INT BUSS Exam 2

trade creation Trade creation 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.

During the NAFTA era, Tandey Manufacturing used to buy all of its component parts from a local plant in Springfield, Illinois, but after a few years, the company decided to buy the parts from a lower-cost facility located in Mexico. This is an example of retaliatory trade action. trade diversion. dumping strategic pricing. trade creation.

It makes it easier to compare prices across Europe. The adoption of a common currency makes it easier to compare prices across Europe. This has been increasing competition because it has become easier for consumers to shop around.

Earth Drivers Inc. sells construction equipment throughout the euro zone. The company has noticed that some customers travel to countries where equipment sells for less to obtain a better deal. What implication of adopting the euro as a common currency does this situation demonstrate? It makes it easier to compare prices across Europe. It makes Europe an optimal currency area. It leads to higher prices in Europe. It decreases competition in Europe. It increases the profit margins of European producers.

exporting Exporting involves producing goods at home and then shipping them to the receiving country for sale.

Fast Tracker Inc., a U.S.-based company, makes custom wearable fitness trackers in Oregon, which are then shipped to Europe for sale there. Based on this information, Fast Tracker Inc. is involved in licensing. exporting. franchising. outsourcing. using a greenfield investment.

arbitrage Arbitrage is the purchase of securities in one market for immediate resale in another to profit from a price discrepancy.

Freeman Fabricators International purchased securities on the London Stock Exchange and then immediately resold them on the New York Stock Exchange at a higher price. The profits from this transaction were used to buy new equipment for the company. This company engaged in a currency swap. a carry trade. an option. countertrade. arbitrage.

He pulled the United States out of these negotiations. Under President Obama, the United States was pursuing two major multilateral trade agreements: the Trans Pacific Partnership (TPP) with 11 other Pacific Rim countries (including Australia, New Zealand, Japan, South Korea, Malaysia, and Chile) and the Transatlantic Trade and Investment Partnership (TTIP) with the European Union. However, President Trump, who appears to be opposed to free trade, pulled the United States out of the TPP and negotiations on the TTIP have been put on hold.

How did President Trump react to the two multilateral trade agreements, the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership, which were being pursued by the Obama administration? He pulled the United States out of these negotiations. He attempted to expand these agreements to include other nations. He quickly signed the agreements after taking office. He asked that the United States control more than 50 percent of the involved nations. He agreed that even more multilateral trade agreements should be established.

banking crisis A banking crisis refers to a loss of confidence in the banking system that leads to a run on banks, as individuals and companies withdraw their deposits.

Images from the Great Depression included lines of people standing at their financial institution waiting to withdraw their money because they didn't trust the money would be there when they needed it. What was this an example of? a political crisis a banking crisis an exchange rate crisis a foreign debt crisis a currency crisis

common market With the signing of the Treaty of Rome in 1957, the European Community (EC) was established. The Treaty of Rome provided for the creation of a common market.

The Treaty of Rome provided for the establishment of a(n) customs union. political union. common market. democratic market. economic union.

the US dollar To understand why the system collapsed, one must appreciate the special role of the U.S. dollar in the system. As the only currency that could be converted into gold and as the currency that served as the reference point for all others, the dollar occupied a central place in the system.

Under the fixed exchange rate regime established at Bretton Woods, __________ served as the reference point for all other currencies. the British pound gold the Mexican peso silver the U.S. dollar

free trade area In a free trade area, all barriers to the trade of goods and services among member countries are removed. Each country, however, is allowed to determine its own trade policies with regard to nonmember

When Norway, Iceland, Liechtenstein, and Switzerland established the EFTA, all barriers to the free flow of goods and services between the countries were removed. Member nations were allowed to determine the level of trade protection for goods coming from all other nations. What level of economic integration does this represent? common market political union free trade area customs union economic union

FDI should be allowed so long as the benefits outweigh the costs. In practice, many countries have adopted neither a radical policy nor a free market policy toward FDI but instead a policy that can best be described as pragmatic nationalism. The pragmatic nationalist view is that FDI has both benefits and costs. According to this view, FDI should be allowed so long as the benefits outweigh the costs.

