Exam # 1 - International Business
26. What are the 4 main sections of the BOP and identify the type of transactions are reported in each section?
1) the current account-balance of trade:1. trade in goods-the trade(exports and imports) in visible goods2. trade in services- the trade in invisble goods3. income flows-net investment income e.g. profits, interest payments, dividends on shares4. current transfers: the net transfers of money by governent and individuals e.g. grants for overseas, migrantworkers' remittances sent back to their own countries 2)the capital account: records capital movements in terms of assets(including physical assets such as purchase of land) and liabilities(debt forgiveness) into and out of a country 3)the financial account: records capital inflows into a country and the capital outflows out of a country, resulting from investments(such as building of factories)*also includes loans and changes in reserves
5. How has international business changed over the last 30 years?
1. value of FDI has grown significantly 2. enterprises to coordinate and control a globally dispersed production system via the internet can expand their global presence at low cost. 3. global communications 4. Technology (Major Factor) 5. Globalization driving businesses to interconnect and be interdependent.
4. What role has technology played in changing international business?
1.) communications - microprocessor 2.) the Internet - (equalizer for constraints of location, scale, time zones). easier for buyers and sellers to connect, globally dispersed production system.) 3.) Transportation technology - commercial jet aircraft -containerization (lower cost of shipping for long distances.)
25. What is the Balance of Payments? Identify what constitutes debits and credits to the BOP accounts. What is meant by equilibrium, surplus, & deficit?
A country's balance-of-payments accounts keep track of the payments to and receipts from other countries for a particular time period. These include payments to foreigners for imports of goods and services, and receipts from foreigners for goods and services exported to them. Current Account - Exports of goods, services, and income receipts (credits), Imports of goods, services, and income (debits) Capital Account - records transactions involving one-time changes in the stock of assets. Financial Account - transactions that involve the purchase or sale of assets. Equilibrium - The country is said to be in balance of payments equilibrium when the sum of its current account and its non-reserve capital account equals zero so that the current account balance is financed entirely by international lending. refer to a situation where the deficits and surpluses of a country are cancelled out, both in a given year and over a period of time (For example, a current account deficit could be cancelled out by a financial account surplus) Account Surplus- credits > debits; inflow > outflow; exports > imports BOP surplus money inflow is greater than money outflow(income exceeds expenditure) Account Deficit- : debits > credits; outflow > inflow; imports > export BOP deficit money outflow is greater than money inflow (expenditure exceeds income)
non-tariff barriers
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.
pegged exchange rate
A pegged exchange rate means the value of the currency is fixed relative to a reference currency, such as the U.S. dollar, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.
8. What are the basic premises of the Absolute Advantage and Comparative (Relative) Advantage theories? Identify and calculate when a country has an absolute and/or comparative advantage.
Absolute Advantage: In his 1776 landmark book The Wealth of Nations, Adam Smith attacked the mercantilist assumption that trade is a zero-sum game. Smith argued that countries differ in their ability to produce goods efficiently. A country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it. that it can produce using fewer resources than another country. Smith's basic argument, therefore, is that a country should never produce goods at home that it can buy at a lower cost from other countries. Smith demonstrates that by specializing in the production of goods in which each has an absolute advantage, both countries benefit by engaging in trade. Comparative (relative) Advantage: David Ricardo took Adam Smith's theory one step further by exploring what might happen when one country has an absolute advantage in the production of all goods According to Ricardo's theory of comparative advantage, it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself The basic message of the theory of comparative advantage is that potential world production is greater with unrestricted free trade than it is with restricted trade. Ricardo's theory suggests that consumers in all nations can consume more if there are no restrictions on trade. greater degree than the theory of absolute advantage, the theory of comparative advantage suggests that trade is a positive-sum game in which all countries that participate realize economic gains. This theory provides a strong rationale for encouraging free trade. So powerful is Ricardo's theory that it remains a major intellectual weapon for those who argue for free trade. Identify and Calculate Absolute/and or comparative advantage: Refer To Handout/ Attached Picture
15. Differentiate between ad valorem, specific, compound, official prices, and variable levy tariffs. Explain what affect tariffs might have on firms and consumers.
Ad Valorem Tariff - Levied as a proportion of the value of the imported good. Specific Tariff - levied as a fixed charge for each unit of a good imported. Compound Price - a combination of ad valorem and specific tariffs. official prices- government sets a minimum price for products. variable levies - the tariff rate changes as needed typically to protect domestic producers. Affects tariffs might have on firms and consumers: 1. tariffs are placed on imports to protect domestic producers from foreign competition by raising the price of imported goods 2. tariffs also produce revenue for the government.- Government gains b/c the tariff increases government revenues 3. Domestic Producers gain b/c the tariff gives them some protection against foreign competitors by increasing the cost of imported foreign goods. 4. Consumers lose because they must pay more for certain imports. 5. tariffs are generally pro-producer and anti consumer. 6. import tariffs reduce the overall efficiency of the world economy. They reduce efficiency because a protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad. inefficient utilization of resources. 7. Export tariffs are less common than import tariffs 8. export tariffs have two objectives: first, to raise revenue for the government, and second, to reduce exports from a sector, often for political reasons.
28. What are the costs and benefits of FDI (especially as it relates to the Balance of Payments) to the home country?
Answer: "Home Country Benefits" 1.) The effect on the capital account of the home country's balance of payments from the inward flow of foreign earnings. 2.) The employment effects that arise from outward FDI. 3.) The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country. Answer: "Home Country Costs" 1.The Balance of Payments: -The balance of payments suffers from the initial capital outflow required to finance the FDI -The current account is negatively affected if the purpose of the FDI is to serve the home market from a low-cost production location -The current account suffers if the FDI is a substitute for direct exports 2.Employment Effects of outward FDI: If the home country is suffering from unemployment, there may be concern about the export of jobs
