INTERNATIONAL BUSINESS EXAM #2

Import Quotas

restrict the quantity of some good that may be imported into a country

_______________ is when residents and nonresidents of a country rush to convert their holdings of domestic currency into a foreign currency. A) Capital flight B) A convertibility crisis C) A currency exit strategy D) Transaction exposure

Capital FLight

Regional economic integration, for example, the EU, offers significant opportunities to US businesses including: A) non-EU companies no longer need to set up subsidiaries in EU countries. B) companies can realize significant cost economies by centralizing operations where factor costs and skills are optimal. C) it makes no difference where in the EU one locates an operation since the costs are the same throughout. D) cultural differences and national consumer preferences are now irrelevant.

Companies can realize significant cost economies by centralizing operations where factor costs and skills are optimal.

_________________ is the extent to which a firm's future international earning power is affected by changes in exchange rates. A) Economic exposure B) Translation exposure C) Transaction exposure D) Profit convertibility exposure

Economic exposure

Local Content Requirements

demand that some specific fraction of a good be produced domestically

T/F - NAFTA's initial impact on jobs was very small.

TRUE

By 2010, nearly all of the members of the WTO have notified the organization of their participation in free trade agreements, and the number of these agreements is around ________. A) 30 B) 100 C) 200 D) 400

400+

The growth of FDI is a result of:

A fear of protectionism Political and economic changes New bilateral investment treaties The globalization of the world economy

Business firms are major players on the international trade scene, and as such: A) they should ignore the minor complaints and extreme demands of protestors. B) they should pay less attention to national laws and focus more on their own strategies. C) they may ignore world events and international trade theory at the operational level and let experts with specialized policy backgrounds make the decisions to prevent costly errors. D) be aware of the problems both protectionism and free trade can bring.

Be aware of the problems both protectionism and free trade can bring.

It is critical for businesses to understand how exchange rates can affect the profitability of trade and investment deals. Which of the following is NOT one of the three main foreign exchange risks? A) Transaction exposure B) Cross currency rate exposure C) Translation exposure D) Economic exposure

Cross currency rate exposure

Knowledge spillovers such as those arising from the concentration of intellectual talent in Silicon Valley are referred to as ________. A) knowledge pools B) knowledge bases C) knowledge epicenters D) externalities

Externalities

Although there is still debate among economists and government leaders, the evidence is growing that a fixed exchange rate regime, modeled along the lines of the Bretton Woods system, is the preferred approach to a global monetary system. A) True B) False

FALSE

T/F - Both governments and consumers realize significant gains from tariffs, while domestic producers typically see a negative effect

FALSE

T/F - Despite its importance in international trade, China is not a member of any major free trade agreement.

FALSE

T/F - Only a few countries choose pragmatic nationalism preferring instead either the free market or radical view.

FALSE

When two parties agree to exchange currency and execute the deal immediately, the transaction is referred to as mutual exchange point. A) True B) False

FALSE

Dirty float is the term applied to black and grey market currency transactions. A) True B) False

False

Strategic trade policy

First mover advantages can be important to success -governments can help firms from their countries attain these advantages -governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage

Levels of regional economic integration:

Free trade area, customers union, common market, economic union, political union

Which of the following is NOT true about inflation? A) There is a connection between exchange rate movements and inflation. B) When the growth in a country's money supply is faster than the growth in output, price inflation is fueled. C) Governments would in general prefer to raise taxes than expand the money supply. D) Government policy determines whether the rate of growth in a country's money supply is greater than the rate of growth in output.

Governments would in general prefer to raise taxes than expand the money supply.

Protectionism: A) increased in the 1980s and 1990s after a period of relative decline. B) was endorsed by the theories of both Adam Smith and David Ricardo. C) helps consumers by keeping prices low. D) preserves jobs in both the short-term and long-term.

Increased in the 1980s and 1990s after a period of relative decline.

All of the following were part of the agenda of the Doha round of talks except: A) cutting tariffs on industrial goods and services. B) phasing out subsidies to agricultural producers. C) increasing the use of antidumping laws to bring discipline to the trading system. D) reducing barriers to cross-border investments.

Increasing the use of antidumping laws to bring discipline to the trading system.

Intellectual property rights have become thorny areas of international trade, especially in relation to software, pharmaceuticals, music and entertainment, and: A) in response uniform patent and copyright laws have been adopted and enforced by all WTO members. B) both the developed and developing world are standing together on protect the rights of companies. C) innovation remains a principal driver for economic growth. D) this was one area of agreement in the Doha round and meetings leading up to it.

Innovation remains a principal driver for economic growth.

The free market view

International production should be distributed among countries according to the theory of comparative advantage

The strategic trade policy argument has two main components. First, appropriate government actions can help raise national incomes if the governments can ensure domestic firms gain first mover advantages. Second, ______________________. A) it may help domestic firms overcome barriers to entry created by foreign firms who had a first mover advantage B) it is necessary to help firms compete against other nations' state-owned companies C) it provides revenue for the government that helps keep other tax revenues down D) proprietary knowledge is protected

It may help domestic firms overcome barriers to entry created by foreign firms who had a first mover advantage

Turkey's application to join the European Union has presented the EU with difficult issues. Which of the following is not one of those issues? A) Less than a quarter of Turkey's international trade is with the EU. B) The EU has concerns about human rights violations, especially with the Kurdish population. C) There are suspicions that the EU is concerned because Turkey is primarily a Muslim nation. D) There are concerns because Turkey straddles both Europe and Asia.

