumping laws? a. They modify their products slightly so as not to permit a direct comparison. b. They use a cash-based accounting method instead of an accrual-based accounting method. c. They set prices based on their fixed costs instead of their marginal costs. d. All of the above are true.

ANS: A In order to avoid price discrimination charges, the importers modify their products slightly so as not to permit them to be directly compared with products sold in other countries at higher prices. This is found in the "Competitive Environment" section (16-2a).

15. Why do low-income countries often criticize the use of transfer pricing? a. It is a way for firms to evade taxes. b. The transfer price is often used to dump product on the market. c. Transfer pricing ignores exchange rates. d. Transfer pricing depletes much needed soft currency reserves.

ANS: A Low-income countries argue that transfer pricing helps a company under-report profits, which decreases their tax burden: Firms use transfer pricing to evade taxes. This is found in the "Political and Legal Environment" section (16-2b).

40. Penetration pricing is used by companies that a. are trying to gain a high sales volume b. are attempting to generate high profit c. are attempting to recover the cost of product development quickly d. all of the above

ANS: A Multinationals that have sales-based objectives, attempting to gain a high sales volume, are likely to use penetration pricing. Firms using this strategy price the product at first below the price of competitors to quickly penetrate the market at their competitors' expense. This material can be found in the "Penetration Pricing and Skimming Strategies" section (16-3d).

23. According to the text, for which industry does the U.S. government support the use of countertrade? a. Weapons c. Textiles b. Computers d. Steel

ANS: A The U.S. government supports countertrade for the sale of weapons and aircraft. In fact, countertrade constitutes the key form of trade internationally for defense equipment. This is found in the "The Economic and Financial Environment" section (16-2c).

10. According to the text, which U.S. industry has recently come under scrutiny by the Chinese government for dumping activity? a. Pharmaceuticals c. Computers b. Newsprint d. Steel

ANS: B China is currently enforcing its anti-dumping legislation to protect local industry from international competition. One target of Chinese scrutiny is U.S. newsprint.This is found in the "Competitive Environment" section (16-2a).

20. Approximately what percentage of total world trade is financed through countertrade transactions? a. 10% c. 30% b. 20% d. 40%

ANS: B Countertrade is on the increase worldwide. It is estimated that the percentage of world trade financed through countertrade transactions is just over 20%. This is found in the "The Economic and Financial Environment" section (16-2c).

4. A manufacturer may charge different prices in different markets for the same product. Which reason is not a valid reason for differential pricing? a. To meet the needs of target consumers who have a limited purchasing power. b. To reduce the risk of gray markets. c. To respond to differences in wholesale prices in different markets. d. To react to changes in the exchange rate in countries where the products are sold.

ANS: B Differential prices are the reason that most gray markets exist. Thus offering differential prices does not reduce the risk of gray markets. This is found in the "Competitive Environment" section (16-2a).

18. Which type of currency is kept at a high artificial exchange rate, is often overvalued, and is controlled by the national government? a. Hard currency c. Pegged currency b. Soft currency d. Variable currency

ANS: B Hard currency is currency that is accepted for payment by any international seller. Soft currency is currency that is kept at a high artificial exchange rate and is controlled by the national government. This is found in the "The Economic and Financial Environment" section (16-2c).

28. In a clearing agreement, when an imbalance occurs and one country owes money to the other, ____ are paid in an agreed upon hard currency. a. countervailing credits c. switch credits b. swing credits d. clearing credits

ANS: B In a clearing agreement, a third party creates clearing accounts that represent trade credits for the perspective parties, and companies trade in and out as necessary. Under a clearing agreement, countries are likely to trade products up to a certain amount stated in a particular, commonly agreed upon hard currency and within a given time frame. When an imbalance occurs and one country owes money to the other swing credits are paid in an agreed upon hard currency known as the clearing currency. This is found in the "The Economic and Financial Environment" section (16-2c).

24. Approximately how many commercial trade exchanges exist in the United States? a. 40 c. 4,000 b. 400 d. 40,000

ANS: B Often, countertrade is conducted with the help of countertrade brokers, since it is rare that a perfect match can exist for product exchanges and since the exchanges themselves are complex. These barter agents or brokers, known in the trade as commercial trade exchanges, number approximately 400 in the United States and typically utilize extensive computerized data bases to locate and match demand and supply. This is found in the "The Economic and Financial Environment" section (16-2c).