27. What are the costs and benefits of FDI (especially as it relates to Balance of Payments) to the host country?
Answer: "Host Country Benefits" 1. Resource Transfer Effects - FDI can bring capital, technology, and management resources that would otherwise not be available. 2. Employment Effects - FDI can bring jobs that would otherwise not be created there. 3. Balance of Payment Effects - FDI can help bring a current account surplus if it is a substitute for imports of goods and services, or the MNE uses a foreign subsidiary to export goods and services to other countries. Because national governments invariably dislike seeing the assets of their country fall into foreign hands, they prefer their nation to run a current account surplus. export of goods may increase. 4. Effect on Competition and Growth - FDI in the form of greenfield investment leads to Increased levels of competition in a market, Drives down prices, and Improves the welfare of consumers. Increased competition can lead to Increased productivity growth, Product and process innovation, and Greater economic growth. Answer: "Host Country Costs" 1. Adverse Effects on Competition - The subsidiaries of foreign MNEs may have greater economic power than indigenous competitors because they may be part of a larger international organization. The MNE could draw on funds generated elsewhere to subsidize costs in the local market. Doing so could allow the MNE to drive indigenous competitors out of the market and create a monopoly position. 2. Adverse Effects on the Balance of Payments - The capital outflows as foreign subsidiaries send earnings back to parent country. OR There is a debit on the current account of the host country's balance of payments associated with imports of input products by the foreign subsidiary 3. National Sovereignty and Autonomy - FDI can mean loss of economic independence. Key decisions that can affect the host countries economy will be made by a foreign parent that has no real commitment to the host country, and over which the host country's government has no real control.
19. What are the costs and benefits of government intervention in trade?
Benefits: -Generate a substantial amount of revenue -Ensure the safety, security, and welfare of citizens -Help a government pursue broad -based economic, political, or social objectives -Help better serve the interests of the nations firms and industries - Consistent with strategic trade policy, examples can be found of government intervention in the form of tariffs, quotas, antidumping actions, and subsidies helping firms and industries establish a competitive advantage in the world economy Costs: suggest that government intervention has three drawbacks. 1. Intervention can be self-defeating because it tends to protect the inefficient rather than help firms become efficient global competitors. 2. Intervention is dangerous; it may invite retaliation and trigger a trade war. 3. Finally, intervention is unlikely to be well executed, given the opportunity for such a policy to be captured by special-interest groups.
30. What are the results of decreasing trade barriers, especially as they relate to regional trade agreements?
Concerns about national sovereignty arise because close economic integration demands that countries give up some degree of control over such key issues as monetary policy, fiscal policy (e.g., tax policy), and trade policy The political case for regional economic integration also has loomed large in several attempts to establish free trade areas, customs unions, and the like. Linking neighboring economies and making them increasingly dependent on each other creates incentives for political cooperation between the neighboring states and reduces the potential for violent conflict. In addition, by grouping their economies, the countries can enhance their political weight in the world. will allow countries to specialize in the production of goods and services that they can produce most efficiently. The result is greater world production than would be possible with trade restrictions In sum, economic theories suggest that free trade and investment is a positive-sum game, in which all participating countries stand to gain. benefits of regional integration are determined by the extent of trade creation, as opposed to trade diversion. 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. Trade diversion occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area. A regional free trade agreement will benefit the world only if the amount of trade it creates exceeds the amount it diverts.
2. What are the potential costs/benefits of globalization?
Costs: 1. Hurts jobs and income in developed nations. "exporting jobs" to low-wage nations and contributing to higher unemployment and lower living standards in their home nations 2. Takes advantages of poor labor policies in developing nations as well as environmental regulation. 3. Reduces national sovereignty. 4. Widens the gap between the rich and the poor. The demonstrators were protesting against a wide range of issues, including job losses in industries under attack from foreign competitors, downward pressure on the wage rates of unskilled workers, environmental degradation, and the cultural imperialism of global media and multinational enterprises, which was seen as being dominated by what some protesters called the "culturally impoverished" interests and values of the United States. Large segments of the population in many countries believe that globalization has detrimental effects on living standards, wage rates, and the environment. A second source of concern is that free trade encourages firms from advanced nations to move manufacturing facilities to less developed countries that lack adequate regulations to protect labor and the environment from abuse by the unscrupulous Benefits: 1. Free Trade They argue that free trade will result in countries specializing in the production of those goods and services that they can produce most efficiently, while importing goods and services that they cannot produce as efficiently. 2. The same argument can be made to support the outsourcing of services to low-wage countries. reduce its cost structure and thereby its prices for products. 3. They argue that tougher environmental regulations and stricter labor standards go hand in hand with economic progress. In general, as countries get richer, they enact tougher environmental and labor regulations. Because free trade enables developing countries to increase their economic growth rates and become richer, this should lead to tougher environmental and labor laws. 4. By creating wealth and incentives for enterprises to produce technological innovations, the free market system and free trade could make it easier for the world to cope with pollution and population growth. Indeed, while pollution levels are rising in the world's poorer countries, they have been falling in developed nations 5. Economists argue that the richest nations of the world can help by reducing barriers to the importation of products from the world's poorest nations, particularly tariffs on imports of agricultural products and textiles. High-tariff barriers and other impediments to trade make it difficult for poor countries to export more of their agricultural production.
31. Explain when and how the EEC/EC/EU were formed (e.g. Treaty of Rome, Maastricht Treaty, etc.). Describe the Euro, how the introduction of the Euro progressed, and the costs/benefits of a single currency.