Less than a quarter of Turkey's international trade is with the EU.

Regional economic integration presents potentially significant threats to business outside the area, including: A) long-term improvements in the competitive positions of firms inside the areas. B) the end of a "fortress" mentality means other firms outside the area will be able to enter the areas more easily to compete with existing area firms. C) the end to efforts to rationalize production and reduce costs. D) the imposition of US standards, recognized as a pioneer in regional economic integration, which means US firms will not be able to get around the legal barriers.

Long-term improvements in the competitive positions of firms inside the areas.

________________ arise(s) when two or more enterprises encounter each other in different regional markets, national markets, or industries. A) Externalities B) Multipoint competition C) Location-specific advantages D) FDI

Multipoint competition

Preserving jobs, protecting industries important to national security, retaliating against unfair foreign competition, and advancing human rights of individuals in exporting countries are examples of __________________. A) political arguments for government intervention B) implementation of the new trade policy C) practical elements of absolute advantage D) political party platforms meant mainly to appeal to voters

Political arguments for government intervention

Governments do not always act in the national interest as they intervene in the economy, when, for example, ____________________. A) corruption is driven out of sight but still exists B) politically important interest groups influence them C) the political system favors business interests over those of consumers D) the country has few natural resources or other factor endowments

Politically important interest groups influence them

Which of the following is NOT one of the seven main instruments of trade policy? A) Subsidies B) Import quotas C) Local content requirements D) Quota rents

Quota Rents

By lowering production costs, ________________ help domestic producers in two ways, competing against foreign firms and gaining export markets. A) subsidies B) tariffs C) administrative policies D) boycotts

Subsidies

Exchange rates are determined by the demand and supply of one currency relative to the demand and supply of another. A) True B) False

TRUE

T/F - A strategic trade policy that aims to establish domestic firms in a global industry might attract retaliation and a trade war.

TRUE

T/F - Economists who have studied the issue have found little evidence that firm move production in response to changes in pollution regulations.

TRUE

T/F - Foreign direct investment has grown more rapidly than world trade and world output for many reasons, including the fear of international businesses of protectionist pressures.

TRUE

T/F - The desire by Europe to hold their own on the world's economic and political stage prompted the formation of the EU.

TRUE

T/F -Since 2002, the number of regulations that have been unfavorable to FDI have increased, particularly in Latin America.

TRUE

The simultaneous purchase and sale of a given amount of foreign exchange for two different value dates is a currency swap. A) True B) False

TRUE

When the income earned by the residents of a country from exports is equal to the money that is paid for imports, a country is said to be in balance of payments equilibrium. A) True B) False

TRUE

Tariffs

Taxes levied on imports that effectively raise the cost of imported products relative to domestic products

Licensing is a potentially good option for which of the following industries or industry groups? A) High-technology industries B) Global oligopolies C) The fast food industry D) Industries with intense cost pressure which demand tight control

The Fast food industry

Many economists criticize ______ for trade intervention arguing that it leads to prolonged inefficiency. A) the retaliation policy B) strategic trade policy C) the infant industry argument D) human rights protection

The infant industry argument

______________ is the political ideology most hostile to FDI, and ______________ is the most supportive of FDI. A) The radical view; pragmatic nationalism B) Pragmatic nationalism; the free market view C) The radical view; the free market view D) The free market view; pragmatic nationalism

The radical view; the free market view

When a MNE considering FDI is negotiating with a country about a potential investment which of the following is the least important factor? A) The value each side places on what the other has to offer B) The strength of the military and police forces of the country C) The number of comparable alternative available to each side D) Each party's time horizon

The strength of the military and police forces of the country

African countries have been experimenting with regional trade blocks with the following result: A) The key to effectiveness had been the enthusiastic support of the free trade movement. B) There are nine trade blocks, often with countries members of more than one block. C) The initiatives have been successful because of reduced traditional rivalries and suspicions. D) Most countries are committed to reducing trade barriers to gain the benefits of freer trade.

There are nine trade blocks, often with countries members of more than one block.

Regional economic integration

agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other an attempt to exploit the gains from free trade and investment

Antidumping Policies

aka countervailing duties -punish foreign firms that engage in dumping and protect domestic producers from "unfair" foreign competition

The infant industry argument

an industry should be protected until it can develop and be viable and competitive internationally

Administrative Policies

bureaucratic rules designed to make it difficult for imports to enter a country

Home countries can faces costs as well as benefits from FDI, including ______________. A) a decrease in the quality of the goods being sold B) less control over environmental quality C) a loss of sovereignty in terms of the firms' actions and behaviors D) employment effects when FDI is seen as a substitute for domestic production

employment effects when FDI is seen as a substitute for domestic production

Several levels of economic integration are possible. Three such levels from the least integrated to the most integrated are: A) free trade area, customs union, common market. B) customs union, political union, economic union. C) free trade area, political union, common market. D) common market, customs union, political union.

free trade area, customs union, common market.

