IB 303 Exam 2

This is the abbreviation for the North American Free Trade Agreement.

NAFTA

Benefits of FDI include all of the following except

National sovereignty and autonomy

What does FDI mean for international businesses?

The theory of FDI has implications for strategic behavior of firms Government policy on FDI can also be important for international businesses

Sentoria is an island nation in the Pacific ocean. It's geographical location is advantageous since it has access to a variety of aquatic life forms and also a number of fresh water sources that provide for fisheries. The lack of arable land drives local demand for seafood. The competition in the domestic fishing industry is fierce and enables Sentoria to be one of the major exporters of seafood. Which of the following theories of international trade best explains Sentoria's dominance as an exporter of seafood?

Theory of Competitive advantage

Which of the following is true regarding the inflow of FDI?

There has been an increase in the importance of China as a recipient of FDI

Are there other strategies to manage foreign exchange risk?

To further manage foreign exchange risk, firms should 1. Establish central control to protect resources efficiently and ensure that each subunit adopts the correct mix of tactics and strategies 2. Distinguish between transaction and translation exposure on the one hand, and economic exposure on the other hand 3. Attempt to forecast future exchange rates 4. Establish good reporting systems so the central finance function can regularly monitor the firm's exposure position 5. Produce monthly foreign exchange exposure reports

How are prices related to exchange rate movements?

To understand how prices and exchange rates are linked, we need to understand the law of one price, and the theory of purchasing power parity

This country is an EU candidate country, waiting since 1987.

Turkey

This country is a member of NAFTA.

United States

Which country developed a very large proportion of the world's new products for most of the 20th century?

United States

This abbreviation refers to a quota on trade imposed by the exporting country, typically at the request of the importing country's government.

VER

Who proposed the product life cycle theory?

Vernon

Consider two countries Daria and Atlantis. Daria is a major producer of wheat and rice while Atlantis specializes in the production of fertilizers and manufacturing equipment. Engaging in free trade benefits both countries since Daria is an agrarian nation and Atlantis lacks arable land. This follows the theory of comparative advantage, and we can say that engaging in free trade benefits all countries that participate in it. Which of the following is an inaccurate assumption on which this conclusion is based?

We have assumed that agrarian nations do not specialize in producing fertilizers

Which of the following statements is true about voluntary export restraints (VERs)?

When imports are limited to a low percentage of the market by a VER, the price is bid up for that limited foreign supply.

Which of the following instances indicates that the dollar is selling at a premium on the 30-day forward market?

When the current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥130 after 30 days

Which of the following was being determined by the research that led to the development of the theory of national competitive advantage?

Why some countries succeed and others fail in international competition

A country is said to have a(n) _____ advantage in production when it is more efficient than any other country in producing a product or service.

absolute

A country is said to have a(n) _____ in the production of a product when it is more efficient than any other country in producing that product.

absolute advantage

The difference between Ricardo's theory and the Heckscher-Ohlin theory is that the Heckscher-Ohlin theory:

actually predicts trade patterns with greater accuracy.

______ investment refers to foreign countries investing in your domestic country.

inward

A(n) _____ requires that some specific fraction of a good must be produced domestically.

local content requirement

Vernon theorizes that, as the market in the United States and other advanced nations matures, the product becomes more standardized, and _____ becomes the main competitive weapon.

price

The _____ view of FDI traces its roots to Marxist political and economic theory.

radical

________countries' governments are sometimes concerned that large foreign MNEs working in the country will become more powerful than local competitors.

recipient

Vernon argues that early in the life cycle of a typical new product, while demand is starting to grow rapidly in the United States, demand in other advanced countries:

remains limited to high income groups.

What factors are important to future exchange rates?

1. A country's price inflation 2. A country's interest rate 3. Market psychology

What are the two forms of FDI?

1. A greenfield investment - the establishment of a wholly new operation in a foreign country 2. Acquisition or merging with an existing firm in the foreign country

What is the function of the foreign exchange market?