EEC/EC/EU Treaty of Rome: established the European Community and European Economic Community. established 1957 The first of the three organizations in the European Community was the European Economic Community (EEC), also known as the Common Market. The EEC was established in 1957 by the Treaty of Rome as a way to unify the economies of Europe and reduce tensions that could lead to war Maastricht Treaty: In February 1992, EC/EU members signed the Maastricht Treaty, which committed them to adopting a single currency by January 1, 1999. The Maastricht Treaty called for establishment of the independent European Central Bank (ECB), similar in some respects to the U.S. Federal Reserve, with a clear mandate to manage monetary policy so as to ensure price stability. Among other things, the ECB sets interest rates and determines monetary policy across the euro zone. The Euro and its progress: It required participating national governments to give up their own currencies and national control over monetary policy. Governments do not routinely sacrifice national sovereignty for the greater good, indicating the importance that the Europeans attach to the euro. By adopting the euro, the EU has created the second most widely traded currency in the world after the U.S. dollar. Some believe that the euro could come to rival the dollar as the most important currency in the world. After January 1, 2002, euro notes and coins were issued and the national currencies were taken out of circulation. By mid-2002, all prices and routine economic transactions within the euro zone were in euros. Since its establishment January 1, 1999, the euro has had a volatile trading history against the world's major currency, the U.S. dollar. Falling demand for U.S. dollars and rising demand for euros translated into a fall in the value of the dollar against the euro. Since 2008, however, the euro has weakened against a basket of currencies, reflecting persistent concerns over slow economic growth and large budget deficits among several EU member states. To compound matters, the sovereign debt crisis had exposed a deep flaw in the euro zone: It was difficult for fiscally more conservative nations like Germany to limit profligate spending by the governments of other nations that might subsequently create strains and impose costs on the entire euro zone. To qualify for EU membership, the applicants had to privatize state assets, deregulate markets, restructure industries, and tame inflation. They also had to enshrine complex EU laws into their own systems, establish stable democratic governments, and respect human rights. On June 23, 2016, and by a narrow margin, the British electorate voted in a national referendum to leave the EU. In early 2017, the British government formally notified the EU of its intention to exit the EU. While the British have enjoyed the benefits of free trade within Europe, a segment of the population has never been comfortable with the loss of national sovereignty implied by membership within the EU. immigration has become a key issue. Costs/Benefits of a single currency: Benefits: - First, they believe that businesses and individuals realize significant savings from having to handle one currency, rather than many. These savings come from lower foreign exchange and hedging costs. - Second, and perhaps more important, 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. the introduction of a common currency has led to lower prices, which translates into substantial gains for European consumers. - Third, faced with lower prices, European producers have been forced to look for ways to reduce their production costs to maintain their profit margins. The introduction of a common currency, by increasing competition, has produced long-run gains in the economic efficiency of European companies. - Fourth, the introduction of a common currency has given a boost to the development of a highly liquid pan-European capital market. Over time, the development of such a capital market should lower the cost of capital and lead to an increase in both the level of investment and the efficiency with which investment funds are allocated. This could be especially helpful to smaller companies that have historically had difficulty borrowing money from domestic banks. - Finally, the development of a pan-European, euro-denominated capital market will increase the range of investment options open to both individuals and institutions. This will enable European investors to better diversify their risk, which again lowers the cost of capital, and should also increase the efficiency with which capital resources are allocated Costs: - The drawback, for some, of a single currency is that national authorities have lost control over monetary policy. - The implied loss of national sovereignty to the ECB - another drawback of the euro is that the EU is not what economists would call an optimal currency area. In an optimal currency area, similarities in the underlying structure of economic activity make it feasible to adopt a single currency and use a single exchange rate as an instrument of macroeconomic policy. Many of the European economies in the euro zone, however, are very dissimilar. One way of dealing with such divergent effects within the euro zone is for the EU to engage in fiscal transfers, taking money from prosperous regions and pumping it into depressed regions
41. Calculate the results of a devaluation of a currency. Explain how trade is affected (costs of exports and imports) as a result of devaluation.
Example: Suppose malaysian bank devalues its currency by 25% (Refer to example) 1MR = 0.24126 US 1 US = 4.14481 MR After 25% 1 MR = 0.18094 US (1-0.25 • 0.24126) 1 US = 5.526 MR ( 4.14481/ (1-0.25) refer to currency questions handout as well * In a devalutaing country, that countrys exports become cheaper in the foreign market and its imports become more expensive.
14. How can the government help industries attain first mover advantages?
For the individual firm, the clear message is that it pays to invest substantial financial resources in trying to build a first-mover, or early mover, advantage, even if that means several years of losses before a new venture becomes profitable. The idea is to preempt the available demand, gain cost advantages related to volume, build an enduring brand ahead of later competitors, and, consequently, establish a long-term sustainable competitive advantage.
20. What inhibits the free flow of goods between countries?
GATT General agreement on tariffs and trade A pact designed to lower trade barriers, such as high tariffs on imported goods and restrictions on the number and types of imported products that inhibited the free flow of goods across borders.
1. What is meant by globalization of markets and globalization of production'? What has led to greater globalization?
Globalization of Markets : Merging of historically distinct and separate national markets into one huge global marketplace. Falling barriers to cross-border trade and investment have made it easier to sell internationally - Companies offering same basic product worldwide create global market. - Can be industrial goods, markets for commodities (aluminum oil, wheat, microprocessors, DRAMS, commercial jet aircraft, computer software, financial assets). - same firms confront each other as competitors As firms follow each other around the world, they bring with them many of the assets that served them well in other national markets—their products, operating strategies, marketing strategies, and brand names—creating some homogeneity across markets. Thus, greater uniformity replaces diversity Globalization of Production: Sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (labor,land,energy, and capital). By doing this, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively. Factors for Greater Globalization: 1.) Decline in barriers to the free flow of goods, services, and capital that has occurred in recent decades. 2.) Technological Change (communication, information processing, and transportation technologies).
36. What is the difference between the gold standard and the gold exchange? Discuss the failure of the gold exchange. What is meant by free float, fixed rates, & managed float?
I. The gold standard had its origin in the use of gold coins as a medium of exchange, unit of account, and store of value - a practice that stretches back to ancient times. As the volume of international trade increased, governments agreed to convert paper currency into gold on demand at a fixed rate. Pegging currencies to gold and guaranteeing convertibility is known as the gold standard. The great strength claimed for the gold standard was that it contained a powerful mechanism for achieving balance-of-trade equilibrium by all countries. 1. A country is said to be in balance-of-trade equilibrium when the income its residents earn from exports is equal to the money its residents pay to other countries for imports (the current account of its balance of payments is in balance). Given a common gold standard, the value of any currency in units of any other currency (the exchange rate) was easy to determine. For example, under the gold standard, 1 U.S. dollar was defined as equivalent to 23.22 grains of "fine" (pure) gold. Thus, one could, in theory, demand that the U.S. government convert that one dollar into 23.22 grains of gold. Because there are 480 grains in an ounce, one ounce of gold cost $20.67 (480/23.22). The amount of a currency needed to purchase one ounce of gold was referred to as the gold par value. With countries devaluing their currencies at will, one could no longer be certain how much gold a currency could buy. Instead of holding onto another country's currency, people often tried to change it into gold immediately, lest the country devalue its currency in the intervening period. This put pressure on the gold reserves of various countries, forcing them to suspend gold convertibility. By the start of World War II in 1939, the gold standard was dead. II. Fixed Exchange Rate Systems Exchange rates are held constant or allowed to fluctuate within very narrow boundaries. - discourages competitive devaluations and imposes monetary discipline. The fixed exchange rate system collapsed in 1973, primarily due to speculative pressure on the dollar following a rise in U.S. inflation and a growing U.S. balance-of-trade deficit. The case for a fixed exchange rate regime claims (a) the need to maintain a fixed exchange rate imposes monetary discipline on a country; (b) floating exchange rate regimes are vulnerable to speculative pressure; (c) the uncertainty that accompanies floating exchange rates dampens the growth of international trade and investment; and (d) far from correcting trade imbalances, depreciating a currency on the foreign exchange market tends to cause price inflation. Free Floating Exchange Rate Systems Exchange rate values are determined by market forces (supply and demand) without government intervention. 1. control monetary policy 2. Automatic trade balance adjustments 3. economic recovery following a severe economic crisis. A country is more insulated from the inflation of other countries and A country is more insulted from unemployment problems in other countries The case for a floating exchange rate regime claims (a) such a system gives countries autonomy regarding their monetary policy and (b) floating exchange rates facilitate smooth adjustment of trade imbalances. Managed Floating Exchange Rate Systems 1. Exchange rate are allowed to fluctuate on a daily basis and there are no official boundaries. Governments sometimes intervene to prevent their currencies from moving too-far from a certain direction. The current managed-float system of exchange rate determination has increased the importance of currency management in international businesses. The volatility of exchange rates under the current managed-float system creates both opportunities and threats. One way of responding to this volatility is for companies to build strategic flexibility and limit their economic exposure by dispersing production to different locations around the globe by contracting out manufacturing (in the case of low-value-added manufacturing) and other means.
