BUS 340 Midterm 1

How did the great depression affect the US dollar?

- "Great Recession," these crises were marked by crashing financial markets; wealth losses in the trillions of dollars; failures of banking, securities, and business firms; unprecedented government stimulus packages increasing deficit spending; record low government interest rates; rising unemployment; and declines in world trade. - U.S. dollar rose substantially in value a - 2007-2008 the dol- lar's value rose because investors around the world were selling stocks, commodi- ties, and other risky assets, and, in turn, purchasing dollars.

How many countries use the euro? What problems has it solved?

- 12 European nations formed European Monetary Union (EMU) in 1999. The EMU introduced the euro as a new currency to replace the currencies of the member countries in the Eurozone, which has since grown to 17 members. - immediate success; it quickly became the second most important currency in the world, ahead of the Japanese yen. - problems of currency fluctuations, inflation, and related eco- nomic downturns were substantially reduced. - euro put an end to the expensive and time-consuming need to convert one currency to another as goods and services are purchased or as business is conducted between countries. - European Central Bank (ECB) and the Eurosystem of central banks in Eurozone coun- tries maintain responsibility for managing the euro. - 1992 Maastricht Treaty, Eurozone members are re- quired to meet certain monetary and budgetary requirements.

What was the bretton woods agreement?

- 1944, the Bretton Woods Agreement established a global currency system based on a gold standard with the U.S. dollar pegged at a fixed rate of exchange to gold in an effort to con- trol inflation. - After World War II, the U.S. dollar became a standard of value for all world curren- cies, - If a country's currency changed by more than 1 percent from its pegged level against the dollar, government intervention was initiated to restore fixed exchange rates.

What is the future of ASEAN?

- ASEAN's Vision 2020 calls for aggressive outward-looking economic policies. - Free Trade Agreements (FTAs) are currently being implemented. - the ASEAN in- spired FTAs will create the world's largest free-trade area, which will comprise much of Asia. - growing ASEAN concern is the economic ascendancy of China, which as a major low- cost manufacturing center, has been one of the world's most attractive destinations for foreign direct investment. - To prevent job losses (and the loss of exports to China) and also to tap China's growing domestic consumer market, members of ASEAN are hoping that the free-trade agreement with China will help. - For China, a free-trade agreement with ASEAN would mean strengthening its regional influence.

What are adaptive institutions? What key factors aim to nurture these institutions? How do democracies affect these institutions?

- Adaptive institutions are government organizations that create strong incentives for private investment and operate under a system of checks and balances that function best in a democratic system of government. - accountability and transparency emerge as key factors for institutional reform that promotes political stability, sustainable economic growth, and globalization. o accountability a system of responsibility in which an authority, such as the government, is answerable for its actions o transparency a system of full disclosure and openness that aims to avoid any semblance of corruption and cronyism - Democracies strive to nurture such institutions by instilling transparency with the help of various communication channels. o newspapers or print media have been the dominant route for conveying in-depth investigation, analysis, and thoughts. o television, which is the most dominant form of instantaneously conveying current developments and information o Internet, has made visual and readable information even more readily available. o greatest ease in portability and accessibility of information are smart- phones that use wireless connections and social media that even espouse a strong tradition of individual rights and a free press. - Such countries tend to have a vibrant free enterprise system, a competitive market structure, and companies that actively seek to be engaged in globalization.

What are domestic content provisions?

- Domestic content provisions are another form of nontariff barrier. Countries may require that a certain percentage of the value of the import be domestically sourced. o Ex. U.S. government may require that apparel imported into the United States should use U.S. cotton, or use a certain amount of American labor. D - aim to protect jobs in the home country.

How do Countries "leapfrog" into the Internet and Cell Phone Era?

- As of 2014, about 43 percent of the world's population of 7 billion had access to the Internet. - Because of market saturation in developed economies, the majority of users will be from developing countries, and they will connect to the Internet principally via wireless networks. - developing countries, the number of cell phone subscribers now outnumbers those for fixed-line networks by more than 20:1. - As cheaper "Internet-capable" mobile phones become the norm and competition and economies of scale lowers access prices, the same can be expected for Internet services. - As communication access spreads in developing countries, businesses rather than governments will lead the way by offering lower prices and more choices for services and devices, with economic liberalization as an enabling factor. - developing countries are skipping the use of land-line technology and moving directly to wireless systems, thereby leapfrogging an entire generation of technology and catching up faster with the developed world.

What are the growth rates of different countries with respect to world trade?

- Asian countries' exports are growing the fastest with China normally expanding its exports at a rate of about 11 percent per year ( - India is second in export expansion at around 10.5 percent growth per year. - United States has continued to have relatively slower import growth of 0.5 percent than its export growth of 4.5 percent from 2005 to 2013. - United States has typically been a net importer of goods and services in the past, which explains its recent, large, current account deficit. - Europe is a net exporter with exports and imports growing at an average of 2.0 and 1.0 percent, - most European Union countries are net exporters.

What is the balance of payments?

- Balance of payments (BOP) refers to a statement of account that summarizes all transactions between the residents of one country and the rest of the world for a given period of time, usually one year. o objective standard that shows how well the country's economy and government policies are performing. o based on a system of credits and debits, the balance of pay- ments must always balance. o two major components with major business implications: (1) the current account, and (2) the financial account. - flow of funds analysis, money moving into a country is a credit (plus sign), while money leaving the same coun- try is a debit (negative sign)

What does it mean when the dollar is selling at a discount and premium?

- Because the dollar is selling for less in the forward market per euro than in the spot market, foreign exchange dealers say that the dollar is selling at a discount in the 60-day forward market (relative to the spot market). - If the dollar was expected to appreciate in the 60-day forward market against the euro, it would be selling at a premium. - firms use the forward market to lock in future ex- change rates and ensure against uncertain future currency movements. - This insurance re- duces their future exchange rate risk and, therefore, is considered a hedge that lowers risk.

Why are effective policies important for globalization? Which ones are highlighted?

- Countries cannot thrive on high-quality institutions alone; they also need effective policies as complements to globalization. - Countries with sound economic policies will be more successful in the global economy, encouraging further opening and cross-border integration. - To attract foreign and domestic private investments, governments need to put in place good governance, competitive markets, property rights, and assist in the fight against corruption. - provide a baseline measurement for gauging the relative quality of a country's economic policies and performance.

Explain good governance as an effective policy.

- Countries that have successfully adapted to globalization realize that they cannot succeed without high-quality government management at home. o Ex. Singapore, a country in which government actions are fully disclosed and discussed before they are implemented, - attractive for domestic and foreign investors to funnel resources into the country to generate profits, fuel economic growth, and quickly adapt to globalization. - most government policies and transactions in Central Asia are conducted in secrecy, therefore, economic progress and global integration has been slow in this region. - quality of administration is also important; fine policies alone do not inspire respect and confidence without competent administrators and consistency over time. o quality of government services, the capabilities of civil servants, the political independence of public agencies, and the credibility of the government's commitment to good policies can measure effective governance.

What are the benefits of regional integration?

- Creating a larger pool of consumers with growing incomes and similar cultures, tastes, and social values. - Encouraging economies of scale in production, increasing the region's level of global competitiveness, and enhancing economic growth through investment flows. - Freeing the flow of capital, labor, and technology to the most productive areas in the region. - Increasing cooperation, peace, and security among countries in the region. - Encouraging member states to enhance their level of social welfare to match that of the most progressive states.

How does globalization affect job losses and income stagnation?

- Critics argue that globalization harms the poor through loss of jobs and stagnant, if not falling, wages. - Critics also argue that open trade and foreign direct investment may take jobs from workers in advanced industrial economies (blue-collar and, increasingly, white-collar workers) and transfer them to less expensive workers in developing countries. - leaves the workers in the richer country out of work. - increase in local labor supply drives down wages, causing wage stagnation. - workers in developing countries are drawn into jobs that may exploit them. o workers often get paid much less than their counter- parts in richer countries, and they are often required to work longer hours in substandard environments. - world enters a "knowledge-based" global economy, advanced countries should expect greater development - Workers in high-income countries will need to use more technology and be more productive in order to maintain or enhance their wage rates. - only way workers in industrialized countries can compete with their counterparts in the developing world will be through increased productivity by using technologically inten- sive manufacturing techniques. - developing countries, globalization will lead to increased demand for labor and will raise wages even for workers who are not directly employed in the new trade-related jobs,

What is the international labour organization?

- Developed countries often resort to managed trade for reasons of unethical labor practices and violation of basic human rights. - International Labor Organization (ILO) standards does not accept the use of child labor, unusually long work hours, below subsistence-level wages in the production of exports (e.g., the case of Nike in Vietnam), or working under dangerous condi- tions with toxic chemicals - restrict imports from developing countries that implement such policies.

What is the digital divide myth?

- Digital divide describes the perceived economic gap between countries or people with easy access to digital and information technology (and its benefits) and those with very limited or no access. - rapid and progressive fall in prices of digital IT equipment and services has increased access and accelerated globalization, thereby narrowing the digital gap. - people like what modern technology has to offer, and developing countries are no different and are now making the same transition that the United States, Europe, and Japan made earlier—only more rapidly and in a less expensive way. - could cause political strain, especially in nondemocratic societies. - some governments may hold their countries back, the vast majority will move forward. - number of mobile phones that can access the Internet has been growing at a phe- nomenal rate, especially in the developing world. - Mobile web-browsing has been growing the fastest in developing countries, including Nigeria, India, and South Africa. - web banking and web commerce, which enhances worker productivity and economic efficiency in these countries.

What are direct and indirect quotes?

- Direct quotes give the prices of a foreign currency in dollars (or the number of dollars per one unit of foreign currency). - Indirect quotes are the reciprocal of the direct quote, or the prices of a dollar in foreign currency terms

What is the european exchange rate system?

- European Exchange Rate Mechanism (ERM) in 1979. Under the ERM, a weighted basket of European curren- cies known as the ECU (European Currency Unit) was defined based on a managed-float system with fixed exchange rates varying within 2.25 percent margins. - nearly fell apart in 1992 due to economic imbalances arising from the unification of East and West Germany as well as economic disparities among different countries in Europe.

What are the concerns with health and safety with imports?

- Every country has the sovereign right to protect the health and physical safety of its citizens from contaminated imports. - Food safety measures introduced to prevent the entry of harmful pests and diseases via imported foods, animals, and plants are a justifiable means to protect human life and physical health.

How does inflation affect the Purchasing Power Parity?

