Exam 2 GEB

Sterling Based Gold Standard

gold standard in which the British pound is commonly used as an alternative means of settlement of transactions (post WWI)

Fixed exchange rate

a system under which the exchange rate for converting one currency into another is fixed

FDI WINNERS ABROAD:

egypt china and hongkong Brazil Russia Bngladesh and Vienmar

IDA (world bank)

created in the 1960s to provide soft loans to the worlds poorest countries in accepting the risk that it may not be repaid.

Ownership Advantage Theory

firm owns some unique competitive advantage that would give it an edge in the global market

During the start of the bretton woods system, people

had faith in the stability of the US dollar.

In our scheme of comparative advantage, the only input is

labor hours avaliable

IFC (world bank)

promotes developments of countries' private sectiors. Similar to investment banking in LDC, equity capital loans... is long term debt for private investors that want to do business in these countries.

FDI is not explainable by

national or industry differences in rates of return.

World Bank lending policies

"hard loans" made to projects that a national government can guarantee, with a reasonable expectation that the loan can be paid back.

Modern Trade Theories

(1) Product Life Cycles (2) Country Similiarity Theory 3) New Trade Theory 4) Porter's Theory of National Competitive Advantage

The H-O theory observations:

1) Factor Endowments: Labor and Capital, land, technology 2) Endowments vary among countries 3) Goods differ according to the types of resources used to produce them. The world's richest countries have a lot of capital; the worlds poorest countries have a lot of labor

Components of Absolute Advantages:

1) Only produce what you have an absolute advantage in. Export the goods in which you are more productive. 2) Import the goods that only another country has an absolute advantage in.

Four Ways of achieving a Sustainable competitive advantage:

1) Owning intellectual Property Rights 2) Investing in research and development (making a better product and getting rapid consumer feedback) 3) Achieving economies of scope (producing large variety of goods and therefore decreasing input costs) 4) Exploiting the experience curve (costs fall as a firm gains experience in manufacturing a product)

Which country was the first to adopt the gold standard and in what year?

1821 and the UK

The World Bank is owned by

189 countries whose voting rights are proportional to their contributions The US has the largest share of votes

Germany's huge surplus in its BOP is

8% of its GDP

Internalization Advantage

: firm benefits from controlling business abroad rather than contracting out

How does the comparative advantage theory work with money?

A country with a comparative advantage in a good can sell that good for less. rational buyers, wanting a cheaper price, will buy that country's good.

Internatlization Theory (International investment)

A firm is more likely to chose FDI when it faces high transaction costs when doing business within its own country Transaction costs that are high cause a firm to internalize operations within a firm - they may make plants abroad and have FDI, but it would still be considered in house. Transaction costs that are low in a foreign country cause a firm to spend FDI and contract with a partner in foreign country. The firm is more likely to export, liscence or have things done out of house

Beggar-the-Neighbor Policies

A theory employed by some central European countries post-WWI that attempted to promote domestic economic growth, but ignored the impact on foreign countries; led to the decline of the European economy and helped begin the rise of Hitler, Mussolini, and Stalin (Chapter 16) Double Sided policy to increase GDP: decrease value of currency to increase exports tax imports to decrease importing. The only problem was....everyone was doing this. Tariffs went up! Collapse in Global Trade

The Bretton Woods Conference was held in

Bretton Woods, New Hampshire

How can government effect the economy?

By controlling the size of moneys supply (monetary policy) or by fiscal policy (taxes and govt spending)

Recently, what country has been more active in the World Bank and IMF?

China

Leontif Paradox

Concerning the H-O model, you would think that the US has a comparative advantage in making capital-intensive goods and not import them. SURPRISE! US exports are less capital intensive than US imports!

Product Life Cycle: Standardized Product Stage

Demand for product stabalizes Product becomes a commodity Manufactures try to cut costs and often move production facilities to countries where the wage rate is low.

