intb 265 exam 2 BSU

How is Ghana encouraging FDI?

-"Buzzfeed of Africa" OMG Digital attracts international investors with $1.1M seed fundraise -Launches national entrepreneurship program

absolute advantage

-Absolute advantage= more efficient at producing a product than any other country Produce goods in which a country has absolute advantage and trade these goods for goods produced elsewhere.

Benefits of FDI to host country

-Bring in capital, technology, & other resources -Job creation -Improve trade deficitIncreases competition -Decreased prices -Innovation & growth

US- China trade war: What are other trade battles taking place since Trump took office?

-Canada imposed tariffs on 12.6bil worth of US goods -the EU imposed 25% on 2.8bil worth of US goods -US is pushing for a better trade deal with japan -Mexico imposed up to 25% of tariffs on pork, steel, cheese, apples, potatoes -India plans to raise import tax on nuts -Turkey has tripled its tariffs on US goods, following the US decision to double its tariffs on steel and aluminum

Purpose of Foreign Exchange Market

-Convert currency of one country into currency of another -Insurance against foreign exchange risk

Free Trade LOSERS

-Domestic firms who are uncompetitive and lose to cheaper imports -Workers who lose jobs in these industries -Regions in which job loss occurs -Social costs due to job loss

Costs of FDI to host country

-Drive out domestic competition -Worsen trade deficit -Limit national sovereignty and autonomy -Loss of economic independence

Free Trade WINNERS

-Exporters with competitive advantage -Workers who gain jobs in export industries -Net economic welfare gain for society -Cheaper consumer prices (imports, competition) -Greater consumer demand, since consumers have more disposable income -Increased growth

When is FDI preferred over exporting?

-High transportation Costs -Trade barriers are high

What are economic arguments for government intervention in international trade?

-Infant industry argument -Strategic trade policy (first-mover)

What are the political arguments for government intervention in international trade?

-Protecting jobs and industries -Protecting national security -Retaliating- use intervention as a bargaining tool and force trading partners to "play by the rules" -Protecting consumers (ban unsafe products) -Further foreign policy objectives -Protect human rights

When is FDI preferred over licensing?

-When the firm has valuable know-how that cannot be adequately protected by a licensing contract -When the firm needs tight control over a foreign entity -When a firm's skills and know-how are not amenable to licensing

zero-sum game

-a situation in which an economic gain by one country results in an economic loss by another -Trump admin believes in this economic situation: Free-trade is a zero-sum game. There are winners and losers.

Levels of Economic Integration

1. Free Trade Area 2. Customs Union 3. Common Market 4. Economic Union 5. Political Union

Acquisition or merging

=with an existing firm in the foreign country •Quicker to execute •Less risk to acquire assets than build them from the ground up •Increase the efficiency of an acquired unit by transferring capital, technology, or management skills

Mercosur (Common Market of the South)

A South American customs union of Argentina, Paraguay, Brazil, and Uruguay -Venezuela joined in 2012, was suspended in 2016 following Maduro's election and human right violations.

nonconvertible currency

A currency is not convertible when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency. EX: The Brazilian real and Chilean peso

Andean Community

A customs union in South America that was launched in 1969. -Bolivia, Colombia, Ecuador, Peru Venezuela withdrew the community in 2006.

Depreciation

A decrease or loss in value in ones currency -Imports are more expensive -exports cheaper -bad time to travel

Federal Direct Investment

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

Customs Union

A group of countries committed to (1) removing all barriers to the free flow of goods and services between each other (2) the pursuit of a common external trade policy. ----Andean Community

Free Trade Area

A group of countries committed to removing all barriers to the free flow of goods and services between each other, but pursuing independent external trade policies. -90% of regional agreements -NAFTA

Economic Union

A group of countries committed to: (1) removing all barriers to the free flow of goods, services, and factors of production between each other (2) the adoption of a common currency (3) the harmonization of tax rates (4) the pursuit of a common external trade policy& common monetary and fiscal policy -European Union (28 member states)

positive sum game

A situation in which all countries can benefit even if some benefit more than others -economists think/feel this way

Appreciation

An increase in the value of a currency in comparison to other countries -Imports are cheaper -exports more expensive -good time to travel

US- China trade war: Who appears to be the biggest winner?