- Ex. inflation caused the prices of U.S. goods to increase 10 percent over the next year, but no inflation occurred in Europe. - consumers would sell dollars and buy euros, resulting in a decline in value of the dollar - compute how much the dollar will decline by using the following PPP equation: - PUS(1 + IUS) = (1 + p)PE(1 + IE), - PUS price index of U.S. goods in dollars - PE price index of European goods in dollars - IUS inflation rate in the United States in dollar terms - IE inflation rate in Europe in euro terms - p percentage change in the euro, which equals the forward premium - if one country's inflation rate exceeds other countries' inflation rates, then it will experience depreciation of its currency relative to foreign curren- cies

How do firm structure, strategy, and rivalry affect Porter's Diamond Model?

- Firm strategy deals with the way companies in an industry manage their operations as well as the structure of the organization. - Management style—top down, bottom up, or consultative—has a large impact on a firm's performance. - background of top managers holds great importance, o ex. Japanese and German firms often employ engineers to run manufacturing companies, - Firm structure and rivalry address the competitive structure of industries in a nation. - Monopolistic industrial structures are unlikely to create innovative or dynamic firms willing to compete abroad or have the capability of competing abroad. - competitive industry will foster innovative, cost-efficient, aggressive firms that can adjust to changing economic conditions at home and will be well prepared to compete abroad. - According to Porter's "diamond" model, the success or competitive advantage of a na- tion at the global stage would crucially depend upon the interaction of the four groups of characteristics - Porter also identified two other crucial variables out- side the diamond that play an important role in the competitiveness of nations: chance and government. - Chance refers to an external shock or development that could drastically change or has- ten the course of economic development. o Innovation in information technology, for ex- ample, has, to a considerable extent, made some countries very competitive all of a sudden. - some external shocks could have negative effects on countries.

What are the stages of regional integration?

- First, two or more countries may create a free-trade area by eliminating all barriers to trade, such as tariffs, quotas, and nontariff barriers like border restrictions, while keeping their own external tariffs (within WTO guidelines) on members not included in the free-trade area. - Second, when countries within a free-trade area have differential external tariffs, imports will primarily enter the free-trade area through the country that has the low- est external tariffs and trade restrictions, thereby causing other free-trade member coun- tries to lose import business. o may eventually lead to the creation of a customs union, in which all free-trade member countries would need to adopt a common external tariff with nonmember countries. - Third, within the member countries of the customs union, in- vestment (hence business and job opportunities) will flow to countries that have the high- est labor productivity and low capital cost. o may encourage the removal of barriers to allow free movement of capital and labor within the customs union, creating a common market or single market. o common market or single market - a market formed when member countries of a customs union remove all barriers to allow the movement of capital and labor within the customs union - Fourth, within the common market, the free movement of labor and capital may encourage member states to implement common social programs (on education, employee benefits and retraining, health care, retirement programs, etc.) and coordinated macroeconomic policies (e.g., similar fiscal and monetary policies) that could lead to the creation of a single regional currency and an economic and monetary union. o economic and monetary union - a union formed when mem- bers of a common market agree to implement common social programs (on education, employee benefits and retraining, health care, etc.) and coordinated macroeconomic policies (such as fiscal and monetary policies) that would lead to the creation of a single regional currency and a regional apex central bank - Finally, because member countries of the economic and monetary union will work closely with each other on all major business and economic issues, the urge to have common defense and foreign policies may lead to the creation of a political union (i.e., a group of countries that will behave as a single country). o political union - the union created when member countries of an economic and monetary union work closely with one another to arrive at common defense and foreign policies and behave as a single country

What is a risk premium?

- Foreign countries (investors) will be less willing to continue investing in current account deficit countries for extended periods of time because of the perceived risk of nonpayment of debt. - investors will require a risk premium that increases interest rates of the borrowing country. - financial account of the BOP consists of three subaccounts: (1) U.S.-owned assets abroad; (2) foreign-owned assets in the United States; and (3) net financial derivatives. - Each of these accounts reports the inflow (1 sign) or outflow (- sign) of funds to and from the country being analyzed. - -owned assets abroad and foreign- owned assets—are greatly affected by foreign direct investment (FDI) and security invest- ments across national borders.

What effects does foreign direct investment have?

- Foreign direct investment (FDI) in a country brings funds and business culture from abroad, creates new well-paying jobs, introduces innovative technologies, and enhances the skills of domestic workers. - governments all over the world try to create a business-friendly environment to attract such investments. - emerging countries like Brazil, Russia, India, and China (BRIC) that have large populations, an expanding middle class, and a combination of relatively low wage-rates and rapidly growing economies tend to attract size- able amounts of foreign investment. - net (inflow minus outflow) foreign direct investment inflows during 1990-2012 based on national income levels and geographic regions of the world. - reflects the decoupling of the world economic order and the move to a multipolar world d - Foreign investment flows are generally based on long-term global or country outlook. - China, has been consistently attracting the largest amount of FDI because of its well-developed in- frastructure and its strategic position as the low-cost manufacturing center of the world.

What is a generalized system of preference?

- Generalized System of Preferences (GSP), where a large number of developed countries have agreed to permit duty-free imports of a se- lected list of products that originate from specific countries o could be based on colonial relationships or based upon helping developing countries suc- ceed in trade—trade could be better than aid. o Countries that are part of a free-trade area allow duty-free entry of imports.

What is globalization? What are the key aspects?

- Globalization encompasses the socioeconomic reform process of eliminating trade, investment, information technology, and cultural and political barriers across countries, which could lead to increased economic growth and geopolitical integration and interdependence among nations of the world. - key aspects of globalization: and interdependence among the elimination of barriers to trade, investment, culture, and information technology that nations of the world separate countries. - growing integration and interdependence among people, communities, and economies around the world. - made it possible for goods, services, capital, technology, and cultures to cross national borders.

How do government institutions and policies affect Porter's Diamond Model?

- Government institutions and policies could help or hurt competitiveness of nations due to the fact that government institutions and policies have the potential to affect all four sets of characteristics associated with Porter's diamond. o For example, in the case of factor conditions, if government policy does not sup- port or provide incentives for higher education, the quality and quantity of a labor force will be detrimentally impacted with corresponding loss in the nation's global competitiveness. o inflationary monetary policies would lead to high cost of capital and diminished competitiveness. o inadequate investment in physical infrastructure will increase busi- ness cost and lower competitiveness. - Government policy could also stifle demand through excessive taxation or perverse in- centive programs. - Such policies will stifle rational investment and innovation and hence, national competitiveness. - Government policies could also stunt the growth of related and supporting industries through the implementation of programs that divert resources to sec- tors in which companies do not have core competencies. - government policies could impact market structure or the level of com- petitiveness in an industry. o Ex. privatization of public enterprises will have a major positive impact on economic growth, economic efficiency, and competitive- ness. o Ex. institution of antitrust policies, for example, could also lead to increased competition, growth of supporting industries, and overall competitiveness of nations. - Porter's model of national competitive advantage provides a neat, comprehensive framework with which to analyze global trade patterns in industrial subsectors. - company that exhibits relatively posi- tive characteristics in all four diamonds will be an exporter of certain types of goods or ser- vices. - country that exhibits relatively negative characteristics will be a net importer of goods or services.

What are the 3 international institutions that facilitate globalization?

- Governments still have the power to erect significant obstacles to globalization, ranging from protectionist policies to ignoring environ- mental standards to immigration restrictions to military hostilities. - interwar period was chaotic as countries did not follow free-trade rules. - Since World War II, governments in the free world have recognized the importance of international cooperation and coordination that has led to the emergence of three major international organizations and financial institutions, namely, the International Monetary Fund (IMF), the World Bank, and the present World Trade Organization (WTO) that play a crucial role in the globalization process.

What are tariffs?

- Tariffs are taxes on imports; they are also known as custom duties in some countries. - custom duties taxes on imports that are collected by a designated government agency responsible for regulating imports - import tariffs generate revenues for governments. - Tariffs come in two forms: specific and ad valorem. o specific tariff describes an import tax that assigns a fixed dollar amount per physical unit. o ad valorem tariff describes a tax on imports levied as a constant percentage of the monetary value of one unit of the imported good.

What does the IMF continue to do?

- IMF tracks global economic trends and performance, alerts its member countries when it sees problems on the horizon, provides a forum for economic policy dialog, and dissemi- nates information to governments on how to implement economic reforms to meet global challenges. - economic reforms - economic policy changes that promote private sector development, competitive markets, market pricing, freer trade, and deregulation - IMF continues to: o Provide a forum for cooperation on international monetary problems; o Facilitate the sustainable growth of international trade, thus promoting job creation, economic growth, and poverty reduction; o Promote exchange rate stability and an open system of international payments; and o Lend countries foreign exchange when needed, on a temporary basis and under adequate safeguards, to help address balance of payment problems - IMF recognizes the fact that the benefits of globalization are not without risks— such as those arising from the recent global credit crisis. - IMF works with countries to help them manage or reduce these risks through economic analysis and policy advice and through technical assistance in areas such as macroeconomic policy reforms, financial sec- tor sustainability, and exchange rate management.

Why are anticorruption policies important for globalization?

- Illicit dealings undermine economic performance by raising costs, creating uncertainty, and thwarting competition and transparency. - Globalized economies (e.g., New Zealand, the Nordic countries, and Singapore) are less likely to tolerate corruption; they rank at the top in an index for absence of corruption by Transparency International

What are export cartels?

- In order to maintain stable economic growth, natural-resource-rich countries have tried to join together to form export cartels, which could control export volume and prices. - requirements for export cartels to be successful; o all cartel members must agree not to cheat on the agreement, o substitutes for the good in question must not exist o demand for a particular product must be relatively inelastic.

What is the impact of technology on globalization?

- Innovations in information technology (computers, software, wireless telecommunications, the cell phone, and the Internet) are radically changing the way people all over the world live, communicate, and work. - period of profound transformation— adjusting lifestyles to make the Internet and wireless technologies a part of everyday life— called the digital era. - economic, social, and political benefits of new information technologies, are changing the relative competitiveness of nations as access to those technologies spreads rapidly around the globe. - bandwidth expands and communication costs fall, more people will be linked together via computers and smartphones. o bandwidth the amount of data and other information that can be transferred in a second via the Internet - economic efficiency of online communication will increase exponentially with the number of these kinds of connections. - technological changes that are transforming the business world now will also revolutionize the nature of social networks and the way that governments operate in the future.