Inflation/Deflation
Inflation: a consistent increase in the price of goods and services over time. During inflationary times, money loses its "buying" or "purchasing" power, and it takes more units of currency to purchase the same units of goods or services. Over time, inflation lowers the value of each unit of currency; Deflation: a consistent decrease in the price of goods and services over time. During deflationary times, money increases in its "buying" or "purchasing" power, and it takes less units of currency to purchase the same units of goods or services. Over time, deflation increases the value of each unit of currency.
38. What are the roles of the IMF and World Bank? What are the subsidiary banks of the World Bank and their lending guidelines?
International Monetary Fund (IMF) - maintain order in the international monetary system. (a) to avoid a repetition of the competitive devaluations of the 1930s and (b) to control price inflation by imposing monetary discipline on countries. - Dicipline through fixed exchange rate. First, the need to maintain a fixed exchange rate puts a brake on competitive devaluations and brings stability to the world trade environment. Second, a fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation - Flexibility, wanted to avoid high unemployment, so they built limited flexibility into the system. Two major features of the IMF Articles of Agreement fostered this flexibility: 1.) IMF lending facilities and 2.) adjustable parities. - By providing deficit-laden countries with short-term foreign currency loans, IMF funds would buy time for countries to bring down their inflation rates and reduce their balance-of-payments deficits. The belief was that such loans would reduce pressures for devaluation and allow for a more orderly and less painful adjustment. - The system of adjustable parities allowed for the devaluation of a country's currency by more than 10 percent if the IMF agreed that a country's balance of payments was in "fundamental disequilibrium." The term fundamental disequilibrium was not defined in the IMF's Articles of Agreement, but it was intended to apply to countries that had suffered permanent adverse shifts in the demand for their products. Without devaluation, such a country would experience high unemployment and a persistent trade deficit until the domestic price level had fallen far enough to restore a balance-of-payments equilibrium. The belief was that devaluation could help sidestep a painful adjustment process in such circumstances. 2.)World Bank - promote economical development to third world nations. The bank lends money under two schemes. Under the IBRD scheme, money is raised through bond sales in the international capital market. Borrowers pay what the bank calls a market rate of interest—the bank's cost of funds plus a margin for expenses. This "market" rate is lower than commercial banks' market rate. Under the IBRD scheme, the bank offers low-interest loans to risky customers whose credit rating is often poor, such as the governments of underdeveloped nations. A second scheme is overseen by the International Development Association (IDA), an arm of the bank created in 1960. Resources to fund IDA loans are raised through subscriptions from wealthy members such as the United States, Japan, and Germany. IDA loans go only to the poorest countries. Borrowers have up to 50 years to repay at an interest rate of less than 1 percent a year. The world's poorest nations receive grants and interest-free loans.
7. What is Mercantilism and Neo-mercantilism?
Mercantilism - The first theory of international trade, mercantilism, emerged in England in the mid-sixteenth century. The principle assertion of mercantilism was that gold and silver were the mainstays of national wealth and essential to vigorous commerce. At that time, gold and silver were the currency of trade between countries; a country could earn gold and silver by exporting goods. Conversely, importing goods from other countries would result in an outflow of gold and silver from those countries. The main tenet of mercantilism was that it was in a country's best interests to maintain a trade surplus, to export more than it imported. By doing so, a country would accumulate gold and silver and, consequently, increase its national wealth, prestige, and power. An economic philosophy advocating that countries should simultaneously encourage exports and discourage imports. The mercantilists saw no virtue in a large volume of trade. Rather, they recommended policies to maximize exports and minimize imports. To achieve this, imports were limited by tariffs and quotas, while exports were subsidized. Neo Mercantilism - a revived theory of mercantilism emphasizing trade restrictions and commercial policies as means of increasing domestic income and employment Neo-mercantilists equate political power with economic power and economic power with a balance-of-trade surplus. Critics argue that several nations have adopted a neo-mercantilist strategy that is designed to simultaneously boost exports and limit imports. For example, they charge that China long pursued a neo-mercantilist policy, deliberately keeping its currency value low against the U.S. dollar in order to sell more goods to the United States and other developed nations, and thus amass a trade surplus and foreign exchange reserves.
6. Why there are fewer US multinationals in the international market place? What are multinationals and mini-nationals?
Multinational Enterprise (MNE) : A multinational enterprise (MNE) is any business that has productive activities in two or more countries. In the last 50 years, two notable trends in the demographics of the multinational enterprise have been (1) the rise of non-U.S. multinationals and (2) the growth of mini-multinationals. Mini-Nationals: Another trend in international business has been the growth of small and medium-sized multinationals (mini-multinationals) many medium-sized and small businesses are becoming increasingly involved in international trade and investment. The rise of the Internet is lowering the barriers that small firms face in building international sales. Why are there fewer US multinationals in international market place? These shifts in representation of powerful multinational corporations and their home bases can be expected to continue. Specifically, we expect that even more firms from developing nations will emerge as important competitors in global markets, further shifting the axis of the world economy away from North America and western Europe and challenging the long dominance of companies from the so-called developed world.