China

Why, according to US, does China devalue its currency?

China devalues its currency to support exports •US accused China of being currency manipulator •China says it is protecting the renminbi from collapsing

Mercantilism

Export more than import (keep trade surplus)

Porter's Diamond

Factor endowments Demand conditions Related and supporting industries Firm strategy, structure, and rivalry

Outflow of FDI

Flow of foreign direct investment out of a country

The Bretton Woods agreement created which two multinational institutions?

IMF and the World Bank

Softbank

Japanese company that invests in other companies -holds large shares in worldwide companies 17% stake in Uber--$9.3 billion into Uber •Alibaba ($102 million) •Sprint ($21.7 billion) •Brandless ($240 million)

Most important trading centers

London***, New York, Zurich, Tokyo, and Singapore

TPP (Trans-Pacific Partnership)

The Trans-Pacific Partnership (TPP) is a trade agreement in February 2016. Trump: withdrew the United States signature causing the agreement to not be set into action

What is happening between US and Huawei and why?

The US accused Huawei of spying for the Chinese government and asked its European allies to avoid using Huawei's products in their 5G network

forward exchange rate

The agreed-upon exchange rate to be used in a forward trade. -Exchange currency and execute the deal at some specific date in the future (30, 90, 180 days in the future)

Brexit

The possible British Exit from the European Union WHY: Sovereignty and migration-- the UK would be better able to manage immigration, free itself from onerous regulations, and spark more dynamic growth.

New Trade Theory

Through economies of scale, trade can increase variety of goods available and decrease costs.In those industries, the global market may be able to support only a small number of enterprises (first movers) -limited gov intervention (support certain export industries (subsidies))

US-China bilateral investment treaty

Trump thinks: trade war between US and China

The investment manager at AllRight Time 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:

a combination of government intervention and speculative activity.

In a floating exchange rate system, a current account deficit is likely to be corrected by

a depreciation in its exchange rate.

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

a forward exchange rate

Foreign Exchange Market

a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems

subsides

a government payment to a domestic producer

________ involves the establishment of a new operation in a foreign country.

a greenfield investment

Common Market

a group of countries that acts as a single market -No trade barriers & common external trade policy -free movement of the factors of production -Mercosur

Rae feels it is best for her company to pay their foreign supplier in Panama this month even though they will receive product for another six months. She recently learned that the currency in Panama is expected to appreciate and, by paying the supplier now, her company will save money. This is an example of...

a lead strategy

tariffs

a tax levied on imports that raises the cost of imported products (specific & ad valorem)

How is China encouraging FDI?

allowing tesla into china

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:

bandwagon effect

A(n) ________ has no barriers to trade among member countries, includes a common external trade policy, and allows factors of production to move freely among members, but does not have a common currency.

common market

According to Porter, which factor endowment would be classified as an advanced factor?

communication infrastructure

pegged exchange rate system

currency is fixed to a reference country (e.g., dollar, euro)

A(n) _____ refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

currency swap

free trade

designed to reduce (or eliminate) tariffs, quotas, and other trade restrictions on items traded

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.

dirty-float

Greenfield Investment

establishing new operations in a foreign country

What currency is used in Eurozone?

euro

Transaction Exposure

extent to which the income from individual transactions is affected by fluctuations in foreign exchange values •Mainly concerned with short-term transactions

Karvel lives in northern California where there is sufficient land and labor to successfully grow grapes for wine. Heckscher-Ohlin would consider the land and labor to be

factor endowments

The economic and strategic advantages that accrue to early entrants into an industry are called

first mover advantages

In countries that adopt a _____ exchange rate system, the values of currencies are set against each other at some mutually agreed-on exchange rate.

fixed

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.

floating

Advocates of the floating rate system argue that:

floating rates help adjust trade imbalances

Inflows of FDI

flow of FDI into a country

local content requirements

fraction of a good must be produced domestically

When Norway, Iceland, Liechtenstein, and Switzerland were joined by the EFTA, all barriers to the free flow of goods and services between the countries was removed. Member nations are allowed to determine the level of trade protection for goods coming from all other nations. What level of economic integration does this represent?

free trade area

Identify the correct sequence of economic integration starting from the least integrated to the most integrated.

free trade area, customs union, common market, economic union, and political union

Jacob is the chief financial officer for RinseAll Detergent products. His company is interested in investing in a facility in Indonesia, but he is worried about unpredictable fluctuations in future exchange rates, which could cost his company millions of dollars. One way to ensure against this exchange risk is for Jacob to use

hedging

The World Bank's initial mission was to

help finance the building of Europe's economy by providing low-interest loans.