38. One example of aggressive export pricing is a. Transfer pricing c. Cost pricing b. Dynamic incremental pricing d. Market pricing

ANS: B One example of aggressive export pricing is dynamic incremental pricing, whereby a company assumes that it will have certain fixed costs whether or not it exports its products overseas. This material is found in the "Aggressive Export Pricing" section (16-3b).

26. Which of the following is an advantage of countertrade agreements? a. Countertrade practices encourage economic efficiency. b. Countertrade allows firms from industrialized countries to sell products in markets that would otherwise be inaccessible. c. Countertrade agreements often speed up the negotiation process. d. All of the above are countertrade advantages.

ANS: B One of the advantages of countertrade is that it allows firms from industrialized countries to sell their products in markets that would otherwise be inaccessible. This is found in the "The Economic and Financial Environment" section (16-2c). PTS: 1 DIF: Medium

9. Which government branch is responsible for determining whether products are dumped on the U.S. market? a. The Export-Import Bank c. The Ministry of Finance b. The U.S. Department of Commerce d. The U.S. Foreign Trade Office

ANS: B The United States Department of Commerce is the government branch responsible for determining whether products are dumped on the U.S. market. It considers that dumping takes place if products are priced only minimally above cost, or at prices below those charged in the producing country. This is found in the "Competitive Environment" section (16-2a).

32. Before the fall of communism in Eastern Europe and before German reunification, Volkswagen sold 10,000 cars to East Germany and agreed to purchase, over a period of two years, goods for the value of the automobiles, from a list of goods provided by the East German government. What type of countertrade does this example describe? a. Clearing agreement c. Offset purchase b. Counterpurchase d. Buyback agreement

ANS: B This is an example of counterpurchase, which involves two exchanges that are paid for in cash, and two parallel contracts. This is found in the "The Economic and Financial Environment" section (16-2c).

14. How can companies bypass profit repatriation restrictions? a. By having a minority share of the business (i.e., less than 50%). b. Through effective transfer pricing. c. By effectively using parallel markets. d. Through exchange rate management.

ANS: B Transfer pricing is a pricing strategy used in intra-firm sales. By charging the foreign subsidiary for services or products, the firm is able to repatriate some of its profits from international operations. This is found in the "Political and Legal Environment" section (16-2b).

8. According to the World Trade Organization, dumping should be condemned if it a. Threatens an established industry. b. Delays the establishment of a viable domestic industry. c. a and b. d. None of the above.

ANS: C According to the World Trade Organization, dumping should be condemned if it threatens to cause injury to an established industry in a particular market and/or if it delays the establishment of a viable domestic industry. This is found in the "Competitive Environment" section (16-2a).

31. In which type of countertrade does the exporter agree to buy goods from a shopping list provided by the importer? a. Barter c. Counterpurchase b. Switch Trading d. Buyback agreement

ANS: C Counterpurchase involves two exchanges that are paid for in cash, and two parallel contracts. The seller purchases products unrelated to its business from the buyer and sells them on international markets. The exporter agrees to buy goods from a shopping list provided by the importer. This is found in the "The Economic and Financial Environment" section (16-2c).

30. Which type of countertrade involves parallel contracts? a. Clearing agreements c. Counterpurchases b. Switch trading d. Offset purchases

ANS: C Counterpurchase involves two exchanges that are paid for in cash; as such, counterpurchase involves two parallel contracts. For this reason, it is also known as parallel barter. This is found in the "The Economic and Financial Environment" section (16-2c).

3. Why should a manufacturer not use even pricing in Turkey? a. Even numbers are considered to be unlucky. b. Even pricing indicates a "cheap" product. c. Retailers can't "keep the change" if the product is priced using even pricing. d. It is harder to adjust even pricing in inflationary markets.

ANS: C In Turkey it is customary for retailers to keep the change in a retail transaction. In that environment, a company using even pricing, regardless of whether or not it is pricing below competitors' price, will be at a disadvantage since retailers will choose to sell competitors' products. This is found in the "Competitive Environment" section (16-2a).

22. Which statement regarding countertrade is true? a. The World Trade Organization supports countertrade. b. The U.S. condemns all forms of government-mandated countertrade. c. The U.S. government only interferes in countertrade agreements that involve firms that use U.S. government financing. d. Developing countries with significant hard currency reserves do not require countertrade agreements.