What is the International Monetary Fund?

- International Monetary Fund (IMF) was established under the Bretton Woods Agreement to help ensure the stability of the international monetary and financial system. o seeks to foster smooth functioning of the inter- national monetary system, provide emergency funds as a lender of last resort to countries with balance of payments problems, and offer financing to countries conditional on recommended economic changes. o Member countries contribute to the Fund in return for temporary access to pooled resources to correct balance of payments difficulties when needed. - the U.S. dollar became overval- ued, with negative consequences to its export competitiveness in world markets. o forced the United States to stop buying and selling gold for the settlement of international transactions on August 15, 1971.

How does regional integration affect remote regions with small local markets?

- International integration is most difficult for countries in regions that are divided, far from world markets, and lack the economic size of a large local economy. - These regions, which Paul Collier5 (2007) calls the "bottom billion," are located in Central Asia; East, Central, and West Africa; and the Pacific Islands. - Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan) has the highest proportion of landlocked countries. - small Pacific Islands are the most geographically fragmented "sea-locked" countries. - challenge for these three regions is to find ways to successfully integrate region- ally and internationally. - Many countries in these regions have minerals (including crude oil and natural gas) and other natural resources that are best exploited on a regional basis, since pipelines or railroads must pass through neighboring countries in order to reach the major global markets. - Regional integration is paramount for resource-led economic growth and to more broadly spread the benefits of this growth. - will require institutional re- form; increasing infrastructure investments to improve market access; and incentives such as preferential access to world markets, liberalized rules of origin, and skills development

What are the benefits to international business?

- International trade benefits consumers in three major ways by providing: o A greater amount of choice in the availability of goods and services. o Lower prices for goods and services consumed. o Higher living standards. - Trade has in- fluenced culture, shaped history, raised living standards, and expanded knowledge to in- clude new ways of thinking. - policymakers in some countries continue to question the benefits of trade by asking whether to open national borders to freer trade and foreign direct investment (FDI), foreign inflow of capital, technology, and skills to enhance do- mestic investment and economic growth. - Open trade and investment does create winners and losers - gains from open trade and investment are always greater than the losses. - right to export and import freely enhances the quality of life and living standards of people in the countries involved in trade. - trade brings with it cultural and tech- nological riches; it can also make the world a more peaceful place because of national interdependence. - generates jobs in both the export and import sectors of an economy. o for every billion dollars worth of exports from the United States 20,000 domestic jobs are created. - living standard of people in the developed countries of Europe, Japan, and North America has been enhanced because of the low-cost goods and services imported from China and India - trade has given an astonishing boost to China's and India's economies as millions of Chinese and Indian workers move from subsistence farming and clerical work into more comfortable middle-class prosperity. - purchase more imported goods and ser- vices, thereby giving a boost to the global economy.

What are the negative aspects of internet related technologies?

- Internet and wireless technologies could make many authoritarian governments uneasy, thereby restricting pub- lic access to social media. o true in relatively closed societies where political freedom, especially of speech, press, or other forms of expression are severely curtailed—as in China and several countries in Central Asia and the Middle East. - nondemocratic governments, such as China and North Korea, have expressed their belief that uncensored information from countries abroad will corrupt local cultures. - fears that Internet-related technologies could bring about rapid social and political change, and access to communications technology could shift the balance of power between ordinary people and their governments, making dissent safer. - unlikely that Internet and related technologies will remain, or completely thrive, free of government interference.

How has the internet impacted globalization?

- Internet-based applications underlie major advances in science, business organization, environment monitoring, transport management, education, and e-government. - increasing global reliance on the Internet for business and social activity, including health and education.

How does independent judiciary and free press affect globalization?

- Investors have greater confidence when conducting business in countries with low crime, effective courts, dependable contract enforcement, and free press. - judiciary system in a country remains an extremely important institution that has a primary responsibility of interpreting the laws and resolving disputes. - Countries seeking to become established as good places to do business will maintain fair, transparent, and functioning legal systems along with a free press that could expose and investigate misdeeds by public officials and corporate leaders. o countries like Somalia, Afghanistan, and Sudan that rank at the bottom of Transparency International's - Respect for the rule of law enhances the predictability businesses require to make decisions based upon the sanctity of contracts.

What was the Jamaica Agreement?

- Jamaica Agreement, which ushered in a reformed international monetary order. o key principles in the Jamaica Agreement were: (1) members could adopt their own exchange systems; (2) a system of global fixed exchange rates (as under Bretton Woods) would only be implemented if ap- proved by a vote of 85 percent of membership; (3) gold would no longer be a common de- nominator of the monetary system; and (4) the special drawing right (SDR) created by the IMF was recommended as the primary reserve asset of the international monetary system - SDR is a basket of currencies consisting of dollars, euros, pounds, and yen, with relative weights set by the IMF based on trade patterns. - To promote stability in the international monetary system, the IMF in cooperation with the World Bank work to assist member countries with exchange rate, li- quidity, economic development, and structural issues.

What is mercantilism?

- Mercantilism is a theory of international trade that supports the premise that a nation could only gain from trade if it had a trade surplus, that is, more exporting than importing. o oldest form of trade theory; it was practiced during the 1500-1750 pe- riod as Europe emerged from the feudal systems of the Middle Ages and moved toward na- tionalism. o money consisted almost exclusively of gold and silver coins; o Wealth, at a personal or national level, was largely determined by the amount of precious metal (gold and silver) to which one had access. o Land and labor were considered less important, because they were primarily factors of production that were needed to generate wealth—gold and silver. factors of production - endowments used to produce goods and services: land (quantity, quality, and mineral resources beneath it), labor (quantity and skills), capital (cost), and technology (quality) - Mercantilists believed that for a nation to become wealthy, that nation must export as much as possible and, in turn, import as little as possible.

What is Porter's "Diamond" Model of National Competitive Advantage?

- Michael Porter published his seminal work, The Competitive Advantage of Nations, - argued that firms and not countries conduct most trade. - Porter looked more closely at the theory of firm and industry specifics to identify characteristics that made firms and industries in countries "winners" or "losers" in international trade. - hybrid model was designed to operate within an environment of government actions and unforeseen exter- nal events—shocks, positive or negative. - model in terms of a "dia- mond" that consists of four groups of company-specific and country-specific characteristics positioned at the edge of a diamond. - interaction of these four groups of characteristics will determine a country's competitive advantage in the global arena.

What is the north american free trade agreement?

- NAFTA is a comprehensive free-trade agreement among Canada, the United States, and Mexico that addresses issues ranging from the protection of workers' rights and the en- vironment to phased reduction of tariff and nontariff trade barriers, which were finally eliminated in 2009 - Canada has always been the United States' largest trade partner, and Mexico has ranked either second or third. - With such close trade links to its northern and southern neighbors, it made sense for the United States to ex- plore more formal trade agreements with its strategic neighbors, which later resulted in NAFTA. - NAFTA negotiations began in 1990; the agreement was signed by the three governments in December 1992, ratified by the legislatures of the three countries, and went into effect on January 1, 1994.

What are the major theories of international trade?

- No single nation in the world is capable of producing and consuming all the goods and ser- vices that its citizens want or need. - Neither does any nation have the required resources— minerals, agricultural land, skilled labor, machinery, technology, and the like—to produce the wide range of goods and services that people in our modern economy desire. - theories provide an appreciation for the progress made in understanding how trade (and gains from trade) really works in an open economy. - theories present a rationale why restriction to trade should be minimized even when domestic economic and business conditions seem awful. - policy-makers ignore trade theory, they are likely to repeat past mistakes, which could then lead to trade retaliation and lower global living standards.

What three reasons do nonprofit organizations believe text messaging will predominate emerging economies?

- Nonprofit organizations in developing countries believe that text messaging will likely predominate emerging economies' mobile phone usage for three reasons: (1) all cell phones, however inexpensive, can send text messages; (2) users know what it costs to send a text message; and (3) cell-web access requires more sophisticated handsets and may not always be supported by cell phone companies. - as countries continue to develop, more consumers will have full access to smartphone capabilities. - access costs have been decreasing and infrastructure has been expanding, developing countries may be poised to leapfrog the industrialized world in the era of smartphone technology.

How can open trade increase competition?

- Open trade increases competition, and, like rivalry from new domestic companies, it does have a negative impact on some because of this disruptive change. - "losers" include workers in some manufacturing as well as service sectors who lose jobs or are forced to accept reduced or stagnant wages (and a lower or sluggish standard of living) for working in globally uncompetitive industries. - happens when assembly-line jobs in uncompetitive manufacturing sectors or when service sector jobs (e.g., call centers, software development) are outsourced abroad to countries l - countries in the developed world try to soften the disruptive nature of trade by retraining and re-educating their workforce and enabling those workers to learn new skills in order to become more productive and gainfully employed.

How can one forecast future interest rates?

- PPP and IRP theories can be used to forecast future exchange rates. - PPP approxi- mation X = IDomestic - IForeign suggests that forecasts of relative inflation rates in two coun- tries can be used to estimate the future exchange rate X of domestic currency to foreign currency. - Another forecasting approach is to use a multiple regression model to estimate the relation- ship between changes in spot rates and fundamental factors.

What are the problems with the purchasing power parity?

- PPP appears to hold in the long run for periods exceeding five years, it may not hold in shorter periods. - countries with large price disparities due to inflation or other reasons, PPP is predictive of exchange rate movements. But for other countries with little difference in inflation rates, PPP is less reliable.1 - transportation costs and trade barriers cause some discrepancies in prices between countries. - govern- ment intervention in trade and exchange rates (e.g., trade restrictions and prohibitions on conversions of local currencies for foreign currencies), multinational firms with pricing power on a global basis (e.g., Microsoft sets prices of its software in different countries), and goods that are not traded but affect internal prices in a country (e.g., rental costs of equipment and property).

How can globalization be made to work for all?

- Policy makers in many countries have come to the conclusion that the globalization debate should center on how to best manage the globalization process—at both national and inter- national levels—so that the benefits are widely shared and costs are kept to a minimum. - greater integration into the world economy and more openness to efficiency and modernization offers all citizens of the global village a more hopeful future. - expansion of trade, the diffusion of technology, extensive migration, and cross-fertilization of diverse cultures. - Globalization has the potential to increase the quality of life for people; however, there cannot be a guarantee that quality of life for all people will increase or that all changes caused by globalization will be positive. - create winners and losers.

What was the major shift towards emerging economies? How many are involved?