A country that relies on the pragmatic nationalist view would say that international production should be distributed among countries according to the theory of comparative advantage. FDI should be allowed so long as the benefits outweigh the costs. no country should ever permit foreign corporations to undertake FDI.FDI is a benefit to both the source country and the host country. the multinational enterprise (MNE) is an instrument of imperialist domination.

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

A currency is considered freely convertible when both residents and nonresidents are allowed to purchase a limited amount of a foreign currency with it. only residents may convert it into a foreign currency without any limitations. only nonresidents may convert it into a foreign currency without any limitations. neither residents nor nonresidents are allowed to convert it into a foreign currency. the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.

results in the licensee bearing the costs and risks. When a firm exports, it need not bear the costs associated with FDI, and it can reduce the risks associated with selling abroad by using a native sales agent. Similarly, when a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks.

A firm might justify a preference for licensing over FDI because licensing results in the licensor retaining control over technical know-how. gives the licensor tight control over the operations of the licensee in the foreign nation. allows the firm to take advantage of differences in factor costs across countries. reduces the potential risks of creating a future competitor. results in the licensee bearing the costs and risks.

imports within the quota. A common hybrid of a quota and a tariff is known as a tariff rate quota. Under a tariff rate quota, a lower tariff rate is applied to imports within the quota than those over the quota.

A tariff rate quota provides a lower tariff rate to all imports in a specific industry. imports within the quota. only domestic producers. agricultural products. imports that are over the quota.

specific tariff Specific tariffs are levied as a fixed charge for each unit of a good imported (e.g., $3 per barrel of oil). Ad valorem tariffs are levied as a proportion of the value of the imported good.

A tax of 14 cents is levied for each ceramic plate imported into a nation. This is an example of a(n) quota rent. specific tariff. ad valorem tariff. import quota. local content requirement.

quota rent The extra profit that producers make when supply is artificially limited by an import quota is referred to as a quota rent.

A(n) __________ refers to the extra profit that producers make when supply is artificially limited by an import quota. profit margin net profit import profit trade surplus quota rent

managed-float Other countries, while not adopting a formal pegged rate, try to hold the value of their currency within some range against an important reference currency such as the U.S. dollar or a "basket" of currencies. This is often referred to as a managed float system or a dirty-float system. It is a float because, in theory, the value of the currency is determined by market forces, but it is a managed (or dirty) float (as opposed to a clean float) because the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency if it depreciates too rapidly against an important reference currency.

A(n) __________ system refers to one in which a country's currency is nominally allowed to float freely against other currencies but in which the government will intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value. fixed float managed-float floating exchange rate pegged exchange rate clean float

Fisher effect 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 the two countries.

According to the __________, there is a strong relationship between inflation rates and interest rates. law of one price purchasing power parity theory efficient market hypothesis Fisher effect theory of demand

location-specific advantages The eclectic paradigm has been championed by the British economist John Dunning. Dunning argues that location-specific advantages are also of considerable importance in explaining both the rationale for and the direction of foreign direct investment.

According to the eclectic paradigm, __________ is/are of considerable importance in explaining both the rationale for and the direction of foreign direct investment. supply and demand multipoint competition location-specific advantages internalization theory human rights

franchising

Dipper Donuts licenses its brand name to foreign firms as long as they agree to run their restaurants on exactly the same lines as Dipper Donuts restaurants elsewhere in the world. In return, the foreign firms have to pay Dipper Donuts a percentage of their profits. This is an example of exporting. strategic alliance. franchising. a greenfield investment. offshoring.

floating rates help adjust trade imbalances. Those in favor of floating exchange rates argue that floating rates help adjust trade imbalances. Critics question the closeness of the link between the exchange rate and the trade balance. They claim trade deficits are determined by the balance between savings and investment in a country, not by the external value of its currency. In other words, a depreciating exchange rate will not boost exports and reduce imports, as advocates of floating rates claim; it will simply boost price inflation.

