MGT 302 2

What are the three fundamental determinants of exchange rates?

- Monetary growth - interest rates - inflation rates

What are three main instruments

- import quotas - subsidies - voluntary export restraints

According to Heckscher and Ohlin, each country has certain factor endowments. What are two examples of these?

- land - labor

The Uruguay Round started in 1986 and eventually provided for which three of these provisions?

- reducing agricultural subsidies - reducing tariffs on industrial good - reducing tariffs on manufactured goods

What are three main instruments of trade policy?

- subsidies - voluntary export restraints - import quotas

One way to reduce _____ exposure involves distributing a firm's productive assets to various locations.

economic

The cost reductions that comes from increased output of a product are known as

economies of scale.

Goods that are taxed as they ship out of a country have a(n) ____ tariff.

export

Porter states that ______ can influence each of the four components of the diamond through subsidies, education policies, and policies toward capital markets.

government

A(n) ______ strategy is when a firm attempts to collect foreign currency receivables early when a currency is expected to depreciate and pay foreign currency payables before they are due when a currency is expected to appreciate.

lead

Evan works in a country in which the government has stated that 45% of all goods must be produced domestically. What type of requirement does this country have in place?

local content requirement

Import quotas are based on the _____ of a good.

quantity

Krugman promoted the idea that if each country seeks to follow a strategic trade policy to protect its interests, this may lead to ______.

trade war

When considering the benefit of free trade in neighboring countries, one government might favor lowering trade barriers but won't do it because of a lack of ______ in the other nation.

trust

Starting in the 1950s, the _____ concentrated on lending money for public sector projects in the third world.

world bank

Which two of these attributes did Porter believe are MOST significant for competitive advantage?

-Demand conditions -Factor endowments

What are two basic factors of production as labeled by Porter?

-Natural resources -Climate

What are two ways trade barriers hamper a firm's productive activities?

-Quotas limit the ability to serve a country from outside locales - They raise the cost of exporting products

Setting a fixed exchange rate imposes discipline on countries in two ways. What are those two ways?

-prevents competitive devaluations and brings stability to global trade -imposes monetary discipline on countries

What two situations are consistent with Ricardo's theory of comparative advantage?

-production is greater with unrestricted free trade than it is with restricted trade -even if countries lack an absolute advantage in the production of any good, consumers can still consume more if there are no restrictions on trade

The gold standard was embraced by most of the world's major trading countries in the late _____.

1800s

If the exchange rate is 1 British pound to $1.35, an American in London will need $______ (rounded to closest whole number) to purchase a purse priced at 20 pounds.

27

Adam Smith states that countries should specialize in the production of goods for which they can produce most efficiently and then trade these for goods produced by other countries. (1776)

Absolute Advantage Theory

During the 1970s, Congress did not allow US industries to export crude oil production. This action is an example of an export _____.

Ban

Which type of control of exposure is MOST effective at protecting resources efficiently and ensuring that each subunit adopts the correct mix of tactics and strategies?

Centralized

David Ricardo states that it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries. (1817)

Comparative Advantage Theory

The Heckscher-Ohlin theory of international trade focuses on ______ when explaining what a country chooses to export.

Factors of production

An efficient market has many impediments to the free flow of goods and services.

False

Economic arguments for trade policy intervention are concerned with protecting the interests of certain groups within a nation, often at the expense of other groups, or with achieving some objective that lies outside the sphere protecting the environment or human rights.

False

Governments always act in the national interest of their countries when they intervene in the economy.

False

Porter would agree that there is a weak association between vigorous domestic rivalry and the creation of competitive advantage.

False

According to new trade theory, the dominance of the United States in the commercial jet aircraft industry is related to ________ mover advantages.

First

When the government does not use quotas, taxes or other means to restrict what its citizens can buy from or sell to another country, it is called ______ trade.

Free

______ is the opposite of economic isolationism.

Free Trade

Which of the following occurred under the gold standard?

Governments agreed to convert paper currency into gold on demand at a fixed rate to allow for the use of paper currencies to finance trade.

Which country was the first to officially follow a policy of free trade in the mid 1800s?

Great Britain

New trade theory, which states that countries may have an advantage in exporting because of first-mover advantages, is different from which theory that says countries have export advantages because of factor endowments?

Heckscher-Ohlin

This theory predicts that countries will export those goods that make intensive use of factors that are locally abundant and import goods that make intensive use of factors that are locally scarce. (1919-1933)

Heckscher-Ohlin theory

A(n) _____ is a type of trade restriction that sets a physical limit on the quantity of a product that can be imported into the country in a set period of time.