Product Life Cycle Theory: Maturing Stage

Demand increases Company expands capacity Beginning to sell foreign Competitors enter competition at home and abroad with copycat products, drawn by possible profits

What type of product most typically follows the Product Life Cycle Theory stages?

Electronic devices

Who might favor mercantalism? (includes protectionism)

Empires amassing wealth or agricultural workers - especially labor unions, textile and steel industry

Why is Britian still an important financial center?

England established its dominance under the Sterling Based Gold Standard in which the UK pound was often the peg in which other currencies tied their value to.

Demise of the Gold Standard

Explicitly came in the Great Depression and countries had to abandon this fixed rate system, letting the money float- especially Britian in 1931

Types of International Investment

FDI and FPI

Ownership Advantage Theory (International Investment)

Firm have an "ownership advantage" when they own valuable assets that make them competitive domestically and can use that advantage to enter foreign markets through FDI. ex) pharmaceuticals, advanced technology, well known brand names or an economy of scale.

MIGA (world bank)

Insures private investors against political risks

The official Name of the World Bank

International Bank for Reconstruction and Development (IBRD)

Modern Trade Based Theories focus on what parties?

Intra - industry trade between businesses, because the Classical trade theories couldn't explain why people in the same field would want to trade similiar products with each other!

IMF vs World Bank

The IMF gives out loans to countries to finance debts, World Bank gives financing to country projects

The Three Theories Explaining FDI - International Investment Theories

Ownership Advantage Theory Internalization Theory Dunning Eclectic Theory

In the Gold Standard, the fixed exchange rate between a currency A, and currency B is:

Par Value of Currency A / Par Value of Currency B

The Bretton Woods System as an adjustable fixed exchange rate system:

Pegs of +/- 1% of the price of the dollar could be adjusted if the coutnry was experiencing severe economic problems. A country could devalue is currency or appreciate it to modify its peg.

Exchange Rate

Price of one currency in terms of another

Supply Factors effecting International Investment

Production cost: Prices, taxes, labor cost Logistics: Transport price and dist. cost Natural Resource: does the country have them Key Technology: Does the company have the technology it needs?

Goals of the International Monetary Fund:

Promote internation monetary corporation Facilitate international trade Maintain exchange stability

Comparative Advantage formula

RATIO: GOOD YOU'RE GIVING UP/ GOOD YOU'RE PRODUCING who is giving up less resources to produce more? The lowest number wins in this instance, and it is impossible for a country to have more than one comparative advantage.

Not all international investment can be explained by FDI and International Invesment Theories. What other factors come into play when examining this?

Supply Factors Demand Factors Political Factors

Dollar-Based Gold Standard

The Bretton Woods system in which the dollar was pegged to equal 1/35th an ounce of gold

What causes difference in productivity? What theory speaks to this?

The Heckscher-Ohin theory (theory of relative factor endowments) proposes that locally abundant factors determine a nation's comparative advantage.

From the Bretton Woods conference, what two new institutions emerged?

The World Bank (International Bank for Reconstructon and Development) and the International Monetary Fund, alongside a new version of the gold standard

Par value

The official price in terms of gold

What does it mean to let a currency float?

The value of the currency is determined by supply and demand and not by a fixed exchange rate regime.

The Main Problem with the gold standard was

The world needed money, but the supply of gold was stable - you can't alchemize this stuff, so it becomes impossible to manage as everyone starts getting richer.

If Country B pegs the value of its currency to country A....

Then the currency will not rise or fall below a cer

According to Dr. Phalin, the only thing that truly is valuable is

Time

Political Factors effecting International Investment

Trade Barriers: Produce abroad to avoid higher tariffs that might be associated with exporting (CH 9) Economic Incentives to produce abroad to take advantage of policies encouraging FDI

Most FDI is either made by or goes to the world's richest nations.

True: Most FdI comes from developed countries and also goes to developed countries.

It is possible to have a country with two absolute advantages. What solves this?