11. What does the New Trade Theory propose?
New Trade Theory: The new trade theory began to emerge in the 1970s when a number of economists pointed out that the ability of firms to attain economies of scale might have important implications for international trade. when the output required to attain economies of scales represents a significant proportion of total world demand, the global market may only be able to support a small number of firms. New trade theory makes two important points: First, through its impact on economies of scale, trade can increase the variety of goods available to consumers and decrease the average cost of those goods. Second, in those industries in which the output required to attain economies of scale represents a significant proportion of total world demand, the global market may be able to support only a small number of enterprises. Thus, world trade in certain products may be dominated by countries whose firms were first movers in their production. economies of scale- a proportionate saving in costs gained by an increased level of production. First-mover advantages are the economic and strategic advantages that accrue to early entrants into an industry. The ability to capture scale economies ahead of later entrants, and thus benefit from a lower cost structure, is an important first-mover advantage. New trade theory argues that for those products where economies of scale are significant and represent a substantial proportion of world demand, the first movers in an industry can gain a scale-based cost advantage that later entrants find almost impossible to match. New trade theory has important implications. The theory suggests that nations may benefit from trade even when they do not differ in resource endowments or technology. Trade allows a nation to specialize in the production of certain products, attaining scale economies and lowering the costs of producing those products, while buying products that it does not produce from other nations that specialize in the production of other products. By this mechanism, the variety of products available to consumers in each nation is increased, while the average costs of those products should fall, as should their price, freeing resources to produce other goods and services. The theory also suggests that a country may predominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce that good. Because they are able to gain economies of scale, the first movers in an industry may get a lock on the world market that discourages subsequent entry. First-movers' ability to benefit from increasing returns creates a barrier to entry
34. What is USMCA and what are its main objectives? Identify the member countries. Be able to identify other regional agreements.
North American Free Trade Agreement (NAFTA) Free trade area among Canada, Mexico, and the United States. NAFTA'S Contents The contents of NAFTA include the following: - Abolition by 2004 of tariffs on 99 percent of the goods traded among Mexico, Canada, and the United States. - Removal of most barriers on the cross-border flow of services, allowing financial institutions, for example, unrestricted access to the Mexican market by 2000. - Protection of intellectual property rights. Removal of most restrictions on foreign direct investment among the three member countries, although special treatment (protection) will be given to Mexican energy and railway industries, American airline and radio communications industries, and Canadian culture. - Application of national environmental standards, provided such standards have a scientific basis. Lowering of standards to lure investment is described as being inappropriate. - Establishment of two commissions with the power to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored. Proponents of NAFTA have argued that the free trade area should be viewed as an opportunity to create an enlarged and more efficient productive base for the entire region. Mexico would benefit from much-needed inward investment and employment. The United States and Canada would benefit because the increased incomes of the Mexicans would allow them to import more U.S. and Canadian goods, thereby increasing demand and making up for the jobs lost in industries that moved production to Mexico. U.S. and Canadian consumers would benefit from the lower prices of products made in Mexico. In addition, the international competitiveness of U.S. and Canadian firms that moved production to Mexico to take advantage of lower labor costs would be enhanced, USMCA - United States-Mexico-Canada Agreement the United States-Mexico-Canada Agreement, or USMCA for short, this new agreement is essentially an updated version of the original NAFTA treaty, with some key changes. Most significantly, NAFTA required automakers to produce 62.5 percent of a vehicle's content in North America to qualify for zero tariffs. The USMCA raises that threshold to 75 percent. The idea is to compel automakers to source fewer parts for a car assembled in North America from Germany, Japan, South Korea, or China. The USMCA agreement also mandates that by 2023, 40 percent of parts for any tariff-free vehicle must come from a so-called high-wage factory. Those factories must pay a minimum of $16 an hour in average salaries for production workers, which is about triple the average wage in a Mexican factory right now The Trump administration clearly hopes these provisions will increase the production of automobiles and component parts in the United States. Critics see the USMCA as likely to result in trade diversion rather than trade creation and argue that the consequences may include higher costs to North American automobile producers and higher prices for consumers. In addition to the changes to automobile trade, the USMCA included an agreement to open up the Canadian dairy market to U.S. producers, which was an important issue for Trump. The USMCA also made some changes to intellectual property regulations. The terms of copyright were extended to 70 years beyond the life of the author (up from 50). It also includes new provisions to deal with the digital economy, including prohibiting duties on things like music and ebooks and protections for Internet companies so they are not liable for content their users produce. Finally, the agreement adds a 16-year sunset clause—meaning the terms of the agreement expire, or "sunset," after 16 years. The deal is also subject to a review every six years, at which point the United States, Mexico, and Canada can decide to extend the USMCA.
13. What are the 4 attributes of Porter's Diamond?
Porter theorizes that four broad attributes of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage (see Figure 6.5). These attributes are 1. Factor endowments—a nation's position in factors of production, such as skilled labor or the infrastructure necessary to compete in a given industry. 2. Demand conditions—the nature of home-country demand for the industry's product or service. 3. Related and supporting industries—the presence or absence of supplier industries and related industries that are internationally competitive. 4. Firm strategy, structure, and rivalry—the conditions governing how companies are created, organized, and managed and the nature of domestic rivalry. Porter speaks of these four attributes as constituting the diamond. He argues that firms are most likely to succeed in industries or industry segments where the diamond is most favorable. He also argues that the diamond is a mutually reinforcing system. The effect of one attribute is contingent on the state of others
23. Define portfolio investment and foreign direct investment. Identify some examples of FDI.
Portfolio Investment - Foreign portfolio investment (FPI) refers to the purchase of securities and other financial assets by investors from another country. Examples of foreign portfolio investments include stocks, bonds, mutual funds, exchange traded funds Foreign Direct Investment (FDI) - Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a good or service in a foreign country. According to the U.S. Department of Commerce, FDI occurs whenever a U.S. citizen, organization, or affiliated group takes an interest of 10 percent or more in a foreign business entity. Other nations use similar classifications. Once a firm undertakes FDI, it becomes a multinational enterprise. While much FDI takes the form of greenfield ventures—building up subsidiaries from scratch—acquisitions and joint ventures with well-established foreign entities are also important vehicles for foreign direct investment FDI takes two main forms. The first is a greenfield investment, which involves the establishment of a new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country. Examples of FDI: 1. )Purchase of assets: Quick entry, local market know-how, local financing may be possible, eliminate competitor, buying problems 2.) New investment: No local entity is available for sale, local financial incentives, no inherited problems, long lead time to generation of sales 3.) International joint-venture: Shared ownership with local and/or other non-local partner and Shared risk.
