MAN. 3600 International Business Exam 2

Current account surplus (8)

when a country exports more goods and services and receives more income from abroad than it imports and pays abroad

According to internalization theory, licensing has three major drawbacks as a strategy for exploiting foreign market opportunities:

· 1- Licensing may result in a firm's giving away valuable technological know-how to a potential competitor. · 2- Licensing does not give a firm the tight control over production, marketing, and strategy, in a foreign country that may be required to maximize its profitability. 3- Problem that arises when the firm's competitive advantage is based not as much on its products as on the management, marketing, and manufacturing capabilities that produce those products. The problem here is that such capabilities are often not amenable to licensing

Firms prefer mergers & acquisitions because: (19)

· They are quicker to execute than greenfield investments · It is easier and less risky for a firm to acquire the desired assets than build them form the ground up. · Firms believe that they can increase the efficiency of an acquired unit by transferring capital technology, or management skills.

Explain New trade theory (9)

(1980's) Paul Krugman developed what has come to be known as the new trade theory. For which he won a Nobel prize in economics) Stresses that in some cases, countries specialize in the production and export of particular products not because of underlying differences in factor endowments but because in certain industries the world market can support only a limited number of firms. (E.g., Commercial aircraft industry).

market imperfections approach

(AKA Internationalization theory) seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering a foreign market

Advantages that stem from resources or assets that are tied to a particular place include... (20)

(Dunning Eclectic Paradigm- OIL) Location Specific advantages

Advantages that stem from resources or assets that are tied to a particular place. (20)

(Dunning Eclectic Paradigm- OIL) Location Specific advantages

What are resource endowments? (18)

(Dunning Eclectic Paradigm- OIL) Location Specific advantages: The advantages that arise from utilizing assets that are tied to a particular foreign location and that firm finds valuable to combine with its own unique assets (such as the firm's technological, marketing, or management capabilities).

Explain Dunning's eclectic paradigm - What is OLI? (20)

(John Dunning-1979) The Eclectic Paradigm A 3-tiered evaluation framework that companies can follow when attempting to determine if it is beneficial to pursue foreign direct investment (FDI). This paradigm assumes that institutions will avoid transactions in the open market if the cost of completing the same actions internally, or in-house carries a lower price.

Explain Dunning's eclectic paradigm - What is OLI?

(John Dunning-1979) The Eclectic Paradigm A 3-tiered evaluation framework that companies can follow when attempting to determine if it is beneficial to pursue foreign direct investment (FDI). This paradigm assumes that institutions will avoid transactions in the open market if the cost of completing the same actions internally, or in-house carries a lower price. OLI- Ownership Specific Advantages- (Apple phones etc.) Location Specific Resources -(Aluminum in Jamaica) Internalization -(transaction disadvantages based on costs)

What is Mercantilism? (5)

(mid-16th century). The main tenet was that it was in a country's best interests to maintain a trade surplus, to export more than it imported. By doing so, a country would accumulate gold and silver and, consequence, increase its national wealth, prestige and power. *Mercantilism views trade as a zero-sum game. One in which a gain by one country results in a loss by another. *Advocates government intervention to achieve a surplus in the balance of trade. (via tariffs) *Neo-mercantilists equate political power with economic power and economic power with a balance of trade surplus. *China-Ex of neo-mercantilist policy deliberately keeping its currency value low against the US dollar in order to see more goods to the US and other developed nations, and this amass a trade surplus and foreign exchange reserves.

Describe each of the following: European Union, CAFTA, Mercosur, Andean pact, NAFTA, etc? (23)