Import Quota

It is realistic to assume that the units of resources required to produce one unit of a good will _____ no matter where a country is on the production possibilities frontier.

Increase

Krugman argues that strategic trade policy should not be embraced because many times governments are influenced by politically important _____ to intervene in the economy.

Interest groups

Which institution was established at Bretton Woods to maintain order in the international monetary system?

International Monetary Fund

The ______ Agreement revised the IMF's Articles of Agreement to allow floating exchange rates.

Jamaica

The economic success of _____ put a strain on the world trading system in the 1980s and promoted protectionism measures.

Japan

Which country is pointed to as the master of administrative trade policies?

Japan

According to the Heckscher-Ohlin theory, it is expected that the US would export capital-intensive goods and import labor-intensive goods, but the opposite was found to be true. This became known as the

Leontief paradox.

The most important foreign exchange trading center (with more than 37% of the market) is ______.

London

This theory had countries maximizing exports and minimizing imports. (circa 1550s)

Mercantilism

______ is a theory of trade which advocates that a country should export more than it imports which would result in the accumulation of gold and silver and increased national wealth and power.

Mercantilism

Michael Porter contends that the degree to which a nation is likely to achieve international success in a certain industry is a function of the combined impact of factor endowments. (1990)

National competitive advantage theory

Which trade theory explains why countries are trade partners when they are trading similar goods and services?

New Trade

Which trade theory states that for products where economies of scale are significant and represent a substantial amount of world demand, the first movers in an industry can gain a scale-based cost advantage that is not available to late entrants?

New Trade

Through its impact on economies of scale, trade can increase the variety of goods available to consumers while decreasing the average cost of those goods. (1970s)

New trade theory

________ argues that a strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry boosts national income at the expense of other countries.

Paul Krugman

A country which has related and supporting industries that spill over into other industries can have a _____ on that country's competitive advantage.

Positive effect

Which of the following theories was based on the belief that it was better to keep production facilities close to the market and to the firm's center of decision making, given the uncertainty and risks inherent in introducing new products?

Product life-cycle

This theory, initially proposed by Raymond Vernon, points out that where a new product is introduced is important. Over time, cost considerations start playing a greater role in the competitive process. (mid-1960s)

Product life-cycle theory

Which economist was a key figure in the early free trade movement in Great Britain?

Ricardo

Raymond Vernon's product life-cycle theory was based on the observation that for most of the 1900s the majority of the world's new products were developed in

The United States

Which round of GATT negotiations provided enhanced protection for intellectual property and significantly reduced barriers on trade in textiles?

The Uruguay

The United States raised the dollar price of gold by nearly $15 per ounce in 1934. Which of the following was true in the given scenario?

The dollar was worth less.

First mover advantages are especially important in industries where the global market can profitably support only a limited number of firms.

True

Following Brexit, Great Britain withdrew from the European Union in 2016.

True

Governments do not always act in the national interest when intervening in the economy.

True

In industries where economies of scale are important, both the variety of goods that a country can produce and the scale of production are limited by the size of the market.

True

Speculative buying and selling of currencies can create volatile movements in exchange rates under the present foreign exchange system.

True

The efficient market school argues that investing in exchange rate forecasting services would be a waste of money.

True

The product life-cycle theory suggests that mature industries tend to shift production out of the United States and into low-cost assembly locations.

True

Theories of international trade claim that promoting free trade is generally in the best interests of a country, although it may not always be in the best interest of an individual firm

True

How would experts reply to the question, "Is Porter's theory correct?"

We do not know. It has not been subjected to empirical testing.

Free trade refers to a situation where

a government does not try to influence what its citizens can buy from global markets.

A country has an absolute advantage when it is able to produce

a greater quantity of a product than its competitors, using the same amount of resources.

A lobbyist from California argues that the U.S. government needs to protect the U.S. semiconductor industry from foreign competition. She argues that semiconductors are now such important components of defense products that it would be dangerous to rely primarily on foreign producers for them. This is an example of ________ argument for government intervention.

a political

Governments implement _____ trade policies that are designed to make it difficult for imports to enter a country.

administrative

Porter argues that ______ factors are the most significant when determining competitive advantage for a country.

advanced

Tariff rates on ______ products are generally much higher than tariffs on manufactured products or services.

agricultural

What industry tends to benefit the most from subsidies in most countries?

agriculture

Ford was the first company to mass-produce cars in the United States. This gave Ford a first-mover advantage, which is

an economic and strategic advantage that accrues to early entrants into an industry.