Advocates of the floating rate system argue that floating rates boost exports. floating rates help adjust trade imbalances. there is no connection between the floating rate system and trade balance. floating rates boost imports. floating rates help keep inflation rates close to zero.

countertrade Countertrade refers to a range of barter-like agreements by which goods and services can be traded for other goods and services.

An American company sold construction equipment to the government of Singapore. Instead of receiving payment in U.S. dollars, the company agreed to take payment in the form of goods. This is an example of short selling. countertrade. capital flight. a carry trade. arbitrage.

carry trade The carry trade involves borrowing in one currency where interest rates are low, and then using the proceeds to invest in another currency where interest rates are high.

Assume that the interest rate on borrowings in Chile is 4 percent, but the interest rate on deposits in British banks is 8 percent. A trader borrows 1 million Chilean pesos, then converts the money into British pounds and deposits it in a British bank. What is the trader involved in? countertrade carry trade purchasing power parity forward exchange arbitration

Mergers and acquisitions are quicker to execute than greenfield investments. Mergers and acquisitions are quicker to execute than greenfield investments. This is an important consideration in the modern business world where markets evolve very rapidly. Many firms apparently believe that if they do not acquire a desirable target firm, then their global rivals will.

Custom Cabinetry International needs immediate access to wood in order to produce an order of 50,000 high-end retail display cases by the end of next year. It cannot afford to wait and establish a new operation in a foreign country where this species of wood is prevalent, so it decides to purchase an existing company instead. Why did Custom Cabinetry decide to make this purchase? A greenfield investment will provide quickest access to the steel forms. FDI flows are similar between developed and developing nations. Mergers and acquisitions are quicker to execute than greenfield investments. The higher percentage of mergers and acquisitions in developing nations compared to developed nations indicate the low valuation of target firms in developing countries. It is easier and less risky for a firm to build up through a greenfield investment rather than through acquisitions.

allowed to move freely because there are no restrictions on cross-border flows of capital. The next level of economic integration, a 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. Labor and capital are free to move because there are no restrictions on immigration, emigration, or cross-border flows of capital among member countries.

In a common market, labor and capital are the means to establishing a customs union. allowed to move freely because there are no restrictions on cross-border flows of capital. controlled by the government. restricted due to restrictions on immigration and emigration. quickly depleted since member nations must limit activities to other member nations.

Fixed Still other countries have operated with a fixed exchange rate, in which the values of a set of currencies are fixed against each other at some mutually agreed-on exchange rate.

In countries that adopt a __________ exchange rate system, the values of currencies are set against each other at some mutually agreed-on exchange rate. clean float floating fixed dirty-float pegged

subsidies A subsidy is a government payment to a domestic producer. Subsidies take many forms, including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms.

In order to encourage the wine production industry, the Italian government provided low-interest loans for the purchase of equipment and plants. The government also gave cash grants and made tax reductions. Which instrument of trade policy is being used by the Italian government? tariffs voluntary export restraints subsidies local content requirements import quotas

fundamental analysis Fundamental analysis draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements. The variables contained in these models typically include those we have discussed, such as relative money supply growth rates, inflation rates, and interest rates. In addition, they may include variables related to balance-of-payments positions.

In terms of the approaches to exchange rate forecasting, __________ draws on economic theory to construct sophisticated econometric models that are used to predict exchange rate movements. chart analysis technical analysis behavioral equilibrium model fundamental analysis portfolio balance model

flow The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year).

It is one of Sanjay's job responsibilities to report the amount of foreign direct investment undertaken by the government over a one-year time period. Sanjay reports the __________ of FDI. stock bundle flow portfolio ratio

European Parliament 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 is the job of the __________ to debate legislation proposed by the commission. However, it is more of a consultative rather than a legislative body. European Council. European Commission. Court of Justice. European Community. European Parliament.

free trade policy Most economists would probably argue that the best interests of international business are served by a free trade stance but not a laissez-faire stance. It is probably in the best long-run interests of the business community to encourage the government to aggressively promote greater free trade by, for example, strengthening the WTO. Business probably has much more to gain from government efforts to open protected markets to imports and foreign direct investment than from government efforts to support certain domestic industries in a manner consistent with the recommendations of strategic trade policy.