*European Union (EU): Is the product of two political factors: (1) the devastation of western Europe during two world wars and the desire for a lasting peace and (2) the European nation's desire to hold their own on the world's political and economic stage. In addition, many Europeans were aware of the potential economic benefits of closer economic integration of the countries *For years, the EU functioned as a common market, although it has now moved beyond this stage. EU Political Structure European Council: Represents the interests of member states. It is clearly the ultimate controlling authority with the EU because draft legislation from the commission can become EU law only if the council agrees. European Commission: Is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states. European Parliament: has 751 members and is directly elected by the populations of the member states. The parliament, which meets in Strasbourg, France, is primarily a consultative rather than legislative body. It debates legislation proposed by the commission and forwarded to it by the council. It can propose amendments to that legislation, which the commission and ultimately the council are not obliged to take up but often will. The power of parliament recently has been increasing, although not by as much as parliamentarians would like. Court of Justice- The superior appeals court for the EU law. Which is comprised of one judge from each country, is the supreme appeals court for EU law. Like commissioners, the judges are required to act as independent officials, rather than as representatives of national interests. The commission or a member country can bring other members to the court for failing to meet treaty obligations. Central America Free Trade Agreement (CAFTA): The aim is to lower trade barriers between the US and the six countries for the most goods and services Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Dominican Republic Mercosur: Originated in 1988 as a free trade pact between Brazil and Argentina. The modest reductions in tariffs and quotas accompanying this pact reportedly helped bring about an 80% increase in trade between the two countries. Expanded in the 1990's to include Paraguay and Uruguay. *The initial aim was to establish a full free trade area by the end of 1994 and a common market afterwards. *May be diverting trade rather than creating trade, and local firms are investing in industries that are not competitive on a worldwide basis. *Initially made progress on reducing trade barriers between member states, but more recently efforts have stalled. Andean pact: Bolivia, Chile, Ecuador, Columbia, and Peru Signed an agreement in 1969 to create the Andean Pact. More or less failed by the mid-1980's., re-launched in 1990 and now operates as a customs union. Renamed the Andean Community in 1997. Signed an agreement in 2003 with Mercosur to restart negotiations towards the creation of a free trade area. North American Free Trade Agreement (NAFTA): US, Mexico, Canada -Abolished tariffs on 99% of the goods traded between the member countries. -It removed barriers on the cross-border flow of services -Protects intellectual property rights -Removes most restrictions on FDI between members -Allows each country to apply its own environmental standards -Establishes two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored.

Be able to make simple foreign exchange rate calculations and apply them.(33&37)

1.) $150 Bus tour of LA to a Japanese tourist in Yen? $150 * 121 (price yen per 1$) = 18,150 YEN 2.) 6-pound beer in a British Pub to an American businessman in USD$? 0.65 L =1$ Reciprocal Exchange rate 1$ /0.65 L= $ 1.538 1.538 * 6= $9.24

Can you calculate a reciprocal exchange rate? What is an effective exchange rate? exchange rate option? a forward exchange rate?

1.) $150 Bus tour of LA to a Japanese tourist in Yen? $150 * 121 (price yen per 1$) = 18,150 YEN 2.) 6-pound beer in a British Pub to an American businessman in USD$? 0.65 L =1$ Reciprocal Exchange rate 1$ /0.65 L= $ 1.538 1.538 * 6= $9.24 Forward Exchange Rate: An agreed upon rate in the future. The Future rate is the EXPECTED Spot Rate so you can make contracts for 30 days later. Effective exchange rate: The effective exchange rate is an index that describes the strength of a currency relative to a basket of other currencies. Exchange Rate Options: In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument that gives the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. (Wiki)

Internalization theory: (15)

If the risk of loss of core competence is great, then it is better to bring the activity back into the internal of the company.

Factor Endowments

A nation's position in factors of production, such as skilled labor or the infrastructure necessary to compete in a given industry. Basic (natural resources, climate, location) or Advanced (Skilled Labor, Infrastructure, technological know-how) *Advanced factors are the most significant for competitive advantage. (i.e., government investment in education. E.g., Japan's large pool of engineers.)

What is an extremely convertible currency?(38)

A currency is Externally convertible when non-residents can covert their holdings of domestic currency into a foreign currency, but when the ability of residents to convert currency is limited in some way. E.g. Russian rubles to us dollars.

Brownfield Investment (Merger & Acquisition):

Acquiring or margining with an existing firm in the foreign country.

What is Knickerbocker's theory? (22)

A theory based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace. This theory is extended to embrace the concept of multipoint competition which arises when two or more enterprises encounter each other in different regional markets, national markets or industries. Economic theory suggests that rather like chess players jockeying for advantage, firms will try to match each other's moves in different markets to try to hold each other in check. His theory can explain imitative FDI behavior by firms in oligopolistic industries, it does not explain why the first firm in an oligopoly decides to undertake FDI rather than export or license.

Brownfield Investment (Merger & Acquisition): (19)

Acquiring or margining with an existing firm in the foreign country. · Firms prefer mergers & acquisitions because: · They are quicker to execute than greenfield investments · It is easier and less risky for a firm to acquire the desired assets than build them form the ground up. · Firms believe that they can increase the efficiency of an acquired unit by transferring capital technology, or management skills.