ANS: C In many developing countries, governments mandate countertrade as a form of payment for firms purchasing imported goods. The U.S. government, in line with mandates of GATT and the WTO, has a policy that opposes government-mandated countertrade, and only interferes in the case of firms that operate with U.S. government financing, or for firms with contracts with the U.S. government. This is found in the "The Economic and Financial Environment" section (16-2c).

29. Buying a party's position in a countertrade in exchange for hard currency and selling it to another customer is known as a(n) a. Counterpurchase c. Switch trade b. Offset purchase d. Buyback agreement

ANS: C Switch trading involves buying a party's position in a countertrade in exchange for hard currency and selling it o another customer. Offset purchases involve large hard-currency purchases, such as the purchase of defense equipment, by a developing country. The seller agrees, in return for the sale of its offering, to purchase products that are valued at a certain percentage of the sale. In a buyback agreement, the seller builds and provides a turn-key plant, as well as the manufacturing know-how. The seller is paid up-front part of the cost of the plant in an agreed upon convertible currency. The seller agrees to purchase specific quantities of the plant's output over an extended period of time. This is found in the "The Economic and Financial Environment" section (16-2c).

6. A manufacturer may charge different prices in different markets for the same product a. to meet the needs of target consumers who have a limited purchasing power b. to keep the product price competitive in markets that are actively targeted by competition c. due to the fact that it offers discounts to wholesalers buying higher quantities d. all of the above are reasons why a manufacturer may charge different prices

ANS: D A manufacturer may charge different prices in different markets for the same product to meet the needs of target consumers who have a limited purchasing power, to keep the product price competitive in markets that are actively targeted by competition; due to changes in the exchange rate in countries where the products are sold - the product is likely to be cheaper in the countries with the weakest currency; and due to the fact that it offers discounts to wholesalers buying higher quantities. This is found in the "Competitive Environment" section (16-2a).

7. How do regulators decide on whether or not a company is guilty of dumping activity? a. The value of the product is based on production costs plus reasonable expenses. b. The price is checked against the price charged within the exporting country. c. The price is checked against similar products in a third country. d. Any of the above methods may be used.

ANS: D Dumping is involved if a product is sold at a price below its normal value, where normal value could be based on production costs plus reasonable expenses and profit, or on the comparable price in the exporting country for an identical or like product. If there is no comparable price for the product in the exporting country, reference is made to the price at which the exporter sells a similar product in a third country. This is found in the "Competitive Environment" section (16-2a).

12. Which of the following have been at the center of anti-dumping action in the past decades for the U.S.? a. Steel c. Textiles b. Electronics d. All of the above

ANS: D Electronics, textiles, and steel among others, originating in countries from Japan, to Russia, to Mexico, have been at the center of anti-dumping action in the past decades. This is found in the "Competitive Environment" section (16-2a).

21. Why do firms engage in countertrade? a. Firms in developing countries are unable to secure bank loans. b. Governments sometimes mandate countertrade as a form of payment. c. Firms in developing countries lack access to hard currency. d. All of the above are true.

ANS: D Firms in developing countries often lack access to hard currency. This also makes it difficult for them to secure bank loans. Governments often mandate countertrade as a form of payment in order strengthen infant industries, balance trade deficits, and stimulate the local economy. This is found in the "The Economic and Financial Environment" section (16-2c).

11. What are countervailing duties? a. Duties imposed on parallel importers. b. Duties applied to countertrade transactions. c. Duties used to counter import quotas. d. Duties imposed on subsidized products imported into the country.

ANS: D Governments are entitled to impose anti-dumping duties on merchandise when it has been determined that price discrimination has occurred and that a particular local industry was injured by the dumping activity. Similar to these are countervailing duties, which are imposed on subsidized products imported into the country. This is found in the "Competitive Environment" section (16-2a).

34. ICI sold a methanol plant to the former Soviet Union for $250 million and agreed to purchase 20% of the plant's output for ten years for a total of $350 million. Of which type of countertrade is this an example? a. Switch trading c. Offset purchase b. Counterpurchase d. Buyback agreement

ANS: D In a buyback agreement, the seller builds and provides a turn-key plant, as well as the manufacturing know-how. The seller is paid up-front part of the cost of the plant in an agreed upon convertible currency. The seller agrees to purchase specific quantities of the plant's output over an extended period of time. This is found in the "The Economic and Financial Environment" section (16-2c).

