IBUS Exam 2

Which statement supports the theory of comparative advantage?

Global production is greater with unrestricted free trade than it is with restricted trade.

Which observation about subsidies is true?

Government subsidies must be paid for, typically by taxing individuals and corporations.

A capital-intensive country exports products that are capital intensive. Which theory is this an example of?

Heckscher-Ohlin

What will happen if a country increases its money supply rapidly under a fixed exchange rate regime?

Imports will become less attractive in that country.

Which statement concerning a voluntary export restraint is true?

It benefits domestic producers by limiting import competition.

Which observation concerning Knickerbocker's theory is true?

It does not explain why the first firm in an oligopoly decides to undertake FDI rather than to export or license.

A government intervenes to help firms and industries establish a competitive advantage. What may happen as a result of this action?

It may invite retaliation and trigger a trade war.

Advanced Marketing Software has decided not to license its software products for fear that doing so will allow competitors to access the company's advanced computing framework. Because of this, the company decides that FDI will better suit its needs for expansion. Which economic theory does this represent?

Knickerbocker's theory

Country A specializes in the production of copper and produces it more efficiently than any other country. It buys wheat, which it produces less efficiently than copper, from Country B, even though it produces wheat more efficiently than Country B. Which theory of international trade supports Country A's decision to buy wheat from Country B?

Ricardo's theory of comparative advantage

A U.S.-based company today invests some of its spare cash in a German money market account that will earn 8 percent for two months. Which of the following, if it happens during the next two months, would imply that the company will earn less than 8 percent on its investment?

The dollar appreciates against the German euro.

If the demand for dollars outstrips its supply and if the supply of Japanese yen is greater than the demand for it, what will happen?

The dollar will appreciate against the yen.

If the textile industry in a nation is characterized by vigorous domestic rivalry, which observation of this nation's international competency is most likely to be true?

The nation's textile firms will have a competitive advantage in international trade.

What will happen, according to Paul Samuelson's critique, if a rich country enters into a free trade agreement with a poor country?

The poor country will rapidly improve its productivity.

Assume that a European nation operates under a fixed exchange rate regime. What would occur if this nation rapidly increased its money supply by printing more currency?

The prices of imports would become more attractive in the country.

Suppose Australia exports lithium-ion batteries to almost every country in the world except Japan because Japan's customs inspectors insist on testing every battery to ensure it works. This would be an example of which trade barrier?

administrative trade policies

Assume that the yen/dollar exchange rate quoted in Tokyo at 3:00 p.m. is ¥120 = $1, and the yen/dollar exchange rate quoted in New York at the same time is ¥123 = $1. A dealer in New York uses dollars to purchase yen and then immediately sells the yen to buy dollars in Tokyo, thereby making a profit. The dealer has engaged in

an arbitrage.

A country wants to hold its currency against the U.S. dollar without a formal pegged rate. The central bank of the country will intervene in the foreign exchange market to maintain the value of its currency should it depreciate too rapidly against the dollar. This practice is known as

an unpegged rate.

Assume that the law of one price holds. A shirt that retails for $120 in New York sells for £60 in London. The exchange rate between the British pound and the dollar is £1 = $1.50. Assuming away transportation costs and trade barriers, this creates a profit-making opportunity called

arbitrage.

Why is it said that not all the new jobs created by FDI represent net additions in employment?

because jobs created by an investment may be offset by the jobs lost in domestic companies

Assume that the interest rate on borrowing in Japan is 1 percent, while the interest rate on deposits in Australian banks is 5 percent. A trader borrows in yen and then converts the money into Australian dollars and deposits it in an Australian bank to make a 4 percent margin. This is an example of which type of trade?

carry trade

An example of transaction exposure is when

companies have obligations for the purchase of goods at previously agreed prices.

In 1997, two South Korean manufacturers of semiconductors, LG Semicon and Hyundai Electronics, were accused of selling dynamic random access memory chips (DRAMs) in the U.S. market at below their costs of production. It was alleged that the firms were trying to unload their excess production in the United States. This is an example of

dumping.

Declan's company manufactures specialized parts for automated machinery. Although it started out as a small company, with the advent of robotics and other technological innovations, the company now ships out such large quantities of product that its unit cost is less than half of its competitors. This scenario exemplifies the concept of

economies of scale.

Walmart makes bulk purchases from its vendors and as a result it is able to get better deals than its competitors. This allows Walmart to offer greater discounts to its customers. In this case, Walmart benefits from

economies of scale.