3. How do decreasing trade barriers affect business?
Positive: 1.) the volume of world trade has been growing for good and services. 2.) increase of value of foreign direct investment. 3. )Firms can disperse parts of their production process to different locations around the globe to drive down production costs and increase production quality. 4.) economies of world nation states become even more intertwined. dependent on each other for imported goods and services 5.) creates wealth 6.) possibility of firms to create and manage globally disperse production systems, further facilitating the globalization of production due to lower barriers. 7.) low cost transportation has made it more economical to ship products around the world, helping create global markets. 8.) reduction of cultural distance, convergence of consumer tastes and preferences. Negative: - "protection" from foreign competitors - Protect jobs at home market. - If trade barriers decline no further, or continue to rise, this may slow the rate of globalization of both markets and production.
10. What are the stages a new product passes through according to the International Product Life Cycle? Where does production takes place at each stage?
Product Life Cycle: Follows the development of new products as it moves from home country production to export to foreign production Many new products are also introduced simultaneously into the U.S., Europe, and Asia Firms use globally dispersed production from the start. "Just because a new product is developed by a U.S. firm and first sold in the U.S. market, it does not follow that the product must be produced in the United States. It could be produced abroad at some low-cost location and then exported back into the United States" US Example: For Production at each stage: 1. 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 is limited to high-income groups. The limited initial demand in other advanced countries does not make it worthwhile for firms in those countries to start producing the new product, but it does necessitate some exports from the United States to those countries. 2. Over time, demand for the new product starts to grow in other advanced countries (e.g., Great Britain, France, Germany, and Japan). As it does, it becomes worthwhile for foreign producers to begin producing for their home markets. In addition, U.S. firms might set up production facilities in those advanced countries where demand is growing. Consequently, production within other advanced countries begins to limit the potential for exports from the United States. 3.As the market in the United States and other advanced nations matures, the product becomes more standardized, and price becomes the main competitive weapon. As this occurs, cost considerations start to play a greater role in the competitive process. Producers based in advanced countries where labor costs are lower than in the United States (e.g., Italy and Spain) might now be able to export to the United States. If cost pressures become intense, the process might not stop there. The cycle by which the United States lost its advantage to other advanced countries might be repeated once more, as developing countries (e.g., Thailand) begin to acquire a production advantage over advanced countries. 4. Thus, the locus of global production initially switches from the United States to other advanced nations and then from those nations to developing countries. The consequence of these trends for the pattern of world trade is that over time, the United States switches from being an exporter of the product to an importer of the product as production becomes concentrated in lower-cost foreign locations. Modern Day: Moreover, with the increased globalization and integration of the world economy discussed in , an increasing number of new products (e.g., tablet computers, smartphones, and digital cameras) are now introduced simultaneously in the United States and many European and Asian nations. This may be accompanied by globally dispersed production, with particular components of a new product being produced in those locations around the globe where the mix of factor costs and skills is most favorable (as predicted by the theory of comparative advantage). In sum, although Vernon's theory may be useful for explaining the pattern of international trade during the period of American global dominance, its relevance in the modern world seems more limited.
18. What are the arguments for trade restrictions for protecting jobs, infant industries, dumping, strategic trade policy, and national defense?
Protecting Jobs (Political) - the most common political argument for government intervention is that it is necessary for protecting jobs and industries from unfair foreign competition. Competition is most often viewed as unfair when producers in an exporting country are subsidized in some way by their government Infant Industries (Economic) - New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations. - support new industries (with tariffs, import quotas, and subsidies) until they have grown strong enough to meet international competition. - This argument has had substantial appeal for the governments of developing nations during the past 50 years, and the GATT has recognized the infant industry argument as a legitimate reason for protectionism. Cons: - First, protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient. In case after case, however, protection seems to have done little more than foster the development of inefficient industries that have little hope of ever competing in the world market - Second, the infant industry argument relies on an assumption that firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital market - Today, if a developing country has a potential comparative advantage in a manufacturing industry, firms in that country should be able to borrow money from the capital markets to finance the required investments. Given financial support, firms based in countries with a potential comparative advantage have an incentive to endure the necessary initial losses in order to make long-run gains without requiring government protection. Dumping (Antidumping) - Antidumping policies are designed to punish foreign firms that engage in dumping. The ultimate objective is to protect domestic producers from unfair foreign competition. Although antidumping policies vary from country to country, the majority are similar to those used in the United States. If a domestic producer believes that a foreign firm is dumping production in the U.S. market, it can file a petition with two government agencies, the Commerce Department and the International Trade Commission (ITC). If a complaint has merit, the Commerce Department may impose an antidumping duty on the offending foreign imports (antidumping duties are often called countervailing duties). These duties, which represent a special tariff, can be fairly substantial and stay in place for up to five years. Strategic Trade Policy (economic) - Government policy aimed at improving the competitive position of a domestic industry and/or domestic firm in the world market. The strategic trade policy argument has two components. First, it is argued that by appropriate actions, a government can help raise national income if it can somehow ensure that the firm or firms that gain first-mover advantages in an industry are domestic rather than foreign enterprises. Thus, according to the strategic trade policy argument, a government should use subsidies to support promising firms that are active in newly emerging industries The second component of the strategic trade policy argument is that it might pay a government to intervene in an industry by helping domestic firms overcome the barriers to entry created by foreign firms that have already reaped first-mover advantages National Defense/Security - Countries sometimes argue that it is necessary to protect certain industries because they are important for national security. Defense-related industries often get this kind of attention (e.g., aerospace, advanced electronics, and semiconductors). Retaliating Some argue that governments should use the threat to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to "play by the rules of the game." If it works, such a politically motivated rationale for government intervention may liberalize trade and bring with it resulting economic gains. It is a risky strategy, however.