True; the theory of comparative advantage solves this

The gold standard is a

Truly fixed exchnge rate sytstem, with the value of currency pegged to gold

Largest Investor in USA FDI

UK

Classical Theories of Trade Deal with what types of goods?

Undifferentiated commodoties and homogenous goods

The Collapse of the Gold Standard Began Around

WWI, where the demand for money to fuel wartime efforts far outnumbered the supply of gold in treasuries.

The Lincoln Fallacy and its problems

When we produce goods and buy at home, we get the goods and the money. When we buy abroad, the foreigner gets the goods and the money. Fails to consider that some things can not be manufactures domestically. If you're making things you're not that efficient in, you're wasting money and resources Solution: International Trade

USA EB-5 Program

allows immigrants permnent citizenship if they invest 500,000 dollars or make 10 jobs.

IMF conditionality

an agreement to loan IMF funds past the usual 25% of the country's quota rate on the condition that certain government policies are adopted

ICSID

arbitrates disputes between foreign investors and national governments. Like MIGA, it promotes private investment in developing countries

The World Bank was established

in 1945 under the Marshall plan to help rebuild Europe after WWII, but now it helps developing economies.

Sovereign Wealth Funds (SWFs)

investment funds controlled by governments holding large stakes in foreign companies. They played a huge role in the 2008 recession in trying to bail out banks. Most of this investment is FPI.

Regional Development Bank

localized organiztions that play a similiar role to the World Bank.

Types of Classical Trade Theories

mercantalism absolute advantage comparative advantage

pegging a currency

setting the value of a currency in relation to another currency or item

Currency and all forms of valuables base their value on

the value that we give to them, they have no instrinsic inherent value

Product Life Cycle Theory

theory suggesting that a nation's comparative advantage will change over time, because products progress through a typical life cycle. There are three stages: New Product Stage, Maturing Product Stage and Standardized Product Stage.

Country similarity theory

trade in manufactured goods is between countries that have similiar per capita income. People in contries with similiar per capita incomes have similiar prefrences. Explains why US may trade with Germany for different types of cars, or Japan with the US depending on the shared goals of consumers abroad.

To join the IMF what must you do? How is it determined?

A country must pay a quota, partly in its currency and partly in gold to join. The quota is determined by the size of the countries economy, determines its voting rights and serves as a part of its official reserves. Members have the unconditional right to borrow up to 25% of their quota from the IMF The US contributes 17.5%

H-O theory

Adds to the theory of comparative advantage: a country will have a comparative advantage in producing the products that intensively uses the resources it has in abundance.

Mercantilism

An economic policy under which nations sought to increase their wealth and power by obtaining large amounts of gold and silver and by selling more goods than they bought Goal: Export more than you import

Porter's Theory of National Competitive Advantage

Combines country and firm based approaches to show why a certain industry in a country might be competitive on a global scale. Countries can create environments for more of less success, but the decisions of firms make them responsible for their performance. 4 Factors: (a) factor conditions - TYPE OF RESOURCES ABUNDANT (b) domestic demand conditions, - A GOOD CONSUMER BASE THAT STIMULATES THE ECONOMY AND MAKES BUSINESSES SUPPLY INNOVATIVE PRODUCTS TO FINE TUNE BEFORE GOING GLOBAL (c) related and supporting industries - POPULATED SUPPLY CHAINS CAN LEAD TO LOWER COSTS FOR HIGHER QUALITY (d) firm strategy, structure, and rivalry. - FACING COMPETITION ALLOWS A BUSINESS TO PUSH TO DO BETTER

Dunning's ecletic Theory

Combines the Internalization theory and the Ownership Advantage theory, BUT ADDS LOCATION AS A FACTOR IN states that International Investment (FDI) Occurs when it has the following advantages: Ownership advantage : firm owns some unique competitive advantage that would give it an edge in the global market. Location Advantage: Doing business abroad is more profitable than just staying at home. Internalization Advantage: firm benefits from controlling business abroad rather than contracting out

The trade of L'Oreal products and Maybelline products from France to the USA is explained by what theory of trade best? (Or, brand name might be integral to which trade theory?)