1. Enables the conversion of the currency of one country into the currency of another 2. Provides some insurance against foreign exchange risk: the adverse consequences of unpredictable changes in exchange rates

How should exchange rate forecasts be prepared?

1. Fundamental analysis - draws upon economic factors like interest rates, monetary policy, inflation rates, or balance of payments information to predict exchange rates 2. Technical analysis - focuses on trends and believes that past trends and waves are reasonable predictors of future trends and waves

Why do governments intervene in trade?

1. Political arguments: concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers) 2. Economic arguments: concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers)

Why is retaliation by government intervention a risky strategy?

A country that is being pressured may respond to the imposition of punitive tariffs by raising trade barriers of its own.

A company that establishes a new operation in a foreign country has made

A greenfield investment

Which country recently received more FDI inflows than all EU countries together?

China

One of the top currency traders in the FOREX is ______.

Citi

This country is a member of the Caribbean Community (CARICOM)

Barbados

The _____ in the United States specifies that government agencies must give preference to U.S. products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage.

Buy America Act

Which of the following statements best indicates Samuelson's criticism of free trade?

By importing cheap goods from a poor country a rich country may not be able to produce a net gain if the dynamic effect of free trade is to lower real wage rates in the rich country.

This is the abbreviation for the Common Market for Eastern and Southern Africa.

COMESA

In which South American country did Walmart acquire a supermarket chain

Chile

_____ refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

Currency swap

The _______ union is one step further along the road to full economic and political integration. A customs union eliminates trade barriers between member countries and adopts a common external trade policy.

Customs

Why has FDI grown more rapidly than world trade?

Executives of business firms see FDI as a way of circumventing future trade barriers

Who is the proponent of the theory of comparative advantage?

David Ricardo

This member of the EU doesn't use the euro.

Denmark

Which of the following formed the crux of Porter's 1990 study of national competitive advantage?

Determining how a country achieves international success in a particular industry

Where did the last WTO round of trade negotiations launch?

Doha

This is the abbreviation for the Economic Community of West African States.

ECOWAS

The most enduring free trade area in the world

EFTA

An ______ union entails even closer economic integration and cooperation than a common market

Economic

How well does PPP theory work?

Empirical testing of the PPP theory indicates that it is not completely accurate in estimating exchange rate changes in the short run, but is relatively accurate in the long run

______ occurs when a firm invests directly in facilities to produce or market a product in a foreign country

FDI

This is a market for converting one country's currency into another's.

FOREX

Which of the following is one of the four factors included in Porter's diamond?

Firm strategy, structure, and rivalry

How can a firm reduce economic exposure?

Firms need to distribute productive assets to various locations to avoid long-term financial problems associated with changes in exchange rates

In a _____trade area all barriers to the trade of goods and services among member countries are removed.

Free

Which of the following terms best represents a situation in which a government does not attempt to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country?

Free trade

Where was the GATT established in 1947?

Geneva

Which of the following groups benefits the most from the imposition of tariffs?

Government and domestic producers

Which theory argues that the pattern of international trade is determined by differences in national factor endowments?

Heckscher-Ohlin

This act allows Americans to sue foreign firms that use property in Cuba confiscated from them after the 1959 revolution.

Helms-Burton

Who claimed that, in the long run, no country could sustain a surplus on the balance of trade?

Hume

Who showed why exporting in return for gold could not increase a country's wealth?

Hume

Who benefits from import quotas and voluntary export restraints?

Import quotas and voluntary export restraints benefit domestic producers by limiting import competition, but they raise the prices of imported goods for consumers

Which of the following statements is true about import quotas?

Import quotas benefit domestic producers by limiting import competition.

Which argument for government intervention suggests that an industry should be protected until it can develop and be viable and competitive internationally?

Infant industry

Which of the following is a variable used in exchange rate forecasting models based on fundamental analysis?

Inflation rate

Which of the following factors is taken into consideration by David Ricardo's theory of comparative advantage in order to explain the pattern of international trade?

International differences in labor productivity

Which of the following is a reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately?

It assumes away transportation costs and trade barriers

Which of the following is a drawback of the purchasing power parity theory?

