IB Exam 2
T/F A Korean petroleum company sets up a crude oil refining facility in Thailand. This is an example of a greenfield investment.
T Reason: A greenfield investment involves the establishment of a new operation in a foreign country.
The government is considering placing additional taxes on foreign lumber imports that are a proportion of the value of the imported lumber. This is an example of
an ad valorem tariff. Reason: Ad valorem tariffs are levied as a proportion of the value of the imported good. In most cases, tariffs are placed on imports to protect domestic producers from foreign competition by raising the price of imported goods.
What is a disadvantage that a firm faces when forming a strategic alliance?
A firm can give away more than it receives when forming an alliance. Reason: Unless a firm is careful, it can give away more than it receives. Strategic alliances have been criticized for giving competitors a low-cost route to new technology and markets.
Which statement is true with respect to multinational firms?
Because of their pivotal role in international trade, firms can and do exert a strong influence on government policy toward trade. Reason: Because of their pivotal role in international trade, firms can and do exert a strong influence on government policy toward trade. This influence can encourage protectionism, or it can encourage the government to support the WTO and push for open markets and freer trade among all nations. Government policies on international trade can have a direct impact on business.
What is a disadvantage of establishing a wholly owned subsidiary?
Establishing a wholly owned subsidiary is generally the most costly method. Reason: Establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market from a capital investment standpoint. Firms doing this must bear the full capital costs and risks of setting up overseas operations.
T/F A firm can maintain high control on product quality by entering a foreign country through franchising.
F Reason: A firm often lacks control over quality when engaging in franchising.
T/F A pegged exchange rate means the value of a currency is flexible against a set of currencies.
F Reason: 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.
T/F An efficient market has many impediments to the free flow of goods and services.
F Reason: An efficient market has no impediments, such as trade barriers, to the free flow of goods and services.
T/F A country limits the amount of sugar that can be imported into its country. This is an example of an import tariff.
F Reason: An import quota is a direct restriction on the quantity of some good that may be imported into a country. An import tariff is a tax levied on imports.
T/F By limiting imports through quotas, governments decrease the attractiveness of FDI and licensing.
F Reason: By limiting imports through quotas, governments increase the attractiveness of FDI and licensing.
T/F In a wholly owned subsidiary, a firm shares the costs of setting up overseas operations with partner firms.
F Reason: Establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market from a capital investment standpoint. Firms doing this must bear the full capital costs and risks of setting up overseas operations.
T/F Under the Jamaica agreement, floating rates were declared unacceptable.
F Reason: Floating rates were declared acceptable under the Jamaica agreement. IMF members were permitted to enter the foreign exchange market to even out "unwanted" speculative fluctuations.
T/F Governments always act in the national interest of their countries when they intervene in the economy.
F Reason: Governments do not always act in the national interest when they intervene in the economy; politically important interest groups often influence them.
T/F A lead strategy involves delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate.
F Reason: Lagging involves accelerating payments from weak-currency to strong-currency countries and delaying inflows from strong-currency to weak-currency countries.
The idea that each country should be allowed to choose its own inflation rate is called the __________blank argument.
monetary autonomy Reason: Advocates of floating rates argue that each country should be allowed to choose its own inflation rate. This is the monetary autonomy argument.
Three steel plants control 90 percent of the steel production sector of a country. The steel industry in the country would be an example of a(n)
oligopoly. Reason: An oligopoly is an industry composed of a limited number of large firms (e.g., an industry in which four firms control 80 percent of a domestic market would be defined as an oligopoly).
The United Arab Emirates (UAE) bases the valuation of its currency on the U.S. dollar. The value of the UAE's currency is changed based on the changes in the value of the dollar. This is an example of a ________blank exchange rate system.
pegged Reason: Under a pegged exchange rate regime, a country will attach the value of its currency to that of a major currency so that, for example, as the U.S. dollar rises in value, its own currency rises too.
A __________blank rate means the value of the currency is fixed relative to a reference currency and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.
pegged exchange Reason: Many developing nations peg their currencies, primarily to the dollar or euro and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.
According to the law of one price, identical products sold in different countries must sell for the same price when
their price is expressed in terms of the same currency. Reason: The law of one price states that in competitive markets free of transportation costs and barriers to trade (such as tariffs), identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.
In the 1986 Uruguay Round, GATT negotiations extended global trading rules to cover
trade in services. Reason: 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.
Most often, joint ventures involve __________blank parties with each holding an equal percent ownership stake.
two Reason: The most typical joint venture is a 50-50 venture, in which there are two parties, each of which holding a 50 percent ownership stake and contributing a team of managers to share operating control.
