IB Exam 1

GDP

(Gross Domestic Product) measures the total value of national (geographical boundaries) output of goods and services produced in a given time period

A society's social structure is its basic social organization (2 parts)

1) Basic unit = the individual VS. the group 2) Degree of stratification into classes or castes

Right-Wing Totalitarianism

A political system in which political power is monopolized by a party, group, or individual that generally permits individual economic freedom but restricts individual political freedom, including free speech, often on the grounds that it would lead to the rise of communism.

Adam Smith - 1776

Absolute Advantage 1. Countries differ in their ability to produce goods efficiently. 2. A country has absolute advantage in producing a product when it is more efficient than any other country in producing it (e.g., Saudi Arabia's oil) 3. Countries should specialize in production of goods they have an absolute advantage in and then trade these goods for goods produced by other countries. 4. Benefits from trade resulting from specialization based on the exploitation of an absolute advantage: increase of overall production/consumption

Solar Solutions, a U.S.-based company, is planning to expand operations to a foreign country. Considering the factors that make a country attractive as a place in which to do business, which country should Solar Solutions consider for entry? Country A, which lacks democratic institutions and has a market-based economic system Country E, which lacks democratic institutions and where property rights are always respected Country C, which has democratic institutions and where corruption is rampant Country D, which has democratic institutions and a market-based economic system Country B, which has democratic institutions and where economic activity is heavily regulated by the state

Country D, which has democratic institutions and a market-based economic system

Silicon Valley in California is the world center for the computer and semiconductor industry and has many of the world's major computer and semiconductor companies located close to each other there. This provides the location-specific advantage of

Externalities

Michaela works in a country where the government does not set quotas or duties on what its citizens can buy from another country, or what they can produce and sell to another country. In other words, the country where Michaela lives practices

Free trade

gross national income (GNI)

GDP + incomes earned by foreign residents - income earned in the domestic economy by nonresidents

Armen's religion believes in the spiritual progression of each person's soul and that dharma is the moral force guiding behavior. Which religion does this describe?

Hinduism

world's oldest religion

Hinduism

According to the eclectic paradigm, __________ is/are of considerable importance in explaining both the rationale for and the direction of foreign direct investment.

Location specific advantages

Pseudo democracy

Lying somewhere between a pure democracy and complete totalitarianism

Custom Cabinetry International needs immediate access to wood in order to produce an order of 50,000 high-end retail display cases by the end of next year. It cannot afford to wait and establish a new operation in a foreign country where this species of wood is prevalent, so it decides to purchase an existing company instead. Why did Custom Cabinetry decide to make this purchase?

Mergers and acquisitions are quicker to execute than greenfield investments.

Anastasia asked her assistant to determine the gross national income of six different countries by evaluating the GNI against the cost of living in the United States. What measure is Anastasia asking her assistant to use?

Purchasing power parity

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, energy, land, and capital).

culture is not ______

Static -it can and does evolve

Individualism

Suggests individuals should have freedom over economic and political pursuits

Karma (Hinduism)

The belief that actions in this life, whether good or bad, will decide your place in the next life.

Fenton Incorporated plans to do business with a company located in the Leone Republic, a common law country. The companies have agreed to draft the business contract in the Leone Republic. Since the contract will be drafted under a common law framework, it will be

Very detailed with contingencies spelled out

economic system

a set of organized principles that regulate the production and distribution of goods, services and productive factors.

A country's national competitive advantage and its attractiveness as a location for international business are most influenced by

a well-developed education system.

China and Germany specialize in the production of silk and automobiles respectively. They are considered the best at their specialization. Assume that chine trades silk with germany in exchange for automobiles. Which perspective is illustrated by this form of trade?

absolute advantage

values

abstract ideas about what a group believes to be good, right, and desirable

Communist totalitarianism

advocates achieving socialism through totalitarian dictatorship

pure command economy

an economic system in which all resources are government-owned and all production is directed by the central plans of government

pure market economy

an economic system with no government so that private firms account for all production

The main reason that gross national income figures can be misleading is because they

don't consider differences in the cost of living.