It does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years.

Which of the following is a major reason why many economists remain critical of the infant industry argument?

It makes the domestic industry inefficient.

Which of the following is true of a country that is running a deficit on a balance-of-payments current account?

It may result in depreciation of the country's currency on the foreign exchange market.

Who is the leading academic in the development of new trade theory?

Krugman

Who pointed out that, contrary to the Heckscher-Ohlin theory, U.S. exports were less capital-intensive than U.S. imports?

Leonef

Advantages that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets are

Location advantages

______ is the largest geographic trading center in the world

London

By signing the _______ Treaty in 1991, the EU committed to adopting a single currency, the euro, by January 1, 1999.

Maastricht

What are the costs of the euro?

Membership implies a loss of control over monetary policy The EU is not an optimal currency area: an area where similarities in the underlying structure of economic activities make it feasible to adopt a single currency and use a single exchange rate as an instrument of macro-economic policy -- Countries may react differently to changes in the euro

The Republic of Argonia, owing to it's vast resources of arable land and fresh water, is an agrarian nation. It exports agricultural products and in turn imports products that it does not produce such as oil, machinery, computers, and electronic devices. The result is that it spends more on imports than what it gains from exports. Which of the following theories prohibits such international trade?

Mercantilism

What are the benefits of NAFTA?

Mexico: • Increased jobs as low cost production moves south and more rapid economic growth The U.S. and Canada: • Access to a large and increasingly prosperous market and lower prices for consumers from goods produced in Mexico • U.S. and Canadian firms with production sites in Mexico are more competitive in world markets

Which of the following statements is true?

Over the years, there has been a marked increase in the stock and flow of FDI

The ____ theory predicts that exchange rates are determined by relative prices and that changes in relative prices will result in a change in exchange rates.

PPP

_____ argued that in certain circumstances the theory of comparative advantage predicts that a rich country might be worse off by switching to a free trade regime with a poor nation.

Paul Samuelson

Who introduced national competitive advantage theory?

Porter

Which of the following is the most common political argument for government intervention in international trade?

Protecting jobs and industries from unfair foreign competition

Which of the following is most likely to be an objective of export tariffs?

Reducing exports from a sector, often for political reasons

Why is regional economic integration important to international companies?

Regional economic integration means that markets that had been protected from foreign competition are increasingly open • EU and NAFTA However, regional economic integration is likely to increase competition

A country Cadmia, which is a leading producer of bauxite, had to impose trade sanctions on Cerian soda cans in order to get the government of Ceria to enforce export restrains. This imposition by Cadmian government was undertaken to protect domestic producers of soda cans. Which of the following government intervention is being used by Cadmia?

Retaliation

Who wrote the book The Principles of Political Economy?

Ricardo

Who wrote the book The Principles of Political Economy?

Ricardo

Palladia specializes in the production of beef and produces beef more efficiently than any other country. It buys wheat, which it produces less efficiently than beef, from Rhodia, even though it produces wheat more efficiently than Rhodia. Which of the following theories of international trade support Palladia's decision to buy wheat from Rhodia?

Ricardo's theory of comparative advantage

A country that is a member of European Union:

Romania

Who argued that, contrary to the standard interpretation, in certain circumstances the theory of comparative advantage predicts that a rich country might actually be worse off by switching to a free trade with a poor nation?

Samuelson

Meitneria and Seaboria specialize in the production of heavy machinery and textiles respectively. While Meitneria doesn't produce textiles, Seaboria is not as technologically advanced as Meitneria. In this situation, according to the Heckscher-Ohlin theory:

Seaboria will recruit experts from Meitneria to specialize in the production of heavy machinery.

Which of the following industries is most likely to come under the purview of national security?

Semiconductors

According to ______, a country has an absolute advantage in production when it is more efficient than any other country in producing a good or service.

Smith

A tariff levied as a fixed charge for each unit of a good imported is a(n)

Specific tariff

How successful has NAFTA been?