- Prior to 2000, globalization generally implied that business expanded from developed or industrialized countries to developing or emerging economies. - dot-com bubble burst in 2000, the flow of business had moved in both directions and also increasingly from one developing country to another. - emerging economies—countries that have been moving toward more open trade and free-market policies - 59 companies, from the "BRIC economies" (Brazil, Russia, India, and China) - forecast by analysts to rise to fully one-third of the Financial Times Global 500 list by 2020. - sharp increase in the number of emerging-market companies acquiring established businesses and brands in Europe and the United States (e.g., Tata-Corus, Mittal-Arcelor, Lenovo-IBM), clearly demonstrating that "globalization" will no longer simply be another word for "Westernization" or "Americanization."

What Is Regional Economic Integration?

- Regional integration includes a multitude of economic and/or political steps that may be taken by member states of a union to increase their global competitiveness—not only preferential trade access. - helps countries—especially small and medium-sized countries—scale up their supply capacity through regional production net- works and become more globally competitive. - development could take place through sector-wide transformations in agriculture, manufacturing, and services. - For regional inte- gration to be successful, member countries need to undertake spatial transformations and allow efficient geographic distribution of economic activities within and among countries. - need to be customized to the economic geogra- phy (to make the best use of the size and location) of the countries involved and their open- ness to interaction with major world markets.

What is the interest rate parity?

- Relative interest rates on financial securities are another possible determinant of ex- change rate changes. - interest rate parity (IRP) - theory stating that interest rates on bonds in different countries should be the same, as investors would buy and sell these bonds to make arbitrage profits until this condition holds

What is the Smithsonian Agreement?

- Smithsonian Agreement on December 17-18, 1971, the United States devalued the dollar against other countries' currencies. o IMF implemented a temporary regime of central rates and wider margins of 2.25 percent above or be- low these central rates. - April 24, 1972, the European Monetary System established a man- aged float exchange rate system with a range of 2.25 percent around central rates for six currencies, known as the "snake-in-the-tunnel," an exchange rate precursor to the euro. - August 15, 1974 the United States closed the gold window and relinquished the dollar-gold exchange standard.

How are competitive markets an effective policy?

- Successfully globalized economies strive to attain competitive market structures at home. - To achieve this objective, countries must enforce regulations that promote free markets such as antitrust laws. o antitrust laws national laws aimed at maintaining competition in all sectors of the economy and preventing monopolistic behavior of firms - meant to encourage competition and pre- vent problems like the "too big to fail" phenomenon that occurred in the 2008 American credit crisis. - In market economies, governments try to minimize the role of state-owned enterprises. o Ex. European Union, Commissioner Joaquin Almunia, of the Competition Commission in Brussels, Belgium, has had a primary role as watchdog on competition (i.e., to make sure that companies—domestic or foreign—that operate in the European Union do not monop- olize any business sector) to ensure that the region's market structure for goods and services remains competitive.

How does globalization affect sustainable development?

- Sustainable Development - economic development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs, whether environmentally, socially, or economically - source of increasing tension between the developing world and developed nations, especially between China, the United States, and the European Union. - In order to produce biofuels, some forests have suffered, but the drive in Europe and the United States to find alternatives to fossil fuels has spurred the growth of biofuels. - Finding solutions depends upon a shared, single vision—meeting the needs of the present without compromising the future—and working toward that vision together. - Some businesses have adopted sustainable development policies. - survey by the World Bank indicates that corporate social responsibility (CRS) prac- tices are now a significant factor in determining where multinational corporations conduct business. - board-approved policies on envi- ronmental management. o labor rights, corruption, human rights, community health, and land rights.

What are the problems with the interest rate parity?

- Transactions cost is one possible impediment to IRP. - As the investment time horizon increases, deviations from IRP may be more likely due to political risk (e.g., government control of capital flows), legal restrictions, tax effects, managed-float exchange rate regimes, and other unpredictable circumstances that can occur over time and disrupt traders' ability to arbitrage away profit differentials. - Herd behavior can cause large purchases or sales of a particular currency that drive currency values beyond their normal bounds, resulting in problems, such as currency crises. - When interest rates change in the United States, foreign interest rates and exchange rates should also change under IRP. - central bank intervention is another reason that IRP may not hold at all points in time. - international investors may globally diversify their investments and behave pas- sively toward arbitrage activities.

What is national security?

- U.S. exports of certain types of high-technology defense equipment, instruments, devices, and components are generally restricted to allies and friendly countries; - Because the need to receive government approval prevents the affected firms from openly competing and increasing sales, these firms receive special treatment and protection.

What are the costs of regional integration?

- Undermining the most-favored-nation status rule (the lowest tariff applicable to one member must be extended to all members), an essential principle of the WTO. - Imposing laws and regulations that are uniform and that at times do not take into account national economic, cultural, and social differences. - Eliminating jobs and increasing unemployment in protected industries. - Losing sovereignty, national independence, and identity. - Reducing the powers of the national government. - Increasing the probability of rising crime associated with illegal drugs and terrorism because of the ease of cross-border labor movements.

What is voluntary export restraint?

- Voluntary export restraint (VER) occurs when an efficient exporting nation agrees to temporarily limit exports of a product to another country to allow competitors in the importing country to become more efficient within a set period of time. o Ex. Japanese and U.S. governments negotiated a VER whereby Japan's automobile manufacturers voluntarily agreed to limit their export of cars to the United States to approximately 1.6 million units a year for three years. gave the American automobile firms three years to retool and become relatively efficient and competitive;

What are the WTO's overriding objectives?

- WTO's overriding objective helps global trade to flow smoothly, freely, fairly, and predictably: o Administering trade agreements o Acting as a forum for trade negotiations o Settling trade disputes o Reviewing national trade policies o Assisting developing countries with trade policy issues, through technical assistance and training programs o Cooperating with other international organizations like the IMF and World Bank

What are the major classes and characteristics of regional integration?

- When regional or bilateral trade pacts do not discourage trade with countries in other regions, they can help; otherwise, regional integration is not advisable. - countries within trading blocs that have significantly lowered trade barri- ers have done better economically than others. - three general categories—regional blocs close to major world markets, remote regions with large local markets, or remote regions with small local markets

What are embargoes?

- When trade sanctions are imposed upon a country for political reasons, an embargo is in force, and trade will be restricted with that country. - may not be universally enforced, are meant to "punish" a country for perceived unac- ceptable international behavior.

What does the World Bank see globalization as?

- World Bank sees globalization as an opportunity to reach global solutions to national challenges. - Concern for the natural environment coupled with the need for sustainable economic growth and development in developing countries has been embedded in the Bank's work.

Why do currency values change?

- World economic and financial markets have become increasingly integrated due to steadily expanding international trade over the past 100 years. - consumers, businesses, and governments must convert from one currency to another at market exchange rates to make payments for internationally traded goods, services, and financial instruments. - gold standard for benchmarking or pegging currencies was replaced in 1973 by a flexible exchange rate system with freely floating cur- rency values determined by market supply and demand. - Resulting currency fluctuations led to a variety of efforts by countries to manage currency values, including pegging, dol- larization, and adoption of regional currencies, such as the European euro. - Currency values can change for many reasons: o different price levels in dif- ferent countries for the same goods and services. o varying interest rates across countries. - price levels and debt costs should be the same in different countries after considering exchange rates. - exchange rates should change to make prices more uniform across countries. - economic prospects of countries can affect their currency values.

What is the foreign exchange market?

- almost 200 countries in the world, most of which are engaged in international trade, and about 150 different currencies that are used to make international payments for goods and services. - exchange of currencies takes place in foreign exchange markets (often re- ferred to as forex), which consists of a network of international banks (who work with exporters and importers) and currency traders (who buy, sell, and speculate in curren- cies). - Over $1.5 trillion dollars worth of currencies are traded daily.

What would happen if multilateral trade and investment liberalization failed?

- apparent that if multilateral trade and investment liberalization fails to continue, regional integration blocs are likely to be the way of the future.

How is transparency important to globalization?

- appears that the poor have suffered as a result of globalization due to increased global competition and decreased subsidies for basic items, such as cooking fuels and food. - World Bank encourages political institutions and leaders to be transparent and convince their constituents that while globalization does create "winners" and "losers," appropriate policies will be in place to retrain and uplift the downtrodden. - Political stability has been greatest among long-standing democracies.

What is a balance of transfers?

- balance of transfers is the net of transfer payments between countries based on outflows (2 sign means that a payment is going abroad as foreign aid, retirement benefits, etc.) and inflows (1 sign reflects repayment of foreign aid loans, etc.).

What needs to be in place for globalization? How did political change affect globalization?

- before markets, modems, and manufacturers can work, appropriate political systems must also be in place. - foundations of the globalized business world are political—and so are the biggest threats to the system - Technocrats, especially in the Americas, Asia, and Europe, are struggling to convince their citizens that globalization does not just benefit the rich. If unable, globalization could unravel - political change that accelerated the globalization process: started in 1978 with China moving away from Maoism to market reforms, followed by Thatcherism in 1979 in the United Kingdom, Reaganomics in 1980, the creation of the European Union in the mid 1980s, and the 1989 collapse of the Berlin wall and the Soviet Union. - Finally in 1991, when India faced a balance of payments crisis, through IMF support, it was forced to dismantle bureaucratic regulation and protectionism that had hobbled its economy for decades. - span of less than 13 years, the political elites in the world's major power centers came to similar conclusions. They embraced globalization and a move toward free-market economics.

What is the Big Mac Index?

- big mac index calculation using the cost of a McDonald's restaurant sandwich to assess the relative values of currencies o The Economist computes the parity ratio of foreign cost (in dollars) to U.S. cost, or $3.50/$3.80 5 0.92.9 Since this ratio should be 1 under PPP, in our example the euro is undervalued by 8 percent against the dollar.

What is the ASEAN sociocultural community?

- objective is to ensure that the ASEAN workforce is well prepared to benefit from the economic integration process that is underway. - Programs are being put into place through investments in basic and higher education, training, R&D, and raising the standard of disad- vantaged groups and rural population through better public health care and social protection.

How has information technology become more available to emerging economies?

- broadband prices have been falling, governments in emerging economies, such as China, India, and South Africa, are facilitating the spread of broadband to rural towns and villages to provide instant access to market information and government programs to remote villagers. - enable policymakers to maximize the economic potential of remote communities and make globalization sustainable. - IT revolution has been relatively instantaneous - IT and globalization are closely related. - reducing communication costs, IT has helped to globalize the production of goods and services and has encouraged a freer flow of these items, including capital, across national boundaries - IT acts as a catalyst in the globalization process by lowering operating costs. - Internet-related technologies help reduce corporate and societal hierarchies because of greater access to information for everyone concerned.