In which situation would FDI deteriorate the current account of the host country's balance of payments?
when a foreign subsidiary imports a substantial number of its inputs from abroad Reason: A concern arises when a foreign subsidiary imports a substantial number of its inputs from abroad, which results in a debit on the current account of the host country's balance of payments.
A company wishing to engage in foreign direct investment must evaluate all its options. Which statement is an important consideration for the modern firm wishing to expand into new markets?
Mergers and acquisitions are quicker to execute than greenfield investments. Reason: Mergers and acquisitions are quicker to execute than greenfield investments. This is an important consideration in the modern business world where markets evolve very rapidly. Additionally, foreign firms are acquired because those firms have valuable strategic assets and it is less risky for a firm to acquire those assets than to build them from the ground up through a greenfield investment.
T/F Most foreign exchange transactions involve U.S. dollars on one side
T Reason: A feature of the foreign exchange market is the important role played by the U.S. dollar. Although a foreign exchange transaction can involve two currencies, most transactions involve dollars on one side.
T/F A firm can rapidly build its presence in the target foreign market through acquisitions.
T Reason: Acquisitions are quick to execute. By acquiring an established enterprise, a firm builds its presence in the target foreign market quickly.
T/F The rate at which one currency is converted into another is known as the exchange rate.
T Reason: An exchange rate is the rate at which one currency is converted into another. It allows companies based in different countries to use different currencies to trade with each other.
T/F Direct effects of FDI on unemployment arise when a foreign MNE employs a number of host-country citizens.
T Reason: Direct effects arise when a foreign MNE employs some host-country citizens. Indirect effects arise when jobs are created in local suppliers because of the investment and when jobs are created because of increased local spending by employees of the MNE.
T/F Dumping is viewed as a method by which firms unload excess production in foreign markets.
T Reason: In the context of international trade, dumping is variously defined as selling goods in a foreign market at below their costs of production or as selling goods in a foreign market at below their "fair" market value. Dumping is viewed as a method by which firms unload excess production in foreign markets.
T/F If the spot rate is $1 = ¥120, and the 30-day forward rate is $1 = ¥130, the dollar is selling at a premium in the forward market.
T Reason: In this case, the dollar is selling at a premium on the 30-day forward market because it would buy more with the forward exchange than the spot rate.
T/F According to the radical political ideology view, the MNE is a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.
T Reason: Proponents of this view argue that MNEs extract profits from the host country and take them to their home country, giving nothing of value to the host country in exchange.
T/F GATT's objective was to liberalize trade.
T Reason: The GATT was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import quotas, and the like.
T/F In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client.
T Reason: The contractor who handles a turnkey project will take care of every detail of the project so that all the firm has to do is "turn the key" and walk in when the project is complete.
T/F The efficient market school argues that investing in exchange rate forecasting services would be a waste of money.
T Reason: The efficient market school argues that forward exchange rates do the best possible job of forecasting future spot exchange rates, and, therefore, investing in forecasting services would be a waste of money.
T/F A U.S.-based furniture manufacturer invests in textile production facilities in China. This is an example of offshore production undertaken to serve the home market.
T Reason: The term offshore production refers to DFI undertaken to serve the home market. Far from reducing home-country employment, such FDI may actually stimulate economic growth (and hence employment) in the home country by freeing home-country resources to concentrate on activities where the home country has a comparative advantage.
T/F The strategic trade policy arguments of the new trade theorists suggest an economic justification for government intervention in international trade.
T Reason: This economic justification for government intervention in international trade challenges the rationale for unrestricted free trade found in the work of classic trade theorists such as Adam Smith and David Ricardo.
A pen costs £50 in Britain. An identical pen costs $70 in the United States when the exchange rate is £1 = $1.50. Which of the following is correct?
The U.S. offers a better deal. Reason: All else being equal, at an exchange rate £1 = $1.50, the pen would have cost $75 (50 × 1.5) in Britain. At $70 for a pen, the United States offers a better deal.
Access to local partner's knowledge and shared development costs and risks are advantages of which foreign market entry mode?
joint venture Reason: In a joint venture, a firm can benefit from a local partner's knowledge regarding the host country's competitive conditions, culture, language, political system, and business.
Speedy Sneakers has given a foreign entity the right to produce and sell its running shoes in return for a royalty fee on every unit sold. This is called
licensing Reason: Licensing involves granting a foreign entity (the licensee) the right to produce and sell the firm's product in return for a royalty fee on every unit sold.