Country Similarity Theory

Classical Theories of Trade assume the parties are at what level?

Country Wide Level

Great Trade Collapse

Created by beggar thy neighbor policies that caused a collapse in trade and allowed for high inflation unemployement and general politiical instability that caused the rise of Hitler Mussolini and Stalin

Demand factors effecting Internation Investment

Customer Access: Does the firm need to be close to customers? Is it close to customers Marketing Advantage: Does the firm benefit from local visibility or some PR advantage Competitive Advantage: Can a firm better exploit its SCA abroad? Customer Mobility: Can firm follow the customer into new markets to avoid losing business?

Product Life Cycle Theory: New Product Stage

Demand is uncertain Developing and introducing innovative product in response to perceived needs Minimizing investment Selling locally and domestically Limited exports Not a lot invested in manufacturing.

Modern trade Based theories deal with what types of goods?

Differentiated good that competes on not lowest price, but who has the better product.

When did the Beggar Thy Neighbor Policy Arise?

During the Great Depression and WWII

In 1931, the collapse of the gold standard started again when

During the great depression, Britian allowed the pound to float

New Trade Theory (Deals with firms and why they go global)

Firms must rapidly expand gloally to take advantage of economies of scale, wen the average cots of production falls s the quantity increases. Serving larger market can do this, so expnding globally is the move. They attempt to leverage their sustainable competitivee advantage to attract more consumers.

The Gold Standard Relied on citizens' beliefs that

For every dollar or fixed amount, there is gold in the national treasury to back it up. Citizens can request this at will and get gold from the government.

FDI

Foreign Direct Investment - Investment made by a foreign company in the economy of another country, or control of 10% or more of a foreign company's assets.

FPI

Foreign portfolio investment - controlling financial asets, such as stocks and bonds, for reasons other than control, such as diversification.

THe Bretton Woods System Relied on

Foreigners and Americans faith in the stability of the dollar

Bretton Woods Era

From 1944 to 1971, the exchange rate at which one currency could be exchanged for another was maintained by governments within 1% of a specified rate. Under this international fixed exchange rate regime, currencies were pegged to the United States dollar, which was based on the gold standard, with gold priced at $35 per ounce. The pegs in the system were adjustable depending on the circumstances of the countries that fell outside its threshold.

Most FDI in the USA

Goes to the East Coast, concentrated in manufacturing and advanced industries. Most FDI only comes from 10 countries!

The new gold standard of Bretton Woods

Held the dollar as the key currency that could be concerted into gold. The dollar was a convertible currency that could be freely exchanged for other currencies.

Cons of Mercantalism

Higher tax from subsidies, cause economic harm in the longer term

The affiliated organizations of the world bank:

IDA - International Development Association IFC - International Finance corporation MIGA - Multilateral Guarantee Agency ISCID - arbitration HQ

Theory of Absolute Advantage (Adam Smith)

If a country can produce a certain good more efficiently than other countries, it will trade with countries that produce other goods more efficiently. A COUNTRY SHOULD ONLY PRODUCE GOODS IN WHICH IT H AN ABSOLUTE ADVANTAGE

In the BW system, if the currency value fell out of the +/- 1% range....

The country's government was required to intervene by buying and exchanging in the foreign market to regulate it. In extreme circumstances, if the value could not be maintained, the currency would be devalued and the threshold would be moved to a new peg.

Adam Smith is creditied as

The father of economics The absolute advantage theory the invisible hand writing the wealth of nations

Gold Standard

a monetary standard under which the basic unit of currency is defined by a stated quantity of gold

Theory of Comparative Advantage

a theory which states that countries benefit from specializing in (and exporting) goods and services in which they have relative advantage, and they benefit from importing goods and services in which they have a relative disadvantage - there can be only one relative advantage and oppurtunity cost is used in evaluation.