One reason the British electorate voted to exit the European Union is because of an increase in ________ within Europe.

immigration

Translation Exposure

impact of currency exchange rate changes on the reported financial statements of a company

Translation exposure refers to the...

impact of currency exchange rate changes on the reported financial statements of a company.

A(n) _____ market is one in which prices do not reflect all available information.

inefficent

International Monetary System

is the institutional arrangement that governs exchange rates

Carlos is the manager of an American company. He expects the value of the British pound to appreciate in the near future and so delays the collection of payments from British customers until the next month. Which tactic is Carlos using to minimize the foreign exchange exposure?

lag strategy

AfCFTA

largest free trade block: African Continental Free Trade Area (2018) -Ratified by 22 countries, signed by everyone except Eritrea -Unite 1.3 billion people -Create $3.4 trillion economic block -"Economic game changer" (IMF)

Royal Chocolatier, a British manufacturer of chocolates, granted U.S. company American Candy Inc. the right to produce and sell Royal Chocolatier's products in the United States In return, American Candy Inc. has to pay a royalty fee on every unit sold. According to this information, what is being done by Royal Chocolatier?

licensing

floating exchange rate system

market determines the value of a currency ex: euro, US dollar

The government of the Republic of Senna enforces tariffs and quotas to limit imported goods, while exports are subsidized. By using these instruments, the government seeks to achieve a surplus in the balance of trade. Based on this information, which approach most influences the Republic of Senna's approach to international trade?

mercantilism

________ is a pact among Argentina, Brazil, Paraguay, and Uruguay to establish a free trade area.

mercosur

Which approach suggests that nations may benefit from trade even when they do not differ in resource endowments or technology?

new trade theory

first-mover advantage

occurs when a company can significantly increase its market share by being first with a new competitive advantage

The currency of Panama, the balboa, is fixed relative to the U.S. dollar. As a result, the U.S. dollar exchange rate determines the exchange rate between the Panama balboa and other currencies. This is an example of a _____ exchange rate.

pegged

A country that wants to create the highest level of economic integration would enter into a(n)...

political union

What currency is used in UK?

pounds

Antidumping Policies

protection against unfair foreign competition

voluntary export restraints

quota on exports at the request of the importing country's government

How is China using its currency as a weapon in the US-China trade war?

recently dropped yuan to its lowest point in the decade -"The drop [in the value of Chinese currency] suggests that the central bank of China is willing to weaponized the currency in light of the trade war"

Stock of FDI

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

import quotas

restriction on the quantity of goods imported

What currency is used in Russia?

ruble

administrative policies

rules making it difficult for imports to enter a country

What currency is used in India?

rupee

trade deficit

situation in which a country imports more than it exports -Current Trade Deficit: $891.3 billion, 2018 (US Census Bureau)

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

spot exchange rate

How did AB InBev get so big? What strategy did it employ as part of its growth?

taking/[merging] with foreign companies all over the world

n his theory of absolute advantage, Adam Smith advocated that ________ should determine what a country imports and what it exports.

the Market mechanism

Under the fixed exchange rate regime established at Bretton Woods, _____ served as the reference point for all other currencies.

the US Dollar

Advanced Factor Endowments

the amount of land, labor, capital, and entrepreneurship that a country possesses and can exploit for manufacturing.

A currency is considered freely convertible when:

the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.

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.