Studies of NAFTA's early impact suggest that both advocates and detractors may have been guilty of exaggeration • Trade between the three countries increased by 250% • The members have become more integrated • Productivity has increased in member nations • Employment effects have been small • Mexico initially became more politically stable, but drug related violence remains a problem

_____ take many forms including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms.

Subsidies

This is a government payment to a domestic producer.

Subsidy

______ refers to exchanging principal and interest in one currency for principal and interest in another currency.

Swap

Why do governments impose tariffs?

Tariffs: • Increase government revenues • Provide protection to domestic producers against foreign competitors by increasing the cost of imported foreign goods • Force consumers to pay more for certain imports

How do interest rates affect exchange rates?

The Fisher Effect states that a country's nominal interest rate (i) is the sum of the required real rate of interest (r ) and the expected rate of inflation over the period for which the funds are to be lent (I) • In other words, i = r + I So, if the real interest rate is the same everywhere, any difference in interest rates between countries reflects differing expectations about inflation rates

On which of the following observations was Raymond Vernon's product life-cycle theory based?

The United States developed a very large proportion of the world's new products for most of the twentieth century and sold them first in the U.S. market.

How are exchange rates influenced by investor psychology?

The bandwagon effect occurs when expectations on the part of traders turn into self-fulfilling prophecies, and traders join the bandwagon and move exchange rates based on group expectations • Governmental intervention can prevent the bandwagon from starting, but is not always effective

What are the benefits and costs of FDI?

The benefits and costs of FDI must be explored from the perspective of both the host (receiving) country and the home (source) country

Which of the following is true when a government is strongly committed to controlling the rate of growth in money?

The country's economy will be marked by an abundance of liquidity.

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days?

The dollar will appreciate against the euro.

Should companies invest in exchange rate forecasting services to help with decision-making?

The efficient market school: forward exchange rates are the best predictors of future spot exchange rates • Investing in forecasting services is a waste of money The inefficient market school: companies should invest in forecasting services • Forward rates are not the best predictor of future spot rates

Why do countries limit currency convertibility?

The main reason is to preserve foreign exchange reserves and prevent capital flight: when residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency In the case of a nonconvertible currency, firms may turn to countertrade (barter like agreements by which goods and services can be traded for other goods and services) to facilitate international trade

Which of the following is one of the limitations of exporting that leads companies to prefer FDI over exporting?

The presence or threat of trade barriers

The Palladian government required that all imported products that came from Lovaskiya be checked by Palladian customs inspectors. The inspection was done at a container freight station that was both remote and poorly staffed. This delayed the Lovaskiyan consignment from reaching the consumers in Palladia. The inspection strategy adopted by the customs officers in Palladia is an example of a(n):

administrative trade policy.

In most countries, which industry tends to benefit most from subsidies?

agriculture

It more realistic to assume diminishing returns to specialization when applying the theory of comparative advantage to a simplified model with two nations because:

all resources are not of the same quality

______ refers to the simultaneous buying and selling of foreign currencies with the intention of making profit from the differences between the exchange rates in different markets.

arbitrage

Administrative trade policies are _________ rules designed to make it difficult for imports to enter a country.

bureaucratic

______ trade involves borrowing in one currency for which interest rates are low and then using the proceeds to invest in another currency for which interest rates are high.

carry

Because they must pay more for certain imports, ______ are damaged the most by tariffs.

consumers

Tariffs cause damage to _____ as they must pay more for certain imports.

consumers

______ refers to a range of barterlike agreements by which goods and services can be traded for other goods and services. It can be used in international trade when a country's currency is nonconvertible.

countertrade

Historically, most FDI has been directed to _______ countries.

developed

FDI is risky because of the problems associated with:

doing business in a different culture where the rules of the game may be very different.