A company that wants to use scenes from the Pixar movie Soul in its advertising campaign would have to have a ________blank with the Pixar company to use the movie.
licensing agreement Reason: In a licensing agreement, a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee. Types of intangible property that might be licensed include patents, inventions, formulas, and designs.
The threat of antidumping action affects a firm by
limiting its ability to use aggressive pricing to gain market share in a country. Reason: WTO rules allow countries to impose antidumping duties on foreign goods that are being sold cheaper than at home or below their cost of production when domestic producers can show that they are being harmed. Firms in a country also can make strategic use of antidumping measures to limit aggressive competition from low-cost foreign producers.
Host governments use a wide range of controls to restrict FDI in one way or another. The two most common are ________blank and performance requirements.
ownership restraints Reason: The two most common ways to restrict FDI are ownership restraints and performance requirements. The other items listed are all common forms of incentives governments offer to foreign firms to invest in their countries.
The ________blank benefits Europe's politically powerful farmers by restricting imports and guaranteeing prices but not consumers in the European Union, who end up paying higher prices overall.
Common Agricultural Policy (CAP) Reason: A political motive also underlay establishment of the Common Agricultural Policy (CAP) by the European Union. The CAP was designed to protect the jobs of Europe's politically powerful farmers by restricting imports and guaranteeing prices. However, the higher prices that resulted from the CAP have cost Europe's consumers dearly.
T/F The fast-food industry is a good example of a business sector where licensing is a poor option for FDI.
F Reason: Licensing tends to be more common, and more profitable, in fragmented, low-technology industries in which globally dispersed manufacturing is not an option. A good example is the fast-food industry. McDonald's has expanded globally by using a franchising strategy, which is essentially the service-industry version of licensing. With franchising, the firm licenses its brand name to a foreign firm in return for a percentage of the franchisee's profits.
T/F Relational capital refers to releasing technological know-how to partners in an acquisition.
F Reason: Managing an alliance successfully requires building interpersonal relationships between the firms' managers, or what is sometimes referred to as relational capital.
T/F A firm that enters into a joint venture with another company reserves the right to keep control of its own technology.
F Reason: One of the disadvantages of a joint venture is that a firm entering into this type of agreement risks giving control of its technology to its partner. One option to keep the technology would be to hold a majority ownership (more than 50 percent) in the venture.
T/F Pioneering costs arise when the business system in a foreign country is like a firm's home market.
F Reason: Pioneering costs arise when the business system in a foreign country is so different from that in a firm's home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game.
T/F The concept of carry trade involves borrowing money in one currency where interest rates are high and then using the proceeds to invest in other currency where interest rates are low.
F Reason: The carry trade has become more common in recent years. It involves borrowing in a currency that has low interest rates, converting the money into a currency with higher interest rates, and depositing that money into the bank.
T/F The infant industry argument relies on an assumption that firms can make efficient long-term investments by borrowing money from the domestic or international capital market.
F Reason: 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. Consequently, governments have been required to subsidize long-term investments.
T/F The location-specific advantages argument associated with John Dunning explains why firms prefer FDI to licensing or to exporting.
F Reason: The location-specific advantages argument associated with John Dunning does help explain the direction of FDI. However, it does not explain why firms prefer FDI to licensing or to exporting.
T/F Economic arguments for trade policy intervention are concerned with protecting the interests of certain groups within a nation, often at the expense of other groups, or with achieving some objective that lies outside the sphere of protecting the environment or human rights.
F Reason: These are all political arguments. Economic arguments for intervention are typically concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers).
T/F Advocates say that fixed exchange rates can help a country deal with economic crises.
F Reason: When a country faces a severe economic crisis, its currency typically declines on foreign exchange markets. Advocates of floating exchange rates also argue that exchange rate adjustments can help a country to deal with economic crises.
Maribel's company has made a greenfield investment. What does this mean?
It established a new operation in a foreign country. Reason: Foreign direct investment takes on 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.
A home country wants to limit outward FDI flow. What policy should the country implement?
It should limit capital outflows. Reason: Virtually all investor countries, including the United States, have exercised some control over outward FDI from time to time. One policy has been to limit capital outflows out of concern for the country's balance of payments.
________blank argues that a strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry boosts national income at the expense of other countries.
Paul Krugman Reason: Krugman argues that a strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry is a beggar-thy-neighbor policy that boosts national income at the expense of other countries. A country that attempts to use such policies will probably provoke retaliation.
________blank are controls over the behavior of the MNE's local subsidiary. The most common of these are related to local content, exports, technology transfer, and local participation in top management.