22. What is the WTO and what is its trade dispute resolution process and its purpose.
Purpose: The WTO acts as an umbrella organization that encompasses the GATT along with two sister bodies, one on services and the other on intellectual property. The WTO's General Agreement on Trade in Services (GATS) has taken the lead in extending free trade agreements to services. The WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an attempt to narrow the gaps in the way intellectual property rights are protected around the world and to bring them under common international rules. WTO has taken over responsibility for arbitrating trade disputes and monitoring the trade policies of member countries. While the WTO operates on the basis of consensus as the GATT did, in the area of dispute settlement, member countries are no longer able to block adoption of arbitration reports Process: Arbitration panel reports on trade disputes between member countries are automatically adopted by the WTO unless there is a consensus to reject them. Countries that have been found by the arbitration panel to violate GATT rules may appeal to a permanent appellate body, but its verdict is binding. If offenders fail to comply with the recommendations of the arbitration panel, trading partners have the right to compensation or, in the last resort, to impose (commensurate) trade sanctions. Every stage of the procedure is subject to strict time limits. Thus, the WTO has something that the GATT never had—teeth
39. Describe current rates, forward rates, direct, & indirect quotes, and freely convertible currencies.
Spot Exchange Rate The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day. Change continually. Reported on real time basis. "Todays Rate" Indirect Quote - US dollars in foreign currency Direct Quote - foreign currency in US dollars 1.) Direct and Indirect quotes are recipricols of eachother. 2.) Direct quote = 1/indirect quote Indirect quote = 1/direct quote EX: 1 yen = 0.010506 (Direct Quote) 1 USD = 95.18 yen ( indirect quote) Direct Quote = 1/95.18 Indirect Quote = 1/0.010506 = 95.18 Forward Exchange Rate When two parties agree to exchange currency and execute a deal at some specific date in the future. Used to hedge against risk. Influenced by expected interest rates and inflation rates. Freely Convertible Currencies - A country's currency is freely convertible when the government of that country allows both residents and nonresidents to purchase unlimited amounts of foreign currency with the domestic currency. Free convertibility is not universal. Many countries place some restrictions on their residents' ability to convert the domestic currency into a foreign currency (a policy of external convertibility). Restrictions range from the relatively minor (such as restricting the amount of foreign currency they may take with them out of the country on trips) to the major (such as restricting domestic businesses' ability to take foreign currency out of the country).
17. What are the benefits and costs of government subsidies?
Subsidies - Government payments such as cash grant, low interest loan, tax break, government equity. Benefits 1. By lowering production costs, subsidies help domestic producers in two ways: (1) competing against foreign imports and (2) gaining export markets. 2. subsidies can help a firm achieve a first-mover advantage in an emerging industry. If this is achieved, further gains to the domestic economy arise from the employment and tax revenues that a major global company can generate. 3. benefit domestic producers by limiting import competition. Costs 1. government subsidies must be paid for, typically by taxing individuals and corporations. 2. In practice, many subsidies are not that successful at increasing the international competitiveness of domestic producers. Rather, they tend to protect the inefficient and promote excess production.
35. What are the main components of the Bretton Woods Agreement?
The Bretton Woods system of fixed exchange rates was established in 1944. The U.S. dollar was the central currency of this system. the value of every other currency was pegged to its value. established two multinational insitutions 1.) International Monetary Fund (IMF) - maintain order in the international monetary system. 2.)World Bank - promote economical development to third world nations. 3.) system of fixed exchange rates policed by the IMF. 4.) all countries were to fix the value of their currency in terms of gold but not required to exchange their currencies for gold. 5.) each country decided what it wanted its exchange rate to be "vis-a-vis" the dollar and then calculated the gold par of the currency based on the selected dollar exchange rate. 6.) all participating countries agreed to maintain the value of their currencies within 1% of the par value by buying or selling currencies (or gold) as needed. 7.) Not use devalutation as a weapon of competitive trade policy. devaluation of Up to 10% would be allowed if a currency became too weak to defend without formal approval by the IMF. Larger devaluations required IMF approval.
21. Explain GATT's purpose. Discuss the results of the Uruguay Round.
The GATT was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import quotas, and the like. From its foundation in 1947 until it was superseded by the WTO, the GATT's membership grew from 19 to more than 120 nations. The GATT did not attempt to liberalize trade restrictions in one fell swoop; that would have been impossible. Rather, tariff reduction was spread over eight rounds. Uruguay Round: Until then, GATT rules had applied only to trade in manufactured goods and commodities. In the Uruguay Round, member countries sought to extend GATT rules to cover trade in services. They also sought to write rules governing the protection of intellectual property, to reduce agricultural subsidies, and to strengthen the GATT's monitoring and enforcement mechanisms. The Uruguay Round dragged on for seven years before an agreement was reached on December 15, 1993. It went into effect July 1, 1995. The Uruguay Round contained the following provisions: 1. Tariffs on industrial goods were to be reduced by more than one-third, and tariffs were to be scrapped on more than 40 percent of manufactured goods. 2. Average tariff rates imposed by developed nations on manufactured goods were to be reduced to less than 4 percent of value, the lowest level in modern history. 3. Agricultural subsidies were to be substantially reduced. 4. GATT fair trade and market access rules were to be extended to cover a wide range of services. 5. GATT rules also were to be extended to provide enhanced protection for patents, copyrights, and trademarks (intellectual property). 6. Barriers on trade in textiles were to be significantly reduced over 10 years. 7. The World Trade Organization was to be created to implement the GATT agreement.
9. What is the Heckscher-Ohlin Theory (factor endowments) of International Trade? What did Leontief predict in his study? Explain the paradox that Leontief identified.
The Heckscher-Ohlin theory: They argued that comparative advantage arises from differences in national factor endowments. By factor endowments, they meant the extent to which a country is endowed with such resources as land, labor, and capital. Nations have varying factor endowments, and different factor endowments explain differences in factor costs; specifically, the more abundant a factor, the lower its cost. The Heckscher-Ohlin theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. Thus, the Heckscher-Ohlin theory attempts to explain the pattern of international trade that we observe in the world economy. Like Ricardo's theory, the Heckscher-Ohlin theory argues that free trade is beneficial. Unlike Ricardo's theory, however, the Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in factor endowments, rather than differences in productivity. Note that it is relative, not absolute, endowments that are important; a country may have larger absolute amounts of land and labor than another country but be relatively abundant in one of them Leontief predictions in his study and the paradox that Leontief identified: -Leontief postulated that because the United States was relatively abundant in capital compared to other nations, the United States would be an exporter of capital-intensive goods and an importer of labor-intensive goods. To his surprise, however, he found that U.S. exports were less capital intensive than U.S. imports. Because this result was at variance with the predictions of the theory, it has become known as the Leontief paradox. Us exports were labor intensive, not capital intensive goods that heavily use skilled labor and innovative entrepreneurship, such as computer software (labor intensive) , while importing heavy manufacturing products that use large amounts of capital (capital intensive )
33. What are the main objectives of the Single European Act?
The Single European Act (1987) committed EC countries to work toward establishment of a single market by 1992 The Act proposed to: • Remove all frontier controls between EC countries • Apply the principle of mutual recognition to product standards • Institute open procurement to non-national suppliers • Lift barriers to competition in retail banking and insurance • Remove all restrictions on foreign exchange transactions between member countries • Abolish restrictions on cabotage To signify the importance of the Single European Act, the European Community also decided to change its name to the European Union once the act took effect.