Mercantilism

export more than you import

New trade theorists would agree that a country might become dominant in the export of a good simply because it was

following the lead of others

Folkways

norms for routine or casual interaction

Mores

norms that are central to the functioning of a society and its social life

Wise Eyes Corporation has developed a new oral supplement to prevent macular degeneration. Which type of legal protection grants Wise Eyes Corporation exclusive rights for a defined period to the manufacture, use, or sale of this new supplement?

patent

Ocean Athletics is hesitant about entering Ukraine, because the country has been experiencing social unrest in recent years. Based on this information, what type of risk is Ocean Athletics trying to avoid?

political

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

the market mechanism

Government and Trade

• Heavy / Limited / Selective intervention • Unrestricted Free trade

David Hume - 1752

• Increased exports lead to inflation and higher prices of goods (more gold, less goods) • Increased imports lead to lower value of goods. (more goods, less gold) • Result: Country A sells less goods because of higher prices, and Country B sells more goods to Country A because of lower prices. • In the long run, no one can keep a trade surplus and Country A cannot get rich solely by exporting.

Economic Implications of Islam

• Koran establishes explicit economic principles • Under Islam, people do not own property, but only act as stewards for God • Businesses that are perceived to be making a profit through the exploitation of others, by deception, or by breaking contractual obligations are unwelcome

Attractiveness of a country as potential production site

• Labor costs • Education • Presence of infrastructures • PR protection

Creation of a Legal System to Safeguard Property Rights

• Laws protecting private property rights and providing mechanisms for contract enforcement • Without a legal system in place, little incentive to engage in economic activity

Global Institutions

• Manage, regulate, and police the global marketplace • Promote the establishment of multinational treaties to govern the global business system

To maximize its wealth, the government should intervene and

• Maximize exports through subsidies. • Minimize imports through tariffs and quotas.

A country's legal system is important in IB because laws:

• Regulate business practice • Define the manner in which business transactions are to be executed • Set down the rights and obligations of those involved in business transactions

Deregulation

• Removing legal restrictions to the free play of markets • Reducing State-ownership on enterprise • Removing price controls (lower limit & upper limit)

Attractiveness of a country as potential market

• Size of market • Purchasing power • Demographics • PR protection

Patterns of Trade

• Some of the patterns of international trade are rather easy to understand (e.g., Saudi Arabia - oil) • However, others are not so easy to understand... (e.g., Switzerland - pharma industry-30% export, the second largest exporter of packaged medicine in the world)

Benefits of Trade

• Specialize in the manufacturing and exporting products that can be produced most efficiently in that country • Import products that can be produced more efficiently in other countries • Overall gains arise because international trade allows each country to specialize in the most efficient production. • Improvement in economic welfare (overall production/consumption). Increased variety of . goods/services

Buddhism

• Suffering originates in people's desire for pleasure • Stress spiritual growth and the afterlife, rather than achievement while in this world

Confucianism

• Until 1949, official ethical system of China • Not a religion • Three key teachings of Confucianism - loyalty, reciprocal obligations, and honesty

globalization

A shift toward a more integrated and interdependent world economy

Most widely practiced religion

Christianity

David Ricardo - 1817

Comparative Advantage 1. A country should specialize in production of goods that it produces most efficiently [in which has biggest comparative advantage; lowest opportunity cost] 2. ... and buy goods that it produces less efficiently [in which has lowest comparative advantage; highest opportunity cost] from other countries. 3. Results from trade = positive-sum game

Data security software is an expensive process, but manufacturers are able to spread out the costs of the software development over the hundreds of thousands of security programs sold to consumers. What is helping to drive down costs per unit in this situation?

Economies of scale

When compared to American society, some argue that Japanese society is characterized by a lack of

Entrepreneurship.