Performance requirements Reason: These are performance requirements that are meant to help maximize the benefits and minimize the costs of FDI for the host country.
Which trade policy argument suggests that a government should use subsidies to support promising firms that are active in newly emerging industries?
Strategic trade policy Reason: According to the strategic trade policy argument, a government should use subsidies to support promising firms that are active in newly emerging industries.
Tariff barriers raise the costs of exporting products to a country (or of exporting partly finished products between countries). What is a likely consequence of these barriers?
This may put a firm at a competitive disadvantage to indigenous competitors in that country. Reason: Tariff barriers raise the costs of exporting products to a country. Tariff barriers raise prices to consumers, reduce the volume of trade, and encourage the overproduction of products that are heavily subsidized. This puts a firm at a competitive disadvantage in competing against domestic competitors.
What is the most important vehicle currency by trade volume?
U.S. dollar Reason: Due to its central role in so many foreign exchange deals, the dollar is a vehicle currency. In 2019, 88 percent of all foreign exchange transactions involved dollars on one side of the transaction.
When is a currency said to be externally convertible?
When only nonresidents can convert it into a foreign currency without any limitations. Reason: A currency is externally convertible when only nonresidents may convert it into a foreign currency without any limitations.
________blank draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements.
________blank draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements. Reason: There are two approaches to forecasting: fundamental analysis and technical analysis. The variables contained in fundamental analysis typically include relative money supply growth rates, inflation rates, and interest rates.
Most economists would probably argue that the best interests of international business are served by
a free trade stance. Reason: It is probably in the best long-run interests of the business community to encourage the government to aggressively promote greater free trade by, for example, strengthening the WTO. Business probably has much more to gain from government efforts to open protected markets to imports and foreign direct investment than from government efforts to support certain domestic industries in a manner consistent with the recommendations of strategic trade policy.
A lobbyist from New York argues that the U.S. government needs to protect the U.S. aerospace industry from foreign competition. She argues that aerospace technology is so important for national security that it would be dangerous to rely primarily on foreign producers for them. This is an example of ________blank argument for government intervention.
a political Reason: 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). Although not as common as it used to be, this political argument is still made. When the Trump administration announced tariffs on imports of foreign steel and aluminum on March 1, 2018, national security issues were cited as a primary justification.
Suppose the United States wants to encourage the production of tree nuts by domestic producers. To do so, the government provides low-interest loans for the purchase of harvesting equipment and gives cash grants and tax breaks to the producers. Which instrument of trade policy is in use by the United States government?
a subsidy Reason: A subsidy is a government payment to a domestic producer. Subsidies take many forms, including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms.
What is an advantage of turnkey contracts?
ability to earn returns from process technology skills in countries where FDI is restricted Reason: An advantage of a turnkey contract is the ability to earn returns from process technology skills in countries where FDI is restricted. The know-how required to assemble and run a technologically complex process, such as refining petroleum or steel, is a valuable asset.
Tacos and More based in Houston, Texas, plans to buy Sun Grown Salsa, which is based in Mexico. Sun Grown Salsa has been in business for 12 years and demonstrates amazing profits. What type of entry mode is Tacos and More using?
acquisition Reason: When a firm makes an acquisition, it is buying a company that already exists and has a known revenue and profit stream. For this reason, acquisitions are believed to be less risky than greenfield ventures.
A country has adopted a dirty-float system over a clean-float system. In doing so the country has agreed to
allow the central bank to maintain the value of its currency. Reason: Other countries, while not adopting a formal pegged rate, try to hold the value of their currency within some range against an important reference currency such as the U.S. dollar or a "basket" of currencies. This is often referred to as a managed-float system or a dirty-float system. It is a float because, in theory, the value of the currency is determined by market forces, but it is a managed (or dirty) float (as opposed to a clean float) because the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency if it depreciates (or appreciates) too rapidly against an important reference currency.
Forming a strategic alliance is a way to
bring together complementary skills and assets. Reason: A strategic alliance is a way to bring together complementary skills and assets that neither company could easily develop on its own.
To increase the probability of selecting a good partner for forming a strategic alliance, a firm should
collect pertinent, publicly available information on potential allies. Reason: A firm should conduct comprehensive research on potential alliance candidates, including collecting publicly available information, gathering data from informed third parties, and getting to know the potential partner before committing to the alliance.
The short-term movement of funds from one currency to another as an attempt to profit from shifts in exchange rates is called
currency speculation. Reason: Currency speculation is another use