24. Why do firms go abroad?
The answer can be found by examining the limitations of exporting and licensing as means for capitalizing on foreign market opportunities. Transportation costs aside, some firms undertake foreign direct investment as a response to actual or threatened trade barriers such as import tariffs or quotas. By placing tariffs on imported goods, governments can increase the cost of exporting relative to foreign direct investment and licensing. Similarly, by limiting imports through quotas, governments increase the attractiveness of FDI and licensing. All of this suggests that when one or more of the following conditions holds, markets fail as a mechanism for selling know-how and FDI is more profitable than licensing: (1) when the firm has valuable know-how that cannot be adequately protected by a licensing contract, (2) when the firm needs tight control over a foreign entity to maximize its market share and earnings in that country, and (3) when a firm's skills and know-how are not amenable to licensing. a firm will favor foreign direct investment over exporting as an entry strategy when transportation costs or trade barriers make exporting unattractive. Furthermore, the firm will favor foreign direct investment over licensing (or franchising) when it wishes to maintain control over its technological know-how, or over its operations and business strategy, or when the firm's capabilities are simply not amenable to licensing, as may often be the case. Moreover, gaining technology, productive assets, market share, brand equity, distribution systems, and the like through FDI by purchasing the assets of an established company can all speed up market entry, improve production in the firm's home base, and facilitate the transfer of technology from the acquired company to the acquiring company.
37. What is the Jamaica Accord?
The floating exchange rate regime that followed the collapse of the fixed exchange rate system was formalized in January 1976, when IMF members met in Jamaica and agreed to the rules for the international monetary system that are in place today. 1.) Floating rates were declared acceptable 2.) Gold was abandoned as a reserve asset. The IMF returned its gold reserves to members at the current market price, placing the proceeds in a trust fund to help poor nations. IMF members were permitted to sell their own gold reserves at the market price. 3.) Total annual IMF quotas—the amount member countries contribute to the IMF —were increased to $41 billion.
40. What are the factors that affect future exchange movements?
The rate of change in countries' relative prices depends on their relative inflation rates. A country's inflation rate seems to be a function of the growth in its money supply. Interest rates reflect expectations about inflation. In countries where inflation is expected to be high, interest rates also will be high. 1) the country's price inflation, 2) it's interest rate, 3) market psychology.
Fisher effect
an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged
29. What are the 5 levels of economic integration?
from least integrated to most integrated 1) Free Trade Area - a. no trade barriers between member states (decrease tariffs) - most common (90% of all agreements)ex. NAFTA, EFTA 2) Customs Union - a.) no trade barriers between member states (decrease tariffs) b.) COMMON external trade policy ex: Andean Community 3) Common Market - a.) no trade barriers between member states (decrease tariffs) b.) common external trade policy c.) free flow of factors of production between member countries ex. Mercosur hopes to achieve this 4) Economic Union - a.) no trade barrier between member states (decrease tariffs) b.) common external trade policy c.) free flow of factors of production between member countries d.) common currency , harmonization of tax rates, common monetary & fiscal policy -requires coordinating bureaucracy & sacrifice of national sovereignty ex: European Union (although imperfect) 5) Political Union - Independent states are combined into a single union with a central apparatus to coordinate policies. 1) all of the characteristics of an Economic Union 2) common governmental bureaucracy ex: U.S. or Soviet Union
free trade
government does not attempt to restrict what its citizens can buy from or sell to another country. the absence of barriers
IMF (International Monetary Fund)
organization which gives loans to poor countries The IMF's original function was to provide a pool of money from which members could borrow, short term, to adjust their balance-of-payments position and maintain their exchange rate. Some believed the demand for short-term loans would be considerably diminished under a floating exchange rate regime. A trade deficit would presumably lead to a decline in a country's exchange rate, which would help reduce imports and boost exports
16. What are quotas, voluntary export restraints, local content requirements, & and administrative barriers? Explain how these items might affect trade and consumers.
quota - a direct restriction on the quantity of some good that may be imported into a country. voluntary export restraint - quota's on the trade of a single product that is imposed by the exporting country. local content requirements- is a requirement that some specific fraction of a good be produced domestically. administrative barriers - Administrative policies, typically adopted by government bureaucracies, that can be used to restrict imports or boost exports. how these items might affect trade and consumers... 1. both import quotas and VERs benefit domestic producers by limiting import competition. 2. As with all restrictions on trade, quotas do not benefit consumers. An import quota or VER always raises the domestic price of an imported good. 3. LCR = They have also been used in developed countries to try to protect local jobs and industry from foreign competition. 4. Local content regulations provide protection for a domestic producer of parts in the same way an import quota does: by limiting foreign competition. The aggregate economic effects are also the same; domestic producers benefit, but the restrictions on imports raise the prices of imported components. 5. higher prices for imported components are passed on to consumers of the final product in the form of higher final prices. So as with all trade policies, local content regulations tend to benefit producers and not consumers. 6. administrative policies to restrict imports and boost exports.
32. What is the political structure of the European Union? What is each entity responsible for?
refer to picture or class slides
Dumping
selling products in a foreign country at lower prices than those charged in the producing country Dumping is viewed as a method by which firms unload excess production in foreign markets. Some dumping may be the result of predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market.
Arbitrage
the purchase of securities in one market for immediate resale in another to profit from a price discrepancy
What is globalization?
the trend towards a more integrated and interdependent economy.
12. Explain Porter's Theory of National Competitive Advantage.
why a nation achieves international success in a particular industry. Porter's work was driven by a belief that existing theories of international trade told only part of the story. For Porter, the essential task was to explain why a nation achieves international success in a particular industry.