What would help a firm to preempt available demand, gain cost advantages related to volume, and build an enduring brand ahead of later competitors?

First mover advantages

Which of these companies is demonstrating a first-mover advantage?

Form Health Inc. has more than 50 percent market share in the health forms industry, because no other company has invested in this industry before Form Health Inc.

Totalitarianism

Form of government in which one person or political party exercises absolute control over all spheres of human life

U.S. exports are less capital-intensive than U.S. imports, despite the relative abundance of capital in the country. This is in opposition to the Heckscher-Ohlin theory and is an example of

Leontief's paradox.

Although it normally involves much longer-term commitments, franchising is essentially the service industry version of

Licensing

Dharma (Hinduism)

Moral force in society requires the acceptance of certain responsibilities

Garments are exported from China to the United States on a daily basis. In turn, the United States exports agricultural products like soybeans to China. Which statement best explains the trade equation between China and the United States?

Nations with an absolute advantage in producing certain goods trade them for goods produced by other countries.

Theoretic totalitarianism

Political power is monopolized by a party, group, or individual that governs according to religious principles

Democracy

Political system in which government is by the people, exercised either directly or through slated representatives

Socialism

System that advocates state ownership of the basic means of production, distribution, and exchange

Collectivism

System that stresses the primacy of collective goals over individual goals

In Country A, it takes 10 resources to produce 1 ton of tea and 13.5 resources to produce 1 ton of rice. In Country Z, it takes 40 resources to produce 1 ton of tea and 12 resources to produce 1 ton of rice. Country A has a comparative advantage over Country Z in

Tea

How have new information and communication technologies, including the Internet, affected the political economy in general?

They have reduced a state's ability to control access to uncensored information.

Privatization

Transfers ownership of state property into the hands of private individuals

common law framework contract

Very detailed with contingencies spelled out

Tribal totalitarianism

a political party that represents the interests of a particular tribe monopolizes power

When firms do not wish to accept the rules of the CISG, what do they often opt for to settle contract disputes?

arbitration

A shadow economy is in evidence when

citizens engage in barter agreements to avoid paying taxes.

State-owned enterprises and restricted markets are common in countries where ___________ goals are dominant

collective

an individual's right to do something may be restricted on the grounds that it runs counter to "the good of society" when the political system emphasizes

collectivism

Countries in which the government plans the production of goods and services and also the prices of these items operate in a(n) __________ economy.

command

With increased economic progress, cultures across the world seem to be moving toward some universally accepted values and norms. This is known as the

convergence hypothesis.

All Metals Corp. is considering doing business in Central America but is concerned that some governments have been accused of corrupt practices. What aspect of the overall attractiveness of doing business in Central America does this represent?

costs

trademarks

designs and names, officially registered, by which merchants or manufacturers designate and differentiate their products.

Globalization of Markets

distinct, separate national markets -> global marketplace with converging tastes and preferences (e.g., MacDonald's, IKEA, Starbucks, Apple).

___________ can provide a competitive advantage and make a country more or less attractive for expanding businesses

education oppurtunities

When Steve Jobs and Steve Wozniak co founded Apple, they were acting as __________ since they were the first to commercialize this innovative new product.

entrepreneurs

Charlize is from South Africa and believes that the customs and beliefs of her culture are superior to those she has encountered during her trip to America. Charlize's attitude is an example of

ethnocentrism

copyright

exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit

All societies are stratified on a hierarchical basis into social categories, or social strata. Usually defined by characteristics such as

family background, occupation, and income

Robert knows it is important for him to dress appropriately and make sure his hari is neat when he goes for an interview because the employer expects it. This is an example of

folkway

____________ and development in _____________ are making countries more and more similar

globalization, technology

patent

grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention

Within the context of the individual as the basic unit of a social organization, what is a manifestation of the emphasis on individualism in many Western societies?