The most traded currency by value in the world is the ______.

dollar

______ refers to selling goods in a foreign market below their costs of production (below their "fair" market value).

dumping

The _____ states that combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI and it also requires the firm to establish production facilities where those foreign assets or resource endowments are located

eclectic paradigm

According to the Heckscher-Ohlin theory, the pattern of international trade is determined by differences in factor _____.

endowments

This is the common currency of the European Union

euro

A country's currency is said to be _____ when the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.

externally convertible

According to the Heckscher-Ohlin theory, the pattern of international trade is determined by differences in _____.

factor endowments

______ is the amount of FDI undertaken over a given period (normally a year).

flow

A computer manufacturing firm from the United States invests in a microprocessor manufacturing plant in Taiwan. This is an example of:

foreign direct investment.

"This is a contract between two countries in which Country 1 delivers a specified amount of foreign currency to Country 2 at a specified date, and Country 2 pays Country 1 in its domestic currency at the price agreed upon in the contract.

forward

______ refers to the absence of government-imposed barriers to the free flow of goods and services between countries.

free trade

This refers to a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today, with delivery and payment occurring at a specified future date.

futures

By lowering production costs, subsidies help domestic producers in:

gaining export markets.

According to the principle assertion of mercantilism, ______ is the mainstay of a country's wealth and is essential to vigorous commerce

gold

Considered to be the first theory of international trade, the principal assertion of mercantilism is that:

gold and silver are the mainstays of a country's wealth and essential to vigorous commerce.

What is one party that gains from high tariffs?

government

The investment of a wholly new operation in a foreign country is referred to as ______.

green field

According to the _________ industry argument, many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with well-established industries in these countries.

infant

______ advocates that countries should simultaneously encourage exports and discourage imports.

mercantilism

A firm becomes a(n) _____, once it undertakes FDI.

multinational enterprise

The tendency to aggressively court FDI believed to be in a country's national interest is an aspect of pragmatic ______.

nationalism

If both residents and non-residents are prohibited from converting their holdings of domestic currency into a foreign currency, the currency is considered ______.

non convertible

What is foreign direct investment?

occurs when a firm invests directly in new facilities to produce or market in a foreign country

This refers to a contract or financial instrument that gives holder the right, but not the obligation, to sell or buy a given quantity of an asset as a specified price at a specified future date.

option

One of the key assumptions of the Heckscher-Ohlin theory is that:

resources can move freely from the production of one good to another within a country.

These tariffs are levied as a fixed charge for each unit of a good imported.

specific

______ is the daily exchange rate for a currency.

spot

The United States has been an attractive target for FDI partly because of its:

stable and dynamic economy.

This is the oldest instrument of trade policy that the GATT and WTO have successfully limited.

tariffs

U.S. exports are less capital-intensive than U.S. imports, despite the relative abundance of capital in the country. This phenomenon that runs contrary to the prediction of the Heckscher-Ohlin theory is termed as _____.

the Leontief paradox

A firm is most likely to favor foreign direct investment over exporting when:

the firm wishes to maintain control over its operations and business strategy.

The stock of foreign direct investment refers to:

the total accumulated value of foreign-owned assets at a given time

How can firms minimize translation and transaction exposure?

• Buy forward • Use swaps • Lead and lag payables and receivables: paying suppliers and collecting payment from customers early or late depending on expected exchange rate movements

What does the foreign exchange market mean for international firms?

• Firms must understand the influence of exchange rates on the profitability of trade and investment deals • This exchange rate risk can be divided into 1. Transaction exposure 2. Translation exposure 3. Economic exposure

What are the benefits of the euro?

• Handling one currency, rather than many • Easier to compare prices across Europe • Increased competition promotes greater efficiencies in production • The pan-European capital market should further develop • Range of investment options open both to individuals and institutions should increase

What are the drawbacks of NAFTA?

• Jobs could be lost and wage levels could decline in the U.S. and Canada • Mexican workers could emigrate north • Pollution could increase due to Mexico's more lax standards • Mexico would lose its sovereignty

Should NAFTA accept new members?

• Several other Latin American countries have indicated their desire to eventually join NAFTA • Currently both Canada and the U.S. are adopting a wait and see attitude with regard to most countries

Is regional economic integration a good thing?

• There is some concern that the world is moving toward a situation in which a number of regional trade blocks compete against each other • In this scenario, the gains from free trade within blocs could be offset by a decline in trade between blocs