How was the World Trade Organization began? What is its main role?

- commenced operation on January 1, 1995, but its trading system (which sets world trade rules) began in 1948 under the General Agreement on Tariffs and Trade (GATT). - WTO and its agreements now cover trade in agriculture, services, inventions, and intellec- tual property. - GATT's liberalization of the trading system (lowering and/or removing trade barriers such as tariffs, quotas, and subsidies) was developed through a series of trade nego- tiations, or "rounds." - Lowering trade barriers has been one of the most simple ways to encourage trade and globalization. - barriers concerned include custom duties (or tariffs) and measures, such as import bans or quotas, that selectively restrict quantities. - eighth and last GATT round—the 1986-1994 Uruguay Round—led to the creation of WTO. - WTO, based in Geneva, Switzerland, has no branch offices anywhere else in the world. Its 160 member nations (as of June 26, 2014) account for more than 97 percent of world trade in goods and services. - the WTO addresses the rules of trade between nations at a near-global membership level. - WTO has been an organization for liberalizing trade, a forum for governments to negotiate trade agree- ments, and a place for member governments to settle trade disputes. It operates a global system of trade rules.

When was the World Bank conceived? Where is it headquartered?

- conceived at the Bretton Woods Conference in 1944. - initial primary role was to aid the reconstruction of Europe after World War II; - reconstruction and restructuring economies to make them efficient remain a major role of the Bank, along with poverty reduction. - headquartered in Washington, DC,

What is the Doha Round?

- concept of curtailing agricultural subsidies in developed economies was incorporated into the ninth (most recent) round to trade negotiations called the "Doha Round" or Doha Development Agenda (DDA), which was launched in Qatar in November 2001.

What is countertrade?

- countertrade - agreement in which an exporter of goods or services to another country commits to import goods or services of corresponding value from that country - most countertrade transactions are still paid through the banking system; relatively few are done through outright barter - can be extremely inefficient. - Countries participate in countertrade, especially when they do not have adequate amounts of foreign currencies (U.S. dollars, euros, etc.) to pay for their imports. - Countries may also pursue countertrade because they may not be capable of producing goods of international quality or because a banking embargo has been imposed on them.

What are the objectives of economic integration?

- countries generally begin working together with some form of economic integration in mind, for example, to promote trade and investment. - Economic integration occurs when two or more countries join together to form a larger economic bloc. o objectives here are economic gain; that is, to work together rather than separately to increase economic growth and efficiency (through economies of scale in production to become globally competitive and tap world markets), to raise employment, skills, and the quality of life for the citizens of the region and to promote peace and prosperity - others may seek greater economic and social unions so that members of those groups will have similar shared economic and social values. - countries that share similar economic and political systems may choose to form a union to fend off foreign aggression or threat.

What are nontariff barriers?

- countries have resorted to various forms of nontariff barri- ers to restrict imports and, hence, trade. - Import quotas, also known as Quantitative Restrictions (QRs), limit the amount or number of units of products that can be imported to a country. o worse than import tariffs because when a quota is reached, that particular good can no longer be imported or purchased. o under an import quota, with high demand, the price of goods will increase to extremely high levels.

What is the covered interest rate parity principle?

- covered interest rate parity principle implying that for- ward exchange rates and spot exchange rates set interest rates on bonds in different countries equal to one another - uncovered interest rate parity principle implying that expected future spot exchange rates and spot exchange rates set interest rates on bonds in different countries equal to one another - IRP argues that the interest rate earned on assets in different countries will tend toward equality after taking into account exchange rate changes. - If IRP does not hold, global capital flows will take place to arbitrage away excess profit opportunities in interna- tional investments

What is the controversy over globalization?

- critics believe globalization—the impact of an increasingly free flow of ideas, people, goods, services, and capital that leads to closer integration and interdependence of economies and societies—can be a force for exploitation and injustice. - Anti-globalists have drawn support from a broad range of public opinion, and, as a result, they are likely to remain politically influential. - Arguments against globalization highlight problems such as the costs of disruptive economic change including job losses and stagnant wages, the loss of local control over economic policies and developments, the disappearance of old industries, and the related erosion of communities.

What did the sustainable decoupling process lead to?

- current fundamental shift in BRIC economies has been the growing size and income levels of the middle class. - middle class in any country as the crucial segment of that nation, because it provides the consumption of goods and services, savings (hence investment), and government tax revenues. - sustainable decoupling process would eventually lead to a multipolar world—a world economy in which the engines of growth could comprise the United States, the European Union, China, India, Brazil, Russia, and South Africa rather than the United States alone!

What do the pros and cons of regional integration depend on?

- depend upon the level of integra- tion the countries in the group achieve. - variety of motives for par- ticipating in the union: creation of greater business opportunities, global competitiveness, - increased value for consumers (better choice, price, and service), shared values, peace within the region, common security against possible external threats, and more. - effect of regional integration will depend on the net impact of the benefits and costs.

What was the earliest form of international trade?

- earliest and simplest form of international business is trade, which can be defined as the sale (exports) and purchase (imports) of goods (textiles, wine, spices, smartphones, etc.) and services (banking, transportation, education, consulting, etc.) across national borders

What 5 developmental institutions does the World Bank encompass?

- encompasses five closely associated developmental institutions: o International Bank for Reconstruction and Development (IBRD) - Supports reconstruction and restructuring of member countries using funds raised in international capital markets o International Development Association (IDA) - Provides long-term low-interest social sector and infrastructure loans to the poorest members using foreign aid funds provided by the rich nation members o International Finance Corporation (IFC) - Provides loans and takes equity position in private companies of developing countries and works toward developing capital markets in those economies o Multilateral Investment Guarantee Agency (MIGA) - Provides political risk coverage for private investments made in developing countries o International Center for the Settlement of Investment Disputes (ICSID) - Works on issues related to foreign investment disputes

What is foreign direct investment?

- encompasses the purchases of fixed assets (such as factories and equipment) abroad used in the manufacture and sales of goods and services for local consumption or exports. - Acquisitions of a foreign company (including those being privatized), creation of new manufacturing or research facilities abroad, and expansion of an existing plant in a foreign country - flow of FDI is dictated by opportunities to earn profit overseas. - FDI decisions have important implications to consumers, businesses, government, and society. - Consumers gain through greater choice of products (or services) at competitive prices, businesses face increased competition as well as profit opportunities, governments reap additional tax revenues, and society benefits through increased employment opportunities and corporate social responsibility.

What is the exchange rate? What are independent and managed floating exchange rates?

- exchange rate is nothing more than a price at which one currency can be converted to another currency. - In a free-market-oriented foreign exchange market, major currency values are determined by the demand for and sup- ply of currencies; this is called the independent floating exchange rate system. - managed floating exchange rate system - currency's value depends partly upon demand and supply in the foreign ex- change market and partly on active government intervention in the foreign exchange market (by means of central bank purchases and sales of its own currencies to manage currencies).

Why hasn't turkey been accepted into the european union?

- fate of EU candidate country Turkey is still uncertain, a case that has been highly controversial. - low per-capita income level, - significant EU budgetary resources may need to be diverted to Turkey's infrastruc- ture development soon after it joins the EU9 - issue of concern to Europeans is the powerful role of the military in what (as some Europeans believe) is not a truly democratic nation—one with a questionable human rights record and inadequate rights for minorities, especially the Turkish Kurds. - Turkey's population is predominantly Muslim. - if Turkey were admitted to the EU in the near future, then by 2020 it would be the largest member (based on population), with significant voting rights, which could potentially change the nature of the EU.

What is the financial account?

- financial account describes the second half of a country's balance of payments, which shows how the country's current account balance is financed. - Keeping current ac- count deficits for long periods of time is unsustainable for most countries.

How is regional integration coming to latin america?

- first step toward free trade in Latin America was taken with the signing of the Treaty of Montevideo in 1960, creating the Latin Ameri- can Free Trade Association (LAFTA). - 1969, frustrated by the lack of progress in LAFTA, Bolivia, Chile, Colombia, Ecuador, and Peru joined in creating the Andean Group, which aimed to create economic integration through reduced taxes, a common external tariff, and investment in the poorer industrial areas of their respective countries. - Treaty of Asunción in 1991 among Argentina, Brazil, Paraguay, and Uruguay, creating the Southern Cone Common Market, or MERCOSUR (Mercado Común del Sur) o treaty called for progressive tariff reduction, the adoption of sectoral agreements, a common external tariff, and the ultimate creation of a common market by 2005. - Venezuela became a member of MERCOSUR in July 2012 and is considered a key member because of its vast energy resources and significant domestic market. - Guyana and Surinam signed a framework agreement with MERCOSUR in July 2013 to become associate states. - Issues such as these have undermined implementation of most Latin American trade agreements so far, forcing participating countries to repeatedly change their alliances, objectives, and approaches

What are the 5 focus areas that accommodate?

- five focus areas that accommodate and facilitate the globalization process: o trade expansion has been a leading factor in global integration, o Bank's analytical and advisory role has been essential; supporting national policies to strengthen free-market institutions and infrastructure has provided the potential for creating large gains from trade. o financial crises of 1997-1998 and 2008-2009 instigated broad agreements in the Bank that support international standards, especially in financial systems that are a necessary foundation in a global economy. o Bank considers its role as a knowledge and information technology transfer agent to developing countries as the engine for sustainable development. o Bank focuses on eradicating communicable diseases without neglecting the importance of cultural heritage in a shrinking, globalized world.

What are the 5 principles which are the foundation of multi-lateral trading systems?

- five principles are the foundation of the multilateral trading system: o Trade without discrimination: Member countries should not discriminate between their trading partners (giving them equally "most favored nation" or MFN status); member countries should not discriminate between their foreign products and services. o Freer trade: Gradually removing trade barriers through negotiations. o Predictability: Foreign companies, investors, and governments should be confident that trade barriers (including tariff and nontariff barriers) will not be raised arbitrarily; tariff rates and market-opening commitments are "bound" in the WTO. o Promoting fair competition: Discouraging "unfair" practices, such as export subsidies and dumping products in the export market below cost. o Encouraging economic reforms in developing countries: Giving emerging economies more time to adjust to a free-trade environment, greater flexibility, and special privileges to meet WTO requirements.