Most economists would agree that the best interests of international business are found in a nation with a laissez-faire policy. command economy. free trade policy. planned economy. mercantilist view.

the home country's balance of payments benefits from the inward flow of foreign earnings. The benefits of FDI to the home (source) country arise from three sources. First, the home country's balance of payments benefits from the inward flow of foreign earnings. FDI can also benefit the home country's balance of payments if the foreign subsidiary creates demands for home country exports of capital equipment, intermediate goods, complementary products, and the like.

One of the main benefits that FDI provides to the home country is the home country's balance of payments benefits from the inward flow of foreign earnings. FDI benefits the home country by substituting domestic production. FDI increases employment in the home country in the short run. the balance of payments position improves from the initial capital outflow required to finance the FDI. the demand for exports from the home country will reduce in the long run.

hedging When a firm insures itself against foreign exchange risk, it is engaging in hedging.

Shreya is the chief financial officer for Home Safe Security Inc. Her company is interested in investing in a facility in Indonesia, but she is worried about unpredictable fluctuations in future exchange rates, which could cost her company millions of dollars. One way to ensure against this exchange risk is for Shreya to use forecasting. hedging. currency speculation. countertrade. arbitrage.

nontariff A fall in tariff barriers in recent decades has been accompanied by a rise in nontariff barriers, such as subsidies, quotas, voluntary export restraints, and antidumping duties.

Subsidies and quotas are examples of __________ barriers a county might impose. antidumping tariff nontariff content requirements export restraint

International Monetary Fund and the World Bank The agreement reached at Bretton Woods established two multinational institutions—the International Monetary Fund (IMF) and the World Bank.

The Bretton Woods agreement created which two multinational institutions? United Nations and the World Bank World Trade Organization and the International Monetary Fund World Bank and the G20 International Monetary Fund and the World Bank United Nations and the World Trade Organization

subsidies The historically high tariff rates on agricultural products reflect a desire to protect domestic agriculture and traditional farming communities from foreign competition. In addition to high tariffs, agricultural producers also benefit from substantial subsidies. According to estimates from the Organisation for Economic Co-operation and Development (OECD), government subsidies on average account for about 17 percent of the cost of agricultural production in Canada, 21 percent in the United States, 35 percent in the European Union, and 59 percent in Japan.

The U.S. agriculture industry has long-benefited from high tariff rates and _____ that protect domestic agriculture and traditional farming communities. VERs quotas subsidies quota rent ad valorem tariffs

trade diversion Trade diversion occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area.

The United States imports sugar from several nations. If the NAFTA agreement caused the United States to import sugar only from Canada, even though it cost more to do so, it would be an example of dumping. trade diversion. trade creation. retaliatory trade action. a political union.

help finance the building of Europe's economy by providing low-interest loans. The official name for the World Bank is the International Bank for Reconstruction and Development (IBRD). When the Bretton Woods participants established the World Bank, the need to reconstruct the war-torn economies of Europe was foremost in their minds. The bank's initial mission was to help finance the building of Europe's economy by providing low-interest loans.

The World Bank's initial mission was to maintain order in the international monetary system. help finance the building of Europe's economy by providing low-interest loans. promote a floating exchange rate system. promote world peace. revive the gold standard system.

infant industry The infant industry argument is by far the oldest economic argument for government intervention and was proposed by Alexander Hamilton in 1792. According to this argument, to allow manufacturing to get a toehold, governments should temporarily support new industries (with tariffs, import quotas, and subsidies) until they have grown strong enough to meet international competition.

The __________ argument was proposed by Alexander Hamilton in 1792 and is by far the oldest economic argument for government intervention. infant industry strategic trade policy consumer protection national security retaliation

threat Just as the emergence of single markets creates opportunities for business, it also presents a number of threats. For one thing, the business environment within each grouping has become more competitive. The lowering of barriers to trade and investment among countries has led to increased price competition throughout the EU and NAFTA.