39. Which of the following is an advantage of standardized pricing? a. It lowers costs. b. It is a deterrent to gray market activity. c. It deters parallel imports. d. All of the above are advantages of standardized pricing

ANS: D In addition to the cost benefits of standardized pricing, this strategy is also a deterrent to gray market activity; by charging a uniform price worldwide, manufacturers no longer have to deal with parallel imports from a market where the company charges a lower price. This is found in the "Standardized versus Local Pricing" section (16-3c).

25. Which of the following is not a disadvantage of countertrade? a. Countertrade practices frequently restrict profit margins. b. Price setting is difficult because not all cost factors are known in advance. c. Prices are distorted as deliveries, which could take place over time, are made without reference to changes in technology. d. Countertrade makes it difficult for consumers in low-income countries to have access to soft consumer goods.

ANS: D Ministries of Foreign Trade in low-income countries tend to favor heavy industry imports and to restrict light industry imports, especially imports of consumer goods. Countertrade offers a way around the restriction since governments are likely to accept light industry imports if they are part of a countertrade agreement. This is found in the "The Economic and Financial Environment" section (16-2c).

33. McDonnell Douglas sold DC-9s to the former Yugoslavia. To secure the order, McDonnell Douglas agreed to help sell products sourced in the former Yugoslavia to buyers in the United States to generate capital to help finance the purchase of the passenger planes. Of which type of countertrade is this an example? a. Counterpurchase c. Switch Trading b. Barter d. Offset purchase

ANS: D Offset purchases involve large hard-currency purchases, such as the purchase of defense equipment and airplanes, by a developing country. The seller agrees, in return for the sale of its offering, to purchase products that are valued at a certain percentage of the sale. This is found in the "The Economic and Financial Environment" section (16-2c).

2. It is often difficult for firms to keep track of product costs. This is attributed to which of the following? a. Products are assembled in one country and sold all over the world. b. Product components are manufactured in different countries. c. None of the above. d. a and b only.

ANS: D Product components often are manufactured in different countries. Often, the final products are assembled in a particular country—which is frequently not the company's home country—and then sold all over the world. It is consequently difficult for financial officers to keep track of product costs. This is found in the "Ability to Keep Track of Costs" section (16-1b).

35. Which of the following is a justification for setting a higher price in the home market than in the international market? a. There may be few or no challenges from competition in the international market. b. The market potential might be limited. c. Buyers in the international market could afford the higher price. d. The firm may have the goal of increasing international market share through penetration pricing.

ANS: D Setting prices higher in the home market than in the international market is justified by a company goal of increasing international market share, which may occur through penetration pricing in foreign markets. The other options listed above are justifications for setting prices lower in the home country. This is found in the "International Pricing Decisions" section (16-3).

36. Setting prices higher in the home market than in the international market is justified by which of the following? a. A lower labor or raw material cost in the international market b. Strong local competition in the international market c. A lower buying power of host-country consumers relative to consumers in the company's home market d. All of the above

ANS: D Setting prices higher in the home market than in the international market is justified by, among others, one or a combination of the following: A lower labor or raw material cost in the international market; strong local competition in the international market; and a lower buying power of host-country consumers relative to consumers in the company's home market. This is found in the "International Pricing Decisions" section (16-3).

37. Which of the following justifies setting prices lower in the home country, compared to company prices in the international market? a. No cost advantages to producing overseas to justify a lower price. b. Few or no challenges from competition in the international market. c. Limited market potential of the international market. d. All of the above justify lower prices in the home country.

ANS: D Setting prices lower in the home country than internationally is justified by: No cost advantage to producing overseas, such as economies of scale and labor; few or no challenges from competition in the international market; limited market potential; and buyers in the international market able to pay the higher price. This is found in the "International Pricing Decisions" section (16-3).

1. The location of production facilities determines a. The extent to which companies can control costs. b. The extent to which companies price their products competitively. c. Whether the company can benefit from advantageous exchange rates. d. All of the above.

ANS: D The location of production facilities determines the extent to which companies can control costs and price their products competitively. Multinationals usually can afford to shift production to take advantage of lower costs and exchange rates, whereas small to medium-size firms are often limited to exporting as the only venue for product distribution. Companies can and often do price themselves out of the market in certain countries, especially if they do not shift production to a low-labor-cost, low-tax country. This appears in the "Production Facilities" section (16-1a).