What is a fixed exchange rate system?

- fixed exchange rate system, is one in which the country pegs its currency (formally or in- formally) at a fixed rate to a major currency or basket of currencies, and the exchange rate fluctuates within a narrow margin around a central rate

What is the Flexible exchange rate system?

- flexible exchange rate system began to emerge with market forces of supply and demand determining the prices of different currencies. - central banks intervene in the forex market by buying or selling currency to prevent its value from going too high or low. - clean float currency has minimal government intervention and, with few exceptions, is market determined. - dirty float currency has varying degrees of government interven- tion to maintain a range of acceptable values against other currencies. - large depre- ciation of the currency could cause difficulties in making debt payments denominated in foreign currencies and thereby damage the domestic financial system and economy. - some countries do not float their currencies for these reasons.

What is foreign direct investment?

- foreign direct investment (FDI)—corporate investment abroad to build new manufacturing or service facilities or to purchase existing companies abroad. o FDI does improve labor and environmental conditions, particularly in the developing world.

What does a foreign exchange market consist of?

- forex market consists of spot, forward, and futures markets

What is the free trade area of the americas?

- formal discussions to establish a Free Trade Area of the Americas (FTAA) began in 1994 under the Clinton administration. - FTAA would encompass 800 million people and a huge regional economy. o unlikely to begin any time in the near future. - Bush administration began free-trade talks with the five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and the Dominican Republic. - DR-CAFTA (Domini- can Republic and Central American Free Trade Agreement), became effective in 2005. - U.S. and Central American economies are relatively complementary; the United States has the competitive advantage in the production of grains, and Central America is a low- cost producer of coffee, tropical fruits (especially bananas), ornamental plants, and sugar (including bioethanol from sugar cane).

What are forward markets and forward rates?

- forward market enables purchases and sales of currencies in the future with prices (known as the forward rate) established at a previous time. - forward market is an informal over-the-counter (OTC) market run by banking institutions. - can use a forward contract with a bank to lock in the exchange rate. - not be exposed to exchange rate risks associated with fluctuating exchange rates over time. - Forward rates are regularly quoted for 30, 90, and 180 days in the future. - difference between forward and spot exchange rates reflects expectations by inves- tors about future exchange rate movements.

What does the practice of trade policy involve?

- free trade also creates jobs in the exports and imports sectors of economies. - Despite these benefits, individuals, firms, and lobby groups continue to pressure government policymakers to impose barriers to imports or subsidize exports of goods and services. - Trade policy refers to all government actions that seek to alter the free flow of merchandise or services from or to a country. - country's trade policy will, therefore, have a direct impact on the value and volume of their exports and imports. - main instrument of trade policy has been import tariffs; - nontariff barriers and export subsidies have become equally important in interna- tional business.

What are the theories of absolute and comparative advantages?

- free trade without restrictions would increase the wealth of all those who participated in free, unrestricted trade. - Adam Smith's international trade theory was his belief that free trade encour- ages countries to specialize in the production of those goods and services that they most efficiently produce. Theory of Absolute Advantage - Brazil has an absolute advantage in coffee production and the United States has an absolute advantage in corn production. An absolute advantage exists when one country can produce a good—such as coffee or corn—more efficiently than another. Theory of Comparative Advantage - produce the commodity in which it has the greatest advantage - comparative advantage - the ability of one country that has an absolute advantage in the production of two or more goods (or services) to produce one of them relatively more efficiently than the other

What is the fundamental basis of globalization? How does it relate to international trade?

- fundamental basis of globalization represents freer international trade and investment or the free flow of goods and services (including cultural and belief systems) between countries. - globalization and international trade and investment are interlinked. - strengthening the role of the private sector; supporting free-market pricing; eliminating barriers to free movement of goods, services, capital, and information technology; and promoting institutions that enforce transparency, disclosure, and the rule of law.

What is the geopolitical rationale to managed trade?

- geopolitical objective is to sacrifice some economic efficiency for the greater good of the country in terms of national security, protection of critical industries, and international commerce.

What are preferential duties?

- preferential duties - an especially advantageous or low import tariff established by a nation for all or some goods of certain countries and not applied to the same goods of other countries o especially from the developing world. - Under this system, the same good imported from a country outside the preferred group will be subject to a higher tariff. - geographically discriminatory as certain countries receive different or preferential treatment.

What is the current practice of managed trade?

- global trade today cannot be completely based upon the economics of free trade, but also encompasses a response to geopolitical and socioeco- nomic factors. - Managed trade refers to agreements, sometimes temporary, between countries (or a group of countries) that aim to achieve certain trade outcomes for the countries involved. - Managed trade aims to replace global market or economic forces with govern- ment actions to determine trade outcomes. o policymakers may use various socioeconomic or geopolitical rationales to protect specific companies or industries and achieve particular strategic objectives.

What is the ASEAN economic community?

- goal is to create a stable, prosperous, and highly competitive ASEAN economic re- gion, in which there is a free flow of goods, services, investment, and capital; and si- multaneously to reduce poverty and socioeconomic disparities. - ASEAN Economic Community calls for the establishment of a single market and production base, - does not call for the free movement of labor across ASEAN. - ASEAN Free Trade Area has been in place since 2007. - aims to promote economies of scale and specialization in production by eliminating tariff and nontariff barriers among member countries. - major integration-related economic activities include: financial sector liberalization; road, railway, pipeline, seaport, and airport con- nectivity and modernization; interconnectivity of telecommunication services; and hu- man resource development.

How has inflation affected international monetary systems?

- governments around the world have worked together to pro- mote stable exchange rates and world trade. Money and Inflation - Many governments have used money to meet political goals of stimulating economic growth and providing employment for citizens. - Printing more money could increase eco- nomic activity. - excess supplies of money could cause inflation. - when the sup- ply of money exceeds the demand for goods and services, the prices of goods and services can rise.

What are strategic industries?

- have a significant employment impact on certain sectors of an economy—the so-called "national champions"—when these champions are unable to compete globally.

How was the european union formed? What does it do?

- headquartered in Brussels, Belgium, is the most highly evolved example of regional integration in the world. - in the fourth stage of the economic integration process and is moving toward the final step that requires political union with com- mon defense and foreign policy institutions. - origins of the EU can be traced to the creation of the European Coal and Steel Com- munity (ECSC), which established a common market in coal, steel, and iron ore among the six founding member countries: France, West Germany, Italy, Belgium, the Netherlands, and Luxembourg, in 1952. - objective of ECSC was to encourage member countries to cooperate in steel production, thereby preventing these countries from warring with each other. - second major step was to approve the Treaty of Rome in 1957, establishing the European Economic Community (EEC) that called for free trade among members as well as a common external tariff for nonmembers. - 1960, the United Kingdom, Denmark, Sweden, Finland, Switzerland, Austria, and Portugal formed the European Free Trade As- sociation (EFTA). - United Kingdom, Ireland, and Denmark applied to join the EEC in August 1961, these countries were not allowed to enter the EEC until 1973 ( o French president Charles de Gaulle showed resistance to the United Kingdom's joining the EEC; de Gaulle believed that the United Kingdom was a "Trojan horse," which, once admitted into the EEC, would try to cater to American rather than EEC interests - Greece joined the EEC in 1981, followed by Spain and Portugal in 1986, bringing the membership to 12. - EEC focused upon the establishment of a common market with free movement of goods, services, and capital. - 1992 the Maastricht Treaty was signed, and the EEC became a full economic union or single market with free movement of labor among member countries. - European Union (EU), began incorporating (har- monizing and unifying) the fiscal, monetary, and social policies of its member countries. - January 1995, Austria, Sweden, and Finland joined the EU, bringing the membership to 15. - May 2004, 10 new countries (eight from the former Soviet bloc, Cyprus, and Malta) were admitted to the EU, bringing the membership to 25. - Bulgaria and Romania were admitted to the EU in January 2007, and Croatia became a member on July 1, 2013, thereby bringing the membership to 28 - enlarged EU will offer tremendous chal- lenges and opportunities for businesses in nonmember countries that seek to become part of the EU. - EU is a regional bloc based on treaties. - treaties starting with the Treaty of Rome in 1957 and others, such as the Maastricht Treaty, the Copenhagen Treaty, the Treaty of Nice, and the Lisbon Treaty, the EU is deepening and strengthening its institutional (economic, political, social, and defense) linkages, which will hopefully enable it to act as one country that will effectively compete with the United States - EU is larger than the United States both in terms of gross national income (GNI) and population.

What is the association of south east asian nations?

- headquartered in Jakarta, Indonesia, was established in August 1967 ing members: Indonesia, Malaysia, the Philippines, Singapore, and Thailand. - membership stands at 10; Brunei joined in 1984, Vietnam in 1995, Laos and Myanmar in 1997, and Cambodia in 1999 - population of 625 million (larger than the EU), a land area of 4.4 million square kilometers (slightly larger than the present EU), and a combined GDP of $2.4 trillion (about 14 percent of the EU). - two main objectives are: (1) to accelerate economic growth, social progress, and cultural development in the region; and (2) to promote regional peace and stability through the rule of law in relationship among countries in the region. - leaders agreed to establish an ASEAN Community based on three pillars: ASEAN Security Community; ASEAN Economic Community; and ASEAN Socio-Cultural Community.

What are security investments?

- individuals and firms hold foreign financial assets in order to diversify their investments beyond domestic stocks and bonds only. - Capital flows generally represent investments for the long term (more than one year). - Central banks, government agencies, and large financial institutions make other financial investments. - To earn interest on their foreign exchange reserves, central banks deposit some of their reserves with foreign central banks. - Certain government agencies (e.g., Export Import Bank and USAID, which are involved in international lending activities) make foreign loans to pursue foreign policy objectives (e.g., economic and military). - large financial institutions finance international trade, manage cash for international corporations, and make international loans to corporations and foreign governments.

What is an Institutional Structure? What key roles do they play?

- institutions - the rules, enforcement mechanisms, and organizations that support market transactions. o help transmit information, enforce contracts and property rights, and promote market competition across extremely diverse developed and developing countries. - institution building may stall or reverse over time because of political conflicts or economic, social, and cultural conditions. - must be effective, and people must want to use them ethically. - Successful institutions play three important roles: They channel information about market conditions, goods, services, and participants; they define property rights and contracts, determining who gets what and when; and they promote competition and innovation in markets.

What is international business?

- international business- all commercial transactions, both private and public between nations of the world - Business has become increasingly international in nature and has been accelerated by low-cost communications technology.