If the demand for dollars is greater than the supply of them and the supply of Indian rupee is greater than the demand for them, then the dollar will _____ against the rupee.

appreciate

Ricardo's theory of _____ advantage states that it makes sense for a country to specialize in the production of those goods that it produces most efficiently and then purchase the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself.

comparative

Heckscher and Ohlin identified differences in national factor endowments as the root of ______.

comparative advantage

The infant industry argument for trade intervention states that developing countries need to support new industries until they are strong enough to _____.

compete globally

Which form of returns to specialization means that the units of resources required to produce one unit are assumed to remain the same no matter where a country is on the production possibility frontier?

constant

The foreign exchange market is used to _____.

convert currency

Foreign exchange rates have been more volatile since 1973 due to the many ______ that have occurred in this period.

crises

The short-term movement of funds from one currency to another as an attempt to profit from shifts in exchange rates is called

currency speculation

Porter states that firms are typically most sensitive to the needs of their closest customers. He called this _____ conditions.

demand

What determines the value of a spot exchange rate?

demand and supply

Even though it was extra work for the company to implement, Johan was happy that consumers had asked for a better grade of plastic for the toys his company produced. In this instance, the competitive advantage of Johan's company is being affected by _____.

demand conditions

A lead strategy occurs when a firm attempts to collect foreign currency receivables early when a currency is expected to ______ and pay foreign currency payables before they are due when a currency is expected to ______.

depreciate; appreciate

When Great Britain returned to the gold standard in 1925, it placed the pound at the prewar gold parity level and, as a result, placed the country in a period of _____.

depression

Assuming the 60-day forward exchange rate was $1 = ¥110 and the spot exchange rate was $1 = ¥120, the dollar is selling at a(n) ________ on the 60-day forward market.

discount

A key to reducing economic exposure involves _____ so the firm is not severely affected by adverse changes in exchange rates.

distributing a firm's productive assets to various locations

At the end of the fiscal year, Jack's company sells their bicycles in Thailand at below what it costs to produce the bikes in order to unload excess inventory. This is an example of _____.

dumping

When manufacturers export a product to another country at a price either below the price charged in its home market or below its cost of production, as a way to get rid of excess product, it is called ______. Multiple choice question.

dumping

Strategic trade policy suggests a(n) ______ justification for government intervention in trade.

economic

The purpose of the Bretton Woods meeting was to facilitate _____.

economic growth following the war

An assembly line in a candy factory is an example of _____ because it allows the candy company to benefit from cost reductions based on the vast amounts of candy produced. Multiple choice question.

economies of scale

Under new trade theory, as the size of markets increase, companies may be able to develop better ______.

economies of scale

One way the GATT hoped to achieve its objective was by _____.

eliminating tariffs

When the current account of a country's balance of payments is in balance it is called the balance-of-trade _____.

equilibrium

Which of the following can a country use to counter-act a country that uses subsidies to support an industry?

establish anti-dumping regulations

When considering free trade opportunities in Mexico, with access to cheap labor and diverse plant life, it makes sense for Mexico to _____ agricultural goods.

export

Transaction _____ refers to the extent that income from individual transactions is affected by changes in foreign exchange values.

exposure

Which of the four attributes identified by Porter would be evident in a country that has the necessary infrastructure to compete in a given industry?

factor endowments

Most companies focus on reducing their economic exposure while ignoring strategies to reduce their transaction and translation exposure.

false

In Porter's model of the determinants of national competitive advantage, he noted many US firms were led by people with ______ backgrounds, likely leading to US firms' lack of attention to improving manufacturing process and product design.

finance

Carl's company was able to gain economic advantage over all of its competition when it premiered the digital camera into South America before them. This is an example of a _____.

first-mover advantage

Preempting demand, gaining volume cost advantages, building the brand, and establishing a long-term competitive advantage are associated with

first-mover advantages.