Explain Adam Smith's theory of absolute advantage. (2)

Adam Smith (The wealth of Nations)- A country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it. According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for those produced by other countries *Trade is a positive sum game (all countries involved in the trade benefit)

Costs of Inward FDI: (16)

Adverse effects on Competition: Host governments sometimes worry that the subsidiaries of foreign MNEs may have greater economic power than indigenous competitors. If it is part of a larger international organization, the foreign MNE may be able to draw on funds generated elsewhere to subsidize its costs in the host market, which could drive indigenous companies out of business and allow the firm to monopolize the market. Adverse effects on the balance of payments: The possible adverse effects of FDI on a host country's balance of payments position are two fold. First, set against the initial capital inflow that comes with FDI must be the subsequent outflow of earnings from the foreign subsidiary to its parent company. Such out-flows show up as capital outflow on balance-of-payments accounts. A second concern arises when a foreign subsidiary imports a substantial number of its inputs from abroad, which results in a debit on the current account of the host country's balance of payments. Possible Effects on National Sovereignty and Autonomy Some host governments worry that FDI is accompanied by some loss of economic independence. The concern is that key decisions that can affect the host country's economy will be made by a foreign parent that has no real commitment to the host country and over which the host country's government has no real control.

How does FDI change over time? (13)

Both the flow and stock of FDI have increased over the last 35 years. Most FDI is still targeted towards developed nations such as the EU, Japan, US. The flow of FDI has accelerated faster than the growth in world trade and world output. Because: 1) Firms fear protectionist pressures. Executives see FDI as a way of circumventing future trade barriers. 2.) Increase in FDI has been driven by the political and economic changes that have been occurring in many of the world's developing nations. 3.) The globalization of the world economy is also having a positive effect on the volume of FDI. Many firms still see the whole world as their market, and they are undertaking FDI in an attempt to make sure they have a significant presence in many regions of the world. Many firms now believe it is important to have production facilities close to their major customer/ This too creates pressure for greater FDI.

Balance of payments accounts:

Double entry bookkeeping. Every international transaction automatically enters the balance of payments twice-once as a credit and once as a debit. Thus, any international transaction automatically gives rise to two offsetting entries in the balance of payments. Because of this, the sum of the current account balance, the capital account, and the financial account balance should always add up to zero. Doesn't always occur due to the existence of statistical discrepancies. E.g., Purchase a car produced in Japan by Toyota for $20,000. Debit to current account $20k Credit to the financial account (if deposited in US bank)

Franchising:

Essentially the service-industry's version of licensing, although it normally involves much longer-term commitments than licensing. With franchising, the firm licenses its brand name to a foreign firm in return for a percentage of the franchisee's profits. The franchising contract specifies the conditions that the franchisee must fulfill if it is to use the franchisor's brand name. E.g McDonald's

Explain exchange rates regimes, managed float regime, forward exchange rates (Ch. 11) (28)

Exchange Rate Regimes: A fixed exchange rate regime imposes discipline in two ways. First, the need to maintain a fixed exchange rate puts a brake on competitive devaluations and brings stability to the world trade environment. Second, a fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation. Managed Float Regime Nothing is truly a free-floating currency. All governments try to influence the slope of the line for depreciating currency or appreciating currency and they do that through Open Market Operations. USD is appreciating too rapidly harms exports, want to decrease the value of the USD relative to other currencies. Japanese Yen is a managed float regime. Forward Exchange Rates: An agreed upon rate in the future. The Future rate is the EXPECTED Spot Rate so you can make contracts for 30 days later. Positive relationship exists between the inflation rate and the level of the money supply!

Internationalization (14 & 15)

Exports, Licensing, franchising, Joint-venture, FDI

Internationalization: (15)

Exports, Licensing, franchising, Joint-venture, FDI

competitive advantage

Firms are most likely to succeed in industries or industry segments where the diamond is most favorable. He also argues that the diamond is a mutually reinforcing system. The effect of one attribute is contingent on the state of others. Two additional variables can influence the national diamond in important ways; chance and government.

Jobs

He was particularly concerned about the ability to offshore service jobs that traditionally were not internationally mobile, such as software debugging, call-center jobs, accounting jobs, and even medical diagnosis of MRI scans.

Licensing: (19)

Involves granting a foreign entity (the licensee) the right to produce and sell the firm's product in return for a royalty fee on every unit sold.

Exporting:

Involves producing goods at home and then shipping them to the receiving country for sale. · Exports can be limited by transportation costs and trade barriers · Some firms undertake foreign direct investment as a response to actual or threatened trade barriers such as import tariffs or quotas.