What is the IMF? When did it start?

- international monetary system—the global sys- tem of exchange rates and international payments that enables countries and their citizens to buy goods and services from each other. - ensure stable national currencies and encourage its members to eliminate foreign exchange restric- tions that hinder trade. - conceived in July 1944, shortly after the surrender of the Axis powers in World War II, when representatives of 44 countries met in Bretton Woods, New Hampshire in the United States, and agreed upon a framework for international economic coopera- tion. - necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression. - began operations on March 1, 1947, in Washington, DC.

What are the objectives of mercantilism?

- objective - value of exports must always exceed those of imports so that the coun- try would have a trade surplus. o trade surplus- when the value of exports exceeds the value of imports; the opposite of a trade deficit - rationale was simple: exports generate income, causing gold or silver to flow into the country. - imports were deter- mined to be a cost, as gold or silver must leave the country to pay for them. - National wealth was seen as the foundation of national power and global influence. - Mercantilists also believed that accumulation of gold and silver by way of exportation was the only way that countries without gold and silver mines could become wealthy. - did not want, or care, to see the big picture - every trading nation decided to increase its exports and decrease its imports, there would be a surplus of exported goods in the world market.

What is the Euro?

- introduced on January 1, 1999. - considered the crowning success of the EU's plans to integrate European economies. - 2008 global credit crisis—foreign governments have sought to diversify their hold- ings of foreign exchange reserves by moving more reserves away from dollars and toward euros. - 19 of the 28 EU countries are allowed to use the euro as their currency. - Eurozone (countries that are allowed to use the euro as their national cur- rency). - world's most independent central bank, the European Central Bank (ECB), based in Frankfurt, Germany, is the apex central bank for the Eurozone countries and maintains responsibility for the Eurozone's monetary policy (implemented by the central banks of the 19 member countries) and the stability of the euro. - ECB tries to maintain the stability of the euro by keeping Eurozone inflation below, but as close as possible to, 2 percent annually. - United Kingdom and Denmark have opted not to join, whereas in the case of Sweden the public has not approved joining the euro but to continue using their own national currency.

What are the key assumptions of the Heckscher-Ohlin and Factor Price Equalization theory?

- key assumptions for the H-O theory to work are (1) perfect competition in the marketplace and (2) perfect immobility of factors of produc- tion among countries. - factor price equalization theory- states that when factors (labor, for example) are allowed to move freely among trading nations, efficiency further increases, which leads to superior allocation of the production of goods and services among countries. - free mobility of factors will lead to the efficient reallocation of resources (factors of production) until price equilibrium is reached. o Ex. over time the wage rates for plumbers doing similar work in Britain and Poland will be the same. Then, factor price equalization would have been attained.

How does regional integration affect remote regions with large local markets?

- large local market gives countries the advantage of attracting industrial activities - If the country's infrastructure is also well connected to world markets, this advantage is reinforced. - Ex. Brazil, carribean, south Africa, Australia - Effective institutions, good governance, and solid regional infrastructure can help resource-rich economies like Australia, Brazil, and South Africa to grow through increased production, specialization, and access to world markets. - For the smaller economies of the regional bloc, modern infrastructure is especially important to reduce the distance to large neighboring countries and to use those neighbors as a further conduit to world markets.

What does the current account consist of?

- largely driven by activities of consumers and business. - consists of four subaccounts: (a) trade (or goods) balance, (b) services balance, (c) income balance, and (d) net transfers. - four components add up to give the current account balance.

What is the law of one price and arbitrage?

- law of one price, identical goods should sell for the same price in different countries according to the local currencies. - arbitrage buying goods in a lower priced market and selling them in a higher priced market to make profits

How does globalization create winners and losers?

- more than 400 million Chinese citizens have climbed out of poverty since the implementation of economic reforms that started in 1978 in their country. - India's initiation of economic reforms in 1991, that country has become a rapidly growing economy with a middle class a - Brazil has been flourishing as well, and recent economic growth successes in South Africa, Tanzania, and Nigeria show that Africa, too, may be poised for brighter economic prospects. - closer participation with institutions such as the IMF, the World Bank, and the WTO has promoted civil liberties by proliferating information and increasing choices. - rapid growth in emerging market economies could lead to higher commodity prices, such price increases are a reflection that economic growth accelerates at a faster rate than the supply of resources, including crude oil and food.

What is the most favoured nations principle?

- most favored nation (MFN) principle, any tariff concession granted by one member to any other country will automatically be extended to all other countries of WTO—nondiscrimination in tariff policy. o WTO members are obligated to apply the MFN principle only to other WTO members, but they can apply MFN to nonmember countries as well. o WTO members periodically assemble to discuss major trade negotiations with the prime objective of lower tariffs and increased trade and economic growth among member nations.

What is a multi-lateral trading system? How does the WTO fit in?

- multilateral trading system—are the WTO's agreements, negotiated and signed by a large majority of the world's trading nations and ratified in their parliaments. - agreements lay the legal ground rules for international commerce. - contracts that guarantee member countries important trade rights. - bind governments to keep their trade policies within agreed limits to every member's benefit. - WTO agreements are lengthy, complex legal texts covering a wide range of activities including agriculture, textiles and clothing, banking, telecommunications, gov- ernment purchases, industrial standards and product safety, food sanitation regulations, intellectual property, and much more.

What is a factor of endowment? What is the Heckscher-Ohlin and Factor Price Equalization theory?

- nations primarily export goods and services that intensely use their abundant factors of production. - concept of factor intensity as the basis of trade. - factor endowment - the quantity and quality of factors of production (land, labor, capital and technology) that a country owns - Heckscher-Ohlin (H-O) theory attributes the comparative advantage of a nation to its factor endowments: land (quantity, quality, and mineral resources beneath it), labor (quantity and skills), capital (cost), and technology (quality). o country rich in minerals, such as Australia, would have global competitive advantage in the production and exports of minerals, such as iron and uranium ore, and coal.

What is the digital generation?

- network's infrastructure has also been fundamentally transformed in the past decade; dial- up Internet access has given way to an "always-on" broadband technology. - users are accessing the Internet via many types of wireless devices, from laptops to cell phones (smartphones, tablets, etc.) in order to have mobile access to email and other appli- cations. - Communication has become the fastest-growing part of household expenditures since 1993 in many countries.

What is the ASEAN security community?

- objective is to ensure that countries in the region live in peace with one another and rely exclusively on peaceful processes in the settlement of intra-regional differences. - ASEAN established the ASEAN Regional Forum (ARF) to discuss major security issues in the region, including relationships with the major powers, nonproliferation, coun- terterrorism, and transnational crime.

What are the 3 fundamental steps to regional integration?

- primary problem is to identify the roadblocks to regional integration so that appropriate institutions and policies can be put in place, which would eliminate the roadblocks and lead to economies of scale and specialization of production. - Lowering or eliminating trade barriers between neighbors is important t - three fundamentals: o Start Small clear goals and initially address a narrow, well-defined area of cooperation in which the costs and benefits are easily defined. o Think Global should not create unconnected or isolated countries. should help countries gain access to world markets that they may not have access to otherwise. small and landlocked countries need regional integration in order to achieve economies of scale, efficiency, and global integration. o Compensate the Least Fortunate Concentration of economic activity gener- ally follows regional integration, because firms will want to specialize by increasing the scale of production in fewer places. lead to increased efficiency and competitiveness; some regions will gain more than others, at least initially. As people migrate to the efficient regions, they will spread their benefits by sending remittances home. explicit compensation programs may be required to ensure access to social services and basic infrastructure in lagging areas.

How are property rights an effective policy?

- protection of property rights has always been fundamental to market economies, as this protection enables buyers and sellers to conduct transactions with a high degree of trust. - countries that have successfully adapted to globalization guarantee property rights, whereas the least-globalized countries offer less protection. - communist and state-controlled economies, like those in Central Asia and parts of Africa and the Middle East, property rights either do not exist or are not well defined. o discourages domestic and foreign investors from making long-term commitments in these countries despite any competitive advantage in terms of labor productivity or raw materials those countries may have. o countries will most likely fall behind and will not be able to take advantage of globalization.

How do regional blocs close to world markets affect regional integration?

- proximity to major world markets is an asset for just-in-time production, exports of perishable goods (fresh fruits, vegetables, and flowers), and tradable services, - Countries close to major markets have the advantage of connecting to markets, suppliers, and ideas. - developed countries seek these regional trading blocs to (1) expand their growth potential abroad as domestic markets mature, and (2) deliver low-cost manufacturing platforms for locally based firms

What is purchasing power parity?

- purchasing power parity (PPP) theory stating that a basket of goods should have approxi- mately the same prices across different countries - If the prices of goods change in one country but not in other countries, the exchange rate of the country's local currency should likewise change with foreign currencies to maintain PPP.

What role do related and supporting industries play in Porter's diamond model?

- quality and competitive nature of supplier industries will determine how successful a country will be. o Ex. Silicon Valley, California, where there are numerous world-class suppliers that provide semiconductors to the IT hardware industry, posits a good example. The availability of a full range of world-class supporting industries makes Silicon Valley the envy of the world. - supporting supply companies create a highly competitive environment, enabling quality products at reasonable prices,

What is the rationale for holding dollars?

- rationale for holding dollars: o dol- lar was perceived as an asset that could weather global financial storms due to the belief that the United States would endure the crises. because the crises caused falling world interest rates, which in turn would tend to lower the debt burden of the United States, the market perceived that the United States could tolerate its trade deficit debts at that time o U.S. dollar is a reserve asset in many countries. maintain liquidity. about two- thirds of the total foreign exchange reserves of countries are held in U.S. dollars. - Due to a strengthening U.S. economy relative to these and other countries, the dollar rose against the euro, yen, and most other world currencies.

What are the reasons for regional integration and what can it do?

- reasons for regional integration are many and varied; they may be purely economic, purely political, or a combination of both. - regional integration can bridge barriers between national bor- ders, and increase interdependence within a region and the rest of the world. - one could argue that regional and global integration are not substitutes, but complements to developments of a particular region.

What is economic geography? How does it affect regional integration?

- removal of tariff and nontariff barriers across national borders can enable small and medium-sized firms to consolidate, specialize, and gain economies of scale in production that will help them achieve competitiveness on a regional and global scale. - economic geography - the study of principles that govern the efficient spatial allocation of economic resources and the resulting consequences - World Development Report concludes that positive changes within market size, location, and openness to trade) are essential for successful regional integration. - policy instruments needed for successful integration include: institutions that unify the markets, infrastructure that efficiently connects these markets, and lower economic barriers to facilitate trade.