A ______ exchange rate discourages competitive devaluations and imposes monetary discipline.

fixed

The most common exchange rate regime used today is the _______ arrangement, used by 43% of the nations.

fixed peg

Monetary policy autonomy and automatic trade balance adjustments are elements that tend to support ______ exchange rates.

floating

Converting the currency of one country into the currency of another country is done through the _____.

foreign exchange market

The efficient market school suggests that ______ exchange rates are optimal at forecasting future ______ exchange rates.

forward; spot

The strategic trade policy may look good in theory, but in practice it may be unworkable. As a result, the case for ___ trade may come to the forefront.

free

______ trade is the economic policy of not discriminating against exports to or imports from foreign countries.

free

A country that does not implement quotas on imported products and does not limit what its citizens can produce and sell to another country is practicing _____.

free trade

Ricardo's theory encourages ______ because it suggests that trade is a positive-sum game.

free trade

When a country allows both residents and nonresidents to purchase unlimited amounts of a foreign currency, the country's currency is

freely convertible

The approach to forecasting that draws on economic theory to develop models that predict exchange rate movements is the _____ approach.

fundamental

Following the Industrial Revolution, to allow for the use of paper currencies to finance trade, governments agreed to convert the paper currency into _______ on demand at a fixed rate.

gold

According to mercantilism, _____ were the mainstays of national wealth and were essential to business activity.

gold and silver

During the 1980s, the trend was for ______ protectionism around the world.

great

The start of the demise of the fixed exchange rate system was notable in 1971 when the US was _____ more than _____.

importing; exporting

A tariff is a tax levied on _____.

imports or exports

The use of currency management instruments such as swaps and the forward market have ______ since 1973.

increased

When governments intervene in foreign trade, they often claim they are protecting ______ from unfair foreign competition.

industries

A(n) ______ market is one in which prices do not reflect all available information, and forward exchange rates will not be the best predictors of future spot exchange rates.

inefficient

The oldest argument for government intervention in trade where developing nations must protect their domestic industries until they are ready to compete globally is the ______ argument.

infant industry

Increasingly, the International Monetary Fund (IMF) has been acting as the macroeconomic police of the world economy by

insisting that countries seeking significant borrowings adopt IMF-mandated macroeconomic policies.

According to Adam Smith, a country has an absolute advantage in the production of a product when it _____.

is more efficient than any other country at producing it

When trying to understand why Japan exports automobiles or why Switzerland exports watches, David Ricardo's theory of comparative advantage bases the explanation in terms of differences in

labor productivity.

In order to win a contract from Mexico, QVB Autos Manufacturing must make 65% of the component parts of their autos in Mexico. This is an example of a

local content requirement.

The institutional arrangements that have reign over exchange rates are referred to as the international _______.

monetary system

Leontief questioned the validity of the Heckscher-Ohlin theory based on his assumption that the US would be an exporter of _____.

more capital-intensive goods

In response to the apparent failure of the current Doha Round, many nations have implemented _____.

multilateral trade agreements

A major criticism of the IMF is that it imposes tight macroeconomic policy on any country it lends money to. This is referred to as a(n) ______ approach.

one-sized-fits-all

Photocopiers were initially exported from the United States. As more and more foreign competitors entered the market, the United States began to import photocopiers. This is an example of which theory?

product life-cycle

The ________ theory argues that such advanced nations as the United States have an incentive to develop consumer products and hence such nations tend to produce newer products.

product life-cycle

Most common argument for government to intervene on

protecting jobs and industries

According to Porter, when _____ industries invest in advanced factors of production, it can help an industry achieve a global competitive advantage.

related and supporting

Jen knows that it is not possible to accurately predict how exchange rates might fluctuate and result in a loss of finances for her company. In other words, Jen understands the reality of foreign exchange ____.

risk

The adverse consequences of unpredictable changes in exchange rates is called foreign exchange ______.

risk

Member nations hoped that the WTO would be a facilitator of future trade deals especially in the area of _____.

services

Free trade has the benefit of ______, which allows a country to manufacture and export in locations where they have a comparative advantage.

specialization

Governments tying currencies to gold and guaranteeing convertibility to gold is known as the gold _____.

standard

Taxes placed on imports to protect domestic producers from foreign competition and to produce revenue for the government are

tariffs

Which instrument of trade policy has been in use the longest?

tariffs

Subsidies are a form of payment that is provided by _____.

the government

A country is in a balance-of-trade equilibrium when ___________.

the income residents earn from exports equals the money its residents pay to other countries for imports

According to David Ricardo's theory of comparative advantage, a country should focus on _____.

the production of goods it produces most efficiently

Kenneth wants to buy a new winter coat for his trip to London. He found the coat for $80 at Nordstrom in New York but he thinks he would prefer to buy it at Harrod's when he gets to London. He knows that based on the law of one price, the coat should cost _____ in London.

the same

According to the law of one price, identical products sold in different countries must sell for the same price when

their price is expressed in terms of the same currency.

The main objective of GATT was to liberalize _____ restrictions.

trade

As the text notes, unrestricted free trade is impossible if there is a lack of ____ between nations.

trust