Greenfield Investment: (19)

Involves the establishment of a new operation in a foreign country

Wages

Technology coupled with rapid advances in the productivity of foreign labor due to better education, the effect on middle-class wages in the US, according to Samuelson, may be similar to mass inward migration into the country: It will lower the market clearing wage rate, perhaps by enough to outweigh the positive benefits of international trade.

Explain Porter's theory of national competitive advantage. Be able to apply it! (7)

Michael Porter (1990) tried to explain why a nation achieves international success in a particular industry. He theorized that four broad attributes of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of a competitive advantage1. Factor endowments: Basic factors natural resources, climate, location, demographic 2. Demand conditions: firms gain competitive advantage if their domestic consumers are sophisticated and demanding. 3. Related and supporting industries: Investments in advanced factors of production can help the industry achieve a strong competitive position internationally, industries grouped together 4. Firm strategy, structure, and rivalry: different nations are characterized by different management ideologies, which may or may not help to build competitive advantage

Geographic Trends in FDI (13)

Most FDI was targeted towards developed nations like the US, Japan and the Eu. but other destinations are emerging like (BRIC Countries as well as Southeast Asia, China, Latin America.

Current Account (Trade) Deficit (8)

Occurs when a country imports more than it exports. Implies a net debtor. A persistent deficit could limit future economic growth. (US currently runs an account deficit) When a country runs a trade deficit, the money that follows to other countries can then be used by those countries to purchase assets in the deficit country. This when the US runs a trade deficit with China, the Chinese use the money that they receive from the US consumers to purchase US assets such as stock, bonds, and the like.

Current account deficit (8)

Occurs when a country imports more than it exports. Implies a net debtor. A persistent deficit could limit future economic growth. (US currently runs an account deficit) When a country runs a trade deficit, the money that follows to other countries can then be used by those countries to purchase assets in the deficit country. This when the US runs a trade deficit with China, the Chinese use the money that they receive from the US consumers to purchase US assets such as stock, bonds, and the like.

Trade Creation: (11)

Occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area. It may also occur when higher-cost external producers are replaced by lower-cost external producers within the free trade area. Good Thing!

Trade Diversion: (11)

Occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area. A regional free trade agreement will benefit the world only if the amount of free trade it creates exceeds the amount it diverts. Bad Thing!

OLI- (20)

Ownership Specific Advantages- (Apple phones etc.) Location Specific Resources -(Aluminum in Jamaica) Internalization -(transaction disadvantages based on costs)

Applying Porter's Theory

Porter contends that the degree to which a nation is likely to achieve international success in a certain industry is a function of the combined impact of factor endowments, domestic demand conditions, and related supporting industries, and domestic rivalry. He argues that the presence of all four components is usually required for this diamond to boost competitive performance (although there are exceptions). Porter also contend that governments can influence each of the four components of the diamond- either positively or negatively.

What is purchasing power parity? What is its relationship to exchange rates?(34)

Purchasing Power Parity (PPP) Theory: Argues that a given relatively efficient markets (a market with no impediments to the free flow of goods and services) the price of a "Basket of Goods" should be roughly equivalent in each country. -Predicts that changes in relative prices will result in a change in exchange rates. Changes in relative prices between countries will lead to exchange rate changes, at least in the short run. -A country with high inflation should see its currency rate depreciate relative to others. *A positive relationship exists between the inflation rate and the level of money supply. *An inverse relationship exists between inflation rate and the exchange rate.

Current Account

Records transactions of goods, services and income, receipts and payments.

Economic integration, Political union, customs union, common market, economic union, free trade area (25)

Regional Economic Integration: Agreements among countries in a geographic region to reduce and ultimately remove tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other. Six stages of Economic Integration Political Union: Involves a central political apparatus that coordinates economic, social and foreign policy. (Largest part of the circle- Represents the most integrated-Political Policy). Customs Union: Eliminates trade barriers between member countries and adopts a common external trade policy. (Second inner layer of the circle-Represents Least integrated) Common Market: Has no barriers to trade among member countries, includes a common external trade policy, and allows factors of production to move freely among members. (Third inner layer of the circle- More Integrated-Monetary Policy) Economic Union: Involves the free flow of products and factors of production among member countries and the adoption of a common external trade policy, but it also requires a common currency, harmonization of members' tax rates, and a common monetary and fiscal policy. (Fourth inner layer of the circle-More Integrated-Fiscal Policy) Free Trade Area: All barriers to the trade of goods and services among member countries are removed. In the theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or administrative impediments are allowed to distort trade between members. Free trade agreements are the most popular form of regional economic integration. (center of the circle-Least integrated)