WTO (World Trade Organization)

the only global international organization dealing with the rules of trade between nations Trump thinks: threatened to pull the United States out of WTO. WTO is sabotaging U.S. trade

Dollarization

the process of aligning a country's currency with the US dollar. -Abandon own currency and adopt another •U.S. dollar as a medium of exchange alongside or in place of its domestic currency.

economies of scale

the property whereby long-run average total cost falls as the quantity of output increases [unit cost reductions associated with a large scale of output]

spot exchange rate

the rate at which a foreign exchange dealer converts one currency into another currency on a particular day *Changes continually - minute by minute

Exchange Rate

the rate at which one currency is converted into another

The Republic of Monaslu has the world's most efficient car manufacturing industry, while the country of Ingora has the world's most efficient electronics industry. The Republic of Monaslu trades cars with Ingora in exchange for consumer electronics. This form of trade between the two countries illustrates

the theory of absolute advantage

The basic message of ________ is that potential world production is greater with unrestricted free trade than it is with restricted trade.

the theory of comparative advantage

European Union (EU)

the world's largest common market, composed of 28 European nations (19/28) headquarters: Brussels, Belgium * 9 countries DID NOT adopt the EU

The stock of FDI refers to the

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

Managed Float System (Dirty Float)

value of a currency is determined by market, but with central bank intervention if it depreciates too rapidly •Used by 82 countries, 43% of all countries

Countries experiencing Hyperinflation

venezuela

Free Trade Agreement

when a government does not attempt to influence what its citizens can buy from another country or what they can produce and sell to another country-through quotas or duties

Freely Convertible Currency

when a government of a country allows both residents and non-residents to purchase unlimited amounts of foreign currency with the domestic currency EX: Canadian Dollar. Euro. Hong Kong Dollar. US Dollar

ASEAN Community

"One vision, one identity, one community" Increase ASEAN's competitive edge as a production base& Attract more FDI "ASEAN plus 3" = PRC , Japan, and Korea. made up of: the ten member countries of ASEAN are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

What currency is used in Japan?

yen

What currency is used in China?

yuan

A situation in which an economic gain by one country results in an economic loss by another is called a

zero-sum game

US- China trade war: Why aren't these policies brining jobs back?

•Capability: no viable supply chain in US •Wages: other countries remain cheaper •Policy: other countries have preferential treatment by US, can get goods back duty-free •Near China, for China [If you were a manager of a U.S. company operating in China, would you change the location of production?•Would you move production back to U.S. ?]

NAFTA (North American Free Trade Agreement)

(Open Trade between the US, Canada, Mexico): Trump thinks - "the worst trade deal maybe ever signed anywhere"

Lead Strategy

•Collect foreign currency receivables early when a foreign currency is expected to depreciate •Paying foreign currency payables before they are due when a currency is expected to appreciate

USMCA

•Dairy farmers: US farmers get access to Canadian dairy market •Drug companies: sell in Canada fro 10 years before facing generic competition (8 years before) •No car tariffs for Mexico and Canada •IP and digital trade •Automobiles must have 75% of components manufactured within USMCA to qualify for zero tariffs (was 62.5% before)

Lag Strategy

•Delay collection of foreign currency receivables if that currency is expected to appreciate •Delay payables if the currency is expected to depreciate

what impacts exchange rates?

•Demand and supply •Prices = inflation •High inflation = currency should depreciate •A country's interest rate •Closely linked to inflation (Fisher effect) •Market psychology

Negative Interest Rates

•Instead of receiving money on deposits in the form of interest, depositors must pay to keep their money in the bank •The Fed "should get our interest rates down to ZERO, or less" (president Trump) •Eurozone: Sweden, Denmark, Switzerland •Japan

NAFTA

•No tariffs on 99% of goods traded •No barrier on cross-border flow of services •Protects IP rights •No restrictions on FDI •Environmental standard •"the worst trade deal maybe ever signed anywhere" (Trump) -mexico,canada,US

Sugar Prices in US vs. World

•US government limits imports (tariffs, quotas) •Sets floor price

What currency is used in Mexico?

Mexican peso

Product Life Cycle Theory

Most new products are initially produced in America, then in developed nations, then in developing countries

________ justifies some limited government intervention to support the development of certain export-oriented industries.

New Trade Theory

currency swap

Simultaneous purchase and sale of a given amount of foreign exchange for two different values

Political Union

Single Union: A central political apparatus that coordinates economic, social, and foreign policy -made up of The US and the EU is on the way

comparative advantage

Specialize in what a country produces most efficiently, and buy goods that are produced less efficiently

Are instruments of trade policy pro-producer or pro-consumer?

Tariffs are pro-producer and anti-consumer