What is a services balance?

- services balance (shipping, airlines, consulting, insur- ance, banking, tourism, software development, etc.) is the net of exports of services (1 sign when they are sold overseas) and imports of services (- sign when they purchased from overseas). A - surplus in the services balance will indicate that a country is competitive in its service industry. - "Balance of services" account shows that the United States is primarily a service economy, with intan- gible services provided for customers in other countries comprising more of its exports.

What are the several key challenges that require national attention?

- several key challenges that require national attention. include building institutions that support (1) a democratic system of government, (2) free markets, (3) an independent judiciary, and (4) a free press.

What is the socioeconomic rationale for managed trade?

- socioeconomics addresses the study of the relationship between business or economic activity and the social life of residents in a nation. - context of international trade, socioeconomics explores the relative negative impact of free trade upon society's welfare, as well as government policy measures that are implemented to minimize the negative outcomes to society in a country. - Several forms of managed trade are part of the socioeconomic category; these include countertrade, export cartels, the infant industry argument, and considerations of ethics and safety.

What are export subsidies and taxes?

- some countries also interfere with the free flow of exports by enforcing export subsidies, or export taxes. - export subsidy - a negative tariff or tax break aimed at boosting exports - export taxes - taxes meant to raise export cost and divert production for home consumption - Export subsidies are aimed at protecting certain groups within their economy, such as agriculture. - At the end of World War II, three major international organizations were established to accelerate trade and economic growth among countries of the world. o The Bretton Woods conference of 1944 instituted the International Monetary Fund (IMF) and the World Bank, and the General Agreement on Tariffs and Trade (GATT), an offshoot of a conference held at Geneva, was established in 1948.

What is dollarization?

- some countries practice dollarization, which means to use the dollar or some other foreign currency together with, or instead of, a domestic currency. o can be unofficially adopted by citizens in a country or officially approved by a country as legal tender in trans- actions

What is a spot market? What is a bid-ask spread?

- spot market trades currencies on a real-time basis for immediate delivery. - Banks earn a transaction fee for forex services. - If one travels to another country and converts local currency to a foreign currency, the bid (buy) and ask (sell) prices of the foreign currency will be posted in banks. - difference between bid and ask prices for a currency, or bid-ask spread, represents the transaction fee earned by the bank.

What is statistical discrepancy?

- statistical discrepancy reconciles any imbalance between the current account and financial account to ensure that all debit and credit entries in the balance of payments statement sum to zero - captures statistical inconsistencies in the recording of the credit and debit entries as well as illegal trade.

Explain why the losers of globalization need support.

- suffer most from the effects of globalization are those countries that have not been able to seize the opportunities to participate in this process. - those that do not provide economic and political free- doms to their citizens. - these countries are governed by authoritarian regimes with minimum rule of law and insignificant transparency. They include Central Asia, much of Africa, and countries such as North Korea. - economists have argued that national policies ought to be implemented to help retrain and educate displaced workers. o enable displaced workers to become more productive and earn a higher income. - High school education needs reform especially in math and the sciences; universal access to basic health care must be addressed; worker retraining programs like those in Germany must be emulated; and a need for more ethical corporate managers has not been filled. - would address the challenge directly and enhance society's resources and competitiveness. - Efforts to hold back globalization or technological progress are bound to fail.

What does the current account balance provide?

- sum of these four subaccounts equals the current account balance, which is more important than the trade balance o provides a measure of the financing needs of a particular country. o country with a current account surplus is called a capital surplus country. o current account deficits each year, which implies that it will need to attract capital from abroad in order to finance current account deficits. - Countries with current account surpluses gener- ally finance countries with current account deficits.

What are hard and soft currencies?

- the dollar, euro, and yen account for around 60 percent of the world economy. - hard currencies are used by emerging market countries to peg the val- ues of the soft currencies. - hard currencies leading world currencies of developed industrialized coun- tries, including the U.S. dollar, European euro, Japanese yen, and British pound sterling - soft currencies emerging market countries' currencies that are less stable in value than hard currencies and are sometimes pegged to hard currency values

What is an income balance?

- third subaccount in the current account of BOP is income balance, which is the net of investment income from abroad (1 sign reflects earn- ings from overseas investment) and investment income paid to foreigners (2 sign indicates payments are sent overseas).

What are the 3 largest foreign exchange markets?

- three largest foreign exchange markets are in London, New York, and Tokyo followed by Hong Kong, Singapore, and Bahrain. - London is the largest foreign exchange market; it largely serves Europe and Africa and handles over 30 percent of the world's daily transactions. - New York City handles about 20 percent of transactions and meets the needs of the Western Hemisphere. - foreign exchange market is a 24-hour market with international financial institu- tions connected by means of sophisticated telecommunications systems that enable in- stant, real-time exchange rate quotations. - function of the foreign exchange mar- ket is to facilitate international trade (in goods and services) and investment (FDI, secu- rity investment, and short-term money market flows). - a close relationship between the balance of payments and foreign exchange markets.

What are the 3 objectives of NAFTA?

- three major objectives: o First is the expansion of trade in goods and ser- vices through the phased elimination of all trade barriers including tariffs, quotas, and licensing restrictions, among the parties. o Second is the protection of intellectual property rights (enforcement of patent and copyright laws for software, music recordings, etc.). o Third is the creation of institutions to address potential problems (unfair trade prac- tices, disputes between companies or governments, environmental protection, worker's rights, competition policies, and the implementation of NAFTA rules and regulations). - additional, peripheral agreements addressing Mexican labor laws and environmental quality were signed by the United States and Mexico to make sure that Mexico would not practice unfair labor laws and would enforce agreed-on environmental quality stan- dards. effective on January 1, 1994. - When the U.S. economy slides into a recession, the impact on Mexico is severe, - United States remains Mexico's largest trade partner, trade and foreign in- vestment diversification (especially with the EU) will be necessary for Mexico to maintain economic growth as low-cost manufacturing becomes increasingly diverted to China from the United States. - China has surpassed Mexico and has be- come the United States' second largest trade partner

What is the history of globalization?

- traced back to the fifteenth century, - began to accelerate after World War II, beginning in 1944 with the creation and implementation of open-market policies advocated by such international institutions as the World Bank, the International Monetary Fund, and, a few years later, by the General Agreement on Tariffs and Trade (GATT), now called the World Trade Organization. - depends upon how the "rules of the game" are implemented: fair trade, flexible exchange rates, open foreign investment policies, and harnessing the Internet (including social media out- lets such as Facebook),

What is a trade balance and trade deficit?

- trade balance is the net of merchandise exports (1 sign as incoming dollars when merchandise, such as a Dell computer, is exported) and merchandise imports (2 sign as dollars leave the country to pay for imports, such as Toyota brand cars). - country imports more than it exports, it has a merchandise trade deficit. - trade balance provides an indication of how competitive an economy is via its primary trade partners.

What are two unpleasant results of mercantilism?

- two unpleasant results: o surplus of exports in the world market would depress prices and, therefore, earnings for exporting countries (in the form of gold and silver) would drop. decrease in wealth would result in lower wages in the export sector, meaning that exporters would become poorer, not richer. o as the demand for exports drops, competitors in the export market would want to un- dersell each other by further lowering their prices in order to get rid of their exports. This would further depress wages in those countries. - keep labor costs low, mercantilists encouraged their people to produce large families by providing bounties for children and penalties for the unmarried. - inflow of gold and silver to the nation—hence national wealth—was what mattered, not the prosperity of its citizens.

Does Regional Integration Confound Global Trade?

- uncertainty surrounding the outcome of the Doha Round of trade negotiations, countries (large and small) are clamoring for bilateral or regional trade agreements to meet their specific agendas. - result of these negotiations, the prospects of creating a truly open global economic system that benefits all countries may recede. - Some governments may initiate regional pacts to cement diplomatic, environmental, or security ties and risk slowing the momentum behind multilateral (global) trade liberalization\

What is the infant industry argument?

- when a country gets a "late start" in a particular industry where it has a potential to become a world-class competitor, short-term protection for that industry or firm may be justified. - infant industry argument expects that economies of scale and the comparative advan- tage of an industry can only be exploited by providing temporary protection. - During this period, the firm or industry will grow and become globally competitive, thereby enhancing society's gains from trade for the long term.

How does World Trade affect the United States Balance of Payments?

- world trade patterns help to explain the U.S. BOP accounts, especially which countries are lending funds to the United States to finance its growing current ac- count deficit. - growth of international trade has been driven by world eco- nomic growth, as well as the elimination of barriers to trade such as tariffs, nontariff import and export quotas, and other restrictions. - global economic and financial crises in 2008 and 2009 were primarily responsible for this sharp downturn in world trade activities.

What is decoupling? What did it cause?

- world's center of economic gravity is shifting toward emerging economies. - Emerging economies are no longer sources of inexpensive labor; they are becoming hotbeds of innovation in diverse fields, such as telecommunications, automo- bile manufacturing, biotechnology, and health care. - Companies in emerging economies are redesigning products without sacrificing quality to reduce costs—not by 10 to 20 percent—but up to 90 percent, o such as a no-frills car for $3,000 (the Tata "Nano") and $300 laptop computers from China's Lenovo. - Innovation in emerging economies will enrich rather than hinder innovation in rich countries.

What is the worlds economic gravity shifting towards? How will this shift benefit richer countries?

- world's center of economic gravity is shifting toward emerging economies. - Emerging economies are no longer sources of inexpensive labor; they are becoming hotbeds of innovation in diverse fields, such as telecommunications, automo- bile manufacturing, biotechnology, and health care. - Companies in emerging economies are redesigning products without sacrificing quality to reduce costs—not by 10 to 20 percent—but up to 90 percent, o such as a no-frills car for $3,000 (the Tata "Nano") and $300 laptop computers from China's Lenovo. - Innovation in emerging economies will enrich rather than hinder innovation in rich countries.

What are factor and demand conditions with Porter's diamond model?

Factor Conditions - Porter's model looks more closely at the quality of the factor endowments (i.e., land, labor, capital, and technology). Demand Conditions - Porter stresses the importance of domestic demand for goods and services when determining a nation's competitive advantage. - When domestic demand remains high, the number of suppliers will also be high. - With sizable demand, domestic competition among suppliers will intensify and result in lower prices as well as sophisticated, innovative new products. - could lead to product specialization.