Direct effects of FDI on employment in the host country arise when a foreign MNE

employs a number of host-country citizens.

The infant industry argument is criticized because it relies on an assumption that

firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital market.

Antonio is an artisan. The country he lives in allows him to sell his goods to people in other countries without any quotas or tariffs. Likewise, he is free to buy materials he needs for his craft from other countries without any restrictions. The country in which Antonio lives practices

free trade

Which theory would support the idea that by increasing the efficiency of resource utilization in the global economy, international trade results in greater economic growth and provides economic benefits to all countries that participate in a global trading system?

gains from trade

According to the strategic trade policy argument,

government support can help domestic firms overcome the first-mover advantages enjoyed by foreign competitors.

If Mexico suffered from "fundamental disequilibrium," and its government chose not to devalue its currency, a likely consequence would be

high unemployment.

In which situation would FDI improve the current account of the host country's balance of payments?

if the FDI is a substitute for imports of goods or services

Country X is efficient in producing heating and cooling equipment. Foreign firms can sell coils and exchangers to this country at a competitive price, but the government of country X stipulates that at least 60 percent of the component parts must be produced domestically in the country. This is an example of a(n)

local content requirement.

Currencies of countries with currency boards will become uncompetitive and overvalued if

local inflation rates remain higher than the inflation rate in the country to which the currency is pegged.

Sandusky Robotics decides to move its manufacturing plant from Sandusky, Ohio to Seoul, South Korea because it will have access to highly skilled labor at a lower cost. This represents

location-specific advantages.

During the 1990s, some Japanese and Western banks were far too willing to lend large amounts to companies that were already overleveraged. The banks knew the government would save them if these loans were foreclosed. What type of activity does this represent?

moral hazard

The commercial aircraft industry can support only a limited number of firms, largely because the existence of established firms would make it difficult to be competitive. This is a basic tenet of

new trade theory.

The currency of Lebanon is fixed relative to the U.S. dollar. This means that the exchange rate between the Lebanese pound and other currencies is determined by the dollar exchange rate. This reflects a

pegged exchange rate.

Suppose a government increases the money supply. As a result, there is a surge in the demand of goods as consumers rush to spend their extra money, but producers cannot keep up with demand. What will be the result?

price inflation

Country X, a developed country, invents a revolutionary electronic product. The country markets this new product in other poor countries to garner large profits. This occurrence is against the idea of

product life-cycle theory.

The Japanese government was pressured by the U.S. government to place limits on the number of vehicles exported to the United States by Japanese automobile producers in 1981. This is an example of

voluntary export restraint.

According to the law of one price, if the exchange rate between the British pound and the dollar is £1 = $1.50, a shirt that retails for $120 in New York should sell for __________ in London.

£80

Which scenario is an example of a greenfield investment?

A Chinese sugar maker sets up a sugar crushing facility in Cuba.

With which statement would a follower of the inefficient market school of thought agree?

Companies would be better off investing in foreign exchange forecasting services.

Country A can produce product X, but it can also buy it at a cheaper price from Country B. Which course of action is suitable in this situation according to Adam Smith's theory of absolute advantage?

Country A should import product X from Country B and it should not attempt to produce it at home.

If a country is experiencing a surge of auto parts from a trading manufacturer, it might ask that country to set a limit on how much can be exported. This limit is known as a(n).

voluntary export restraint.

Which observation about tariffs is true?

Export tariffs are used to ensure there is sufficient supply of a good within a country.

Which observation is consistent with Michael Porter's theory of national competitive advantage?

Factors such as domestic demand and domestic rivalry explain nations' dominance in production.

Assuming the 30-day forward exchange rate for converting dollars into yen was $1 = ¥130 and the spot exchange rate was $1 = ¥120, the dollar is selling at a __________ on the 30-day forward market.

subsidy

A country rejects FDI proposals in certain industries. It does so because the tangible advantages of such investments are lesser than potential costs like loss of employment and reduction of overall well-being. However, it aggressively pursues inviting foreign investments in sectors like infrastructure, education, and health care because of the benefits that accrue with them. Which political view of FDI is discussed in this example?

the pragmatic nationalist view

Professor Nelson believes that early in the life cycle of a U.S. product, demand in other advanced countries is limited to high-income groups. Consequently, it is seldom worthwhile for firms in those countries to start producing the product. This view conforms to

the product life-cycle theory.