The creation of a single market increases price competition for business. In other words, it creates a(n) opportunity. threat. strength. dynamism. weakness.

Floating Floating exchange rate refers to a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand. Four of the world's major trading currencies—the U.S. dollar, the European Union's euro, the Japanese yen, and the British pound—are all free to float against each other.

The exchange rate for converting the U.S. dollar into other currencies is continuously adjusted depending on the laws of supply and demand. This illustrates a __________ exchange rate. flexible pegged dirty-float fixed floating

economic exposure Economic exposure is the extent to which a firm's future international earning power is affected by changes in exchange rates.

The extent to which a firm's future international earning power is affected by changes in exchange rates is known as economic exposure. carry trade. translation exposure. countertrade. transaction exposure.

economic union Like the common market, an 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.

The harmonization of member nations' tax rates plus a common monetary and fiscal policy are all required to form a(n) customs union. free trade area. common market. economic union. planned economy.

a combination of government intervention and speculative activity. An obvious implication with regard to currency management is that companies must recognize that the foreign exchange market does not work quite as depicted in Chapter 10. The current system is a mixed system in which a combination of government intervention and speculative activity can drive the foreign exchange market. Companies engaged in significant foreign exchange activities need to be aware of this and to adjust their foreign exchange transactions accordingly.

The investment manager at Solar Electric Inc. reminds the board that the foreign exchange market is a mixed system. The investment manager wants the board to realize that rates are driven by dynamic competitive forces. supply and demand. the interplay of big business and Western practices. a combination of government intervention and speculative activity. the globalization of developing nations.

the bandwagon effect The bandwagon effect refers to the movement of traders like a herd, all in the same direction and at the same time, in response to each other's perceived actions.

The movement of traders like a herd, all in the same direction and at the same time, in response to each other's perceived actions, is called the Sullivan principle. capital flight. the bandwagon effect. the Fisher effect. the spot effect.

encouraging outward FDI by a home country. Many investor nations now have government-backed insurance programs to cover major types of foreign investment risk. The types of risks insurable through these programs include the risks of expropriation (nationalization), war losses, and the inability to transfer profits back home. Such programs are particularly useful in encouraging firms to undertake investments in politically unstable countries.

When a nation puts government-backed insurance programs in place to cover major types of foreign investment risk, it has the effect of encouraging inward FDI by a host country. restricting inward FDI by a host country. encouraging outward FDI by a home country. restricting outward FDI by a home country. restricting outward FDI by a host country.

moral hazard A criticism of the IMF is that its rescue efforts are exacerbating a problem known to economists as moral hazard. Moral hazard arises when people behave recklessly because they know they will be saved if things go wrong.

When companies behave recklessly because they know they will be saved by a government bail-out if things go wrong, it is called a prisoner's dilemma. lemon law. moral hazard. currency crisis. dirty float.

local content requirement A local content requirement (LCR) is a requirement that some specific fraction of a good be produced domestically. The requirement can be expressed either in physical terms (e.g., 75 percent of component parts for this product must be produced locally) or in value terms (e.g., 75 percent of the value of this product must be produced locally).

When the management team reviewed its government contract on office chairs, they noticed that in order to bid on the project, at least 37 percent of the value of the office chairs had to be produced in the United States. This stipulation is an example of a(n) antidumping policy. voluntary export restraint. administrative trade policy. local content requirement. ad valorem tariff.

World Trade Organization The Uruguay Round went into effect July 1, 1995, and contained the provisions that the World Trade Organization was to be created to implement the GATT agreement.

Which organization was created to implement the GATT agreement? World Trade Organization United Nations World Bank International Monetary Fund Department of Justice

radical view The radical view traces its roots to Marxist political and economic theory. Radical writers argue that the multinational enterprise (MNE) is an instrument of imperialist domination. They see the MNE as a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.

Which political ideology reflects the idea that a multinational enterprise is an instrument of imperialist domination? free market mercantilism pragmatic nationalism radical view planned economy

a forward exchange A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

__________ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. A currency swap Carry trade A forward exchange Currency speculation A spot exchange