Benefits of Inward FDI: (16)

Resource Transfer Effects: FDI brings capital, technology, and management resources that would not otherwise be available and thus boost that country's economic growth rate. Employment Effects: FDI can bring jobs to a host country. Indirect and direct effects. Balance of Payment effects: FDI can help a country to achieve a current account surplus. Effects on competition and economic growth: When FDI takes the form of a greenfield investment, the result is to establish a new enterprise, increasing the number of players in a market and thus consumer choice. In turn, this can increase the level of competition in a national market, thereby driving down prices and increasing the economic welfare of consumers. Increased competition tends to stimulate capital investments by firms in plant, equipment, and R&D as they struggle to gain an edge over their rivals.

Trade

Samuelson's model suggests that in such cases, the lower prices that US consumers pay for goods imported from China following the introduction of a free trade regime may not be enough to produce a net gain for the US economy if the dynamic effect of free trade is to lower read wage rates in the US.

What are the conditions for becoming a full member of the EU? (26)

To qualify for EU membership, the applicants had to privatize state assets, deregulate markets, restructure industries, and tame inflation. They also had to enshrine complex EU laws into their own systems, establish stable democratic governments, and respect human rights.

Explain Leontief's paradox (10)

Study in 1953 by Wassily Leontief (Noble prize winner economics 1973). Using the Heckscher-Ohlin theory, Leontief postulated that because the US was relatively abundant in capital compared to other nations, the US would be an exporter of capital intensive-goods and an importer of labor-intensive goods. To his surprise, however, he found that US exports were less capital intensive than US imports. Because this result was at variance with the predictions of the theory, it has become known as the Leontief paradox.

When, how, and why was the European community established? (24)

The European Community (EC) was established in 1957 at the signing of the Treaty of Rome. The name changed again in 1993 when the EC became the EU. The treaty of Rome provided for the creation of a common market. Called for the elimination of internal trade barriers and the creation of a common external tariff and requiring member states to abolish obstacles to the free movement of factors of production among the member states.

Which of these is concerned with factor endowments? (4)

The Heckscher-Ohlin Theory & Porter (later) -Extent to which a country is endowed with resources such as land, labor, and capital -Countries will export goods that make intensive use of factors that are locally abundant. -Countries will import goods that make intensive use of factors that are locally scarce.

What is the International Fisher Effect(35)

The International Fisher Effect states that for any two countries the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between two countries. Explains how interest rates influence exchange rates: ( CA= Country A CB= Country B ) CA Interest Rate (1)- Interest Rate (2) = CB Exchange Rate Interest Rate example: 15% in USD and 2% in Canada. USD stronger, Canadian Dollar weaker depreciated.

What were the elements of Paul Samuelson's critique? (12)

Trade, Jobs, and Wages

Efficiency Gains:

The comparative advantage model has static assumptions that make no allowances for the dynamic changes that might result from trade. Free trade might also increase the efficiency with which a country uses its resources. Gains in the efficiency of resource utilization could arise from a number of factors. E.g. Economies of scale, trade might make better technology from abroad available to domestic firms.

Firm Strategy, structure, and rivalry

The conditions governing how companies are created, organized, and managed and the nature of domestic rivalry. *Different nations are characterized by different management ideologies, which either help them or do not help them build national competitive advantage. E.g. Consequence of these different management ideologies was a relative loss of US competitiveness in those engineering-based industries where manufacturing processes and product design issues are all-important. *There is a strong association between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry. Vigorous domestic rivalry induces firms to look for ways to improve efficiency, which makes them better international competitors. **Domestic rivalry creates pressures to innovate, to improve quality, to reduce costs, and to invest in upgrading advanced factors.

Explain the law of one price.(36)

The law of one price states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency. -Otherwise, there is an opportunity for arbitrage until prices equalize between the two markets

Demand Conditions

The nature of home demand for the industry's product or service. Firms are most sensitive to the needs of their closest customers. *Can influence the development of capabilities (developed by firms) *Customers pressure local firms to meet high standards of product quality and to produce innovative products. *E.g., Japanese demanded smaller more efficient cars.