Subsidies

government payments to domestic producers

When a firm insures itself against foreign exchange risk, it is called _____________. A) profit protection B) hedging C) monetary self-insurance D) fiscal speculation

hedging

foreign exchange market

is used to convert the currency of one country into the currency of another provides some insurance against foreign exchange risk - the adverse consequences of unpredictable changes in exchange rates

One of the main impediments to regional economic integration is the cost that individuals must bear even while the country as a whole might gain. The second major impediment is the ______________. A) increased concern about monetary policy B) loss of national sovereignty C) loosening of control over fiscal issues D) the increased costs of defending and monitoring borders

loss of national sovereignty

If a company wants a quick entry into a foreign market, ______ are appropriate. A) mergers and acquisitions B) greenfield investments C) portfolio investments D) monopoly investments

mergers and acquisitions

Foreign direct investment (FDI)

occurs when a firm invests directly in new facilities to produce and/or market in a foreign country -greenfield investments -acquisitions or mergers

In a(n) ________________________, similarities in the underlying structure of economic activity make it feasible to adopt a single currency and use a single exchange rate as an instrument of macroeconomic policy. A) optimal currency zone B) free trade area C) customs union D) common market

optimal currency zone

Among the policies countries can take to encourage outward foreign direct investment are foreign risk insurance, capital assistance, tax incentives, and ___________________. A) political pressure B) pressure on organized labor to allow the FDI C) encouraging subsidies from the host-country governments D) transportation subsidies

political pressure

Voluntary Export Restraints

quotas on trade imposed by the exporting country, typically at the request of the importing country's government

The law of one price: A) was one of the first acts of the European Parliament, outlawing price discrimination. B) states that in competitive markets identical products must sell for the same price if the price is expressed in terms of the same currency, except for transportation costs and barriers to trade. C) affects currency transactions of MNE operating in different countries. D) was more significant before the introduction of the euro.

states that in competitive markets identical products must sell for the same price if the price is expressed in terms of the same currency, except for transportation costs and barriers to trade.

The WTO's role as a global policeman for trade has so far been: A) successful. B) moderately unsuccessful. C) quite ineffective. D) completely disorganized.

successful.

It was not until the 1990s that there was consistent involvement of a multinational institution in governing FDI. This changed with the formation of _____________. A) the OECD B) GATT C) the WTO D) the United Nations Advisory Council on FDI

the WTO

If a country is running a current account deficit: A) governments are generally pleased for both the short and long term. B) the country is exporting more goods and services than it is importing. C) the deficit must be financed by the sales of assets of the country. D) FDI is an important consideration, but it cannot help a country address the deficit.

the deficit must be financed by the sales of assets of the country.

Which of the following is not one of the four main benefits of FDI for a host country? A) the resource transfer effect B) the employment effect C) the balance-of-payments effect D) the exchange rate effect

the exchange rate effect

FDI is more profitable than licensing when the firm has valuable know-how that cannot be protected by a licensing contract and when ______________________. A) the firm sells services not physical goods B) the firm needs tight control over a foreign entity to maximize its market share and earnings in that country C) the market in that country is an oligopoly D) foreign exchange rates are extremely volatile

the firm needs tight control over a foreign entity to maximize its market share and earnings in that country

An important feature of ________________ is the important role of U.S. dollar plays as a medium when dealers wish to sell a nondollar currency and buy another nondollar currency. A) the foreign exchange market B) the U.S. treasury C) New York City's financial district D) the European Central Bank

the foreign exchange market

Regional economic integration can be seen as an attempt to achieve gains from ________________ beyond those attainable under international agreements such as the WTO. A) common currencies B) region-specific tariffs C) the free flow of trade and investment D) gains from common access to intellectual property

the free flow of trade and investment

spot exchange rate

the rate at which a foreign exchange dealer converts one currency into another currency on a particular day

exchange rate

the rate at which one currency is converted into another

International businesses use the foreign exchange markets for all of the following reasons except: A) to buy and sell goods in a foreign market. B) to pay a foreign company for its products or services in the country's currency. C) to capitalize on high interest rates offered in foreign markets when making short-term investments of spare cash. D) to exchange payments it receives in foreign currencies.

to buy and sell goods in a foreign market.

A firm will need to consider ________________ as it develops and executes its strategy, disperse activities around the globe and recognizes its cost structures. A) trade barriers B) the culture of its "C level" leadership C) language barriers D) theories of mercantilism

trade barriers

If, prior to NAFTA, the U.S. produced its own textiles at a higher cost than Mexico, but after NAFTA imports them from Mexico: A) trade has been diverted. B) trade has been created. C) Mexico is worse off. D) the U.S. is worse off.

trade has been created.

Currency speculation: A) circumvents the use of foreign exchange markets. B) is a quick, virtually risk free investment. C) typically involves the short-term movement of funds from one currency to another to profit from exchange rates. D) has little impact on foreign exchange rates, currencies and countries.

typically involves the short-term movement of funds from one currency to another to profit from exchange rates.