high degree of managerial mobility between companies

Market-based economic system likely in countries where ________ goals are given primacy over ________ goals

individual, collective

For a country to sustain long term economic growth, the business environment needs to be conducive to

innovation and entrepreneurship

Monique, French fashion designer sells her merchandise by reporting it to retail stores in US, UK, and Brazil. According to this information monique is participating in:

international trade

Cattle Supply Inc. is a market leader in dairy farming equipment, which is typically large, bulky, and very heavy. In order to compete, Cattle Supply sells its products at very low prices. Although these products can be produced anywhere, the company is considering exporting as a way to grow in overseas markets. The viability of Cattle Supply's exporting strategy could be constrained by transportation costs, particularly of products that can be produced in almost any location and have a

low value-to-weight ratio.

Daveed is the warehouse supply manager for a privately owned auto parts distributor. It is his job to take inventory of the products the company has available and place orders for parts when supplies run low. This supply and demand form of production is an example of a __________ economy.

market

Three types of economic systems:

market economy, command economy, mixed economy

If a country wants to improve its attractiveness as a place for doing business and as an investment site, it should

move toward a market-based system.

The rise of Islamic fundamentalism is, in part, a response to the

movement in traditional Islamic societies toward modernization.

Once it undertakes FDI, a firm becomes a(n)

multinational enterprise

In a society, actions of people directed toward one another are governed by a set of social rules called

norms

If the United States invests in paper towel production facilities in Mexico, it would be engaging in

offshore production

Max Williamson invented a self-sealing food storage container and in order to protect his intellectual property should secure a __________ on this product.

patent

Solar Auto Group, based in California, creates a new solar-powered car. The demand for the product in the United States is high but very low or nonexistent elsewhere. The company decides not to locate manufacturing facilities elsewhere and will simply meet the small foreign demand via exports. The theory that best explains the company's policy is

product life-cycle theory.

Economist Hernando de Soto believes that the benefits of capitalism will not be achieved until

property rights are better protected.

Purchasing power parity (PPP)

provides a more direct comparison of living standards in different countries. The base of this adjustment is the cost of living in US.

Corporate Social Responsibility

refers to practices and policies undertaken by corporations that are intended to have a positive influence on the world [focus is on a company's social obligations]

Zhang is a representative for a Chinese company that is based in Confucian culture. When Zhang mentions to his staff that guanxi should be taken into consideration, what is he referring to?

relationships or connections the business has

Norms

shared rules of conduct that tell people how to act in specific situations

civil law framework contract

short and less specific

A firm is most likely to favor foreign direct investment over exporting when

the firm wishes to maintain control over its operations and business strategy.

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.

The Heckscher-Ohlin theory is based on the idea that

the pattern of international trade is determined by differences in factor endowments.

political economy

the political, economic, and legal systems of a country

The spread of democracy among countries is most likely to lead to

the promotion of greater competition.

Which form of government involves one person or political party that exercises absolute control over all spheres of human life and prohibits opposing political parties?

totalitarianism

shadow economy

transaction of goods or services not reported to the government and therefore beyond the reach of tax collectors and regulators

Managers at World Imports/Exports, an international company with operations in China and the United States, are often heard complaining about the difficulties in achieving synergy and cooperation between the employees of both the countries. After extensive research it was concluded that the cultural differences between these countries, which resulted in different work-related values, caused the lack of cooperation. In order to effectively tackle this problem, World Imports/Exports should

vary its management processes and practices to account for these differences.

Countries such as the United States, the United Kingdom, France, Germany, the Netherlands, and Japan dominate in the share of total global stock of FDI and FDI outflows and in rankings of the world's largest multinationals because they

were the most developed countries post-war and home to the largest and best capitalized enterprises.

Overall attractiveness of a country as a potential market and/or investment site for an international business depends on:

• Balancing benefits, costs, and risks associated with doing business in that country • Generally, costs and risks are lower in economically developed and politically stable markets • However, potential for growth may be higher in less developed nations