Related and supporting industries

The presence or absence of supplier industries and related industries that are internationally competitive. *The benefits of investments in advanced factors of production by related and supporting industries can spill over into an industry, thereby helping it achieve a strong competitive position internationally. *As a consequence, to this process successful industries within a country tend to be grouped into clusters. Which is important bc valuable knowledge can flow between the firms within a geographic cluster, benefiting all within that cluster. *Knowledge flows occur when employees move between firms within a region and when national industry associations bring employees from different companies together for regular conferences or workshops

Explain Ricardo's theory of comparative advantage (1)

The theory of comparative advantage (1817)- David Ricardo According to Ricardo's theory of comparative advantage, it makes sense for a country to specialize in the production of those goods that produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce itself. - *Buy the least efficient goods *Produce the most efficient goods *Comparative advantage arises from differences in productivity

How do government's use the foreign exchange market to manage their exchange rates? (30)

The use the Foreign Exchange market to covert the currency of one country into the currency of another. The second is to provide some insurance against Foreign Exchange risk. Hedging. Open Market Operations: Governments buy and sell their own currencies by managing the slope of the line for demand. If the government wants to stop a currency from depreciating, they can sell dollars and buy Euros or Yen

Explain Heckscher-Ohlin's theory (6)

They argued that comparative advantage arises form differences in national factor endowments. Factor endowments: The extent to which a country is endowed with such resources as land, labor, and capital. (factors of production) Nations have varying factor endowments, and different factor endowments explain differences in factor costs; specifically, the more abundant a factor, the lower its cost. *Predicts that countries will export those goods that make intensive use of factors that are locally abundant while importing goods that make intensive use of factors that are locally scarce. *Argues that the pattern of international trade is determined by the differences in factor endowments.

Porter's Diamond

To Determine National Advantage: -Factor Endowments -Related and supporting industries -Firm Strategy, Structure, and Rivalry -Demand Conditions

Explain spot transactions in the foreign exchange market. (29)

When two parties agree to exchange currency and execute the deal immediately, the transaction is referred to as a spot exchange. Exchange rates governing such "on the spot" trades are referred to as spot exchange rates. The Spot Exchange Rate is the rate at which a foreign exchange dealer converts one currency into another on a particular day. Spot exchange rates are reported on a real-time basis on many financial websites. An exchange rate can be quoted in two ways: as the amount of foreign currency one US dollar will buy or as the value of a dollar for one unit of foreign currency. Spot rates change continually, often on a minute-by-minute basis (although the magnitude of changes over such short periods is usually small). The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies. E.g., If lots of people want US dollars and dollars are in short supply, and few people want British pounds and pounds are in plentiful supply, the spot exchange rate for converting dollars to pounds would change. The dollar is likely to appreciate against the pound (or the pound will depreciate against the dollar).

What is currency appreciation, depreciation, and explain its effect on the prices of goods and services. (31)

currency appreciation: (Videos) As the USD gets stronger that means that it is cheaper to buy goods a broad buys more foreign currency, makes ability to purchase other goods with more dollars to buy those goods currency depreciation: When the value of a currency is weaker against that of another currency. When the USD is weaker it is more expensive to buy goods abroad and buys less foreign currency, makes the ability to purchase other goods with Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system in which no official currency value is maintained.

Dynamic gains

in both the stock of a country's resources and the efficiency with which resources are utilized will cause a country's PPF to shift outward. A dynamic gain in the efficiency with which resources are used in a poor country.

Balance of Payments Account

keeps track of the payments to and receipts from other countries for a particular time period. Has three main accounts. Double entry bookkeeping.

Inflows of FDI: (13)

meaning the flow of FDI into a country.

Outflows of FDI: (13)

meaning the flow of FDI out of a country

FDI (Foreign Direct Investment): (17)

occurs when a firm invests directly in facilities to produce or market a good or service in a foreign country. According to the US dept of commerce, FDI occurs whenever a US citizen, organization, or affiliated group takes an interest of 10 % or more in a foreign business entity. *Once a firm undertakes FDI it becomes an MNE* * Have controlling interest (over 10%) or Production activities in two or more countries.

Capital Account:

records one-time changes in the stock of assets.

Financial Account:

records transactions that involve the purchase or sale of assets

Flow of FDI (13)

refers to the amount of FDI undertaken over a given period of time. normally a year. Like a movie!

Stock of FDI: (13)

refers to the total accumulated value of foreign-owned assets at a given time. Snapshot!

Factor endowments can be affected by

subsidies, policies toward capital markets, polices towards education, and so on. Government can shape domestic demand through local product standards or with regulations that mandate or influence buyer needs. Government policy can influence supporting and related industries through regulation and influence firm rivalry through such devices as capital market regulation, tax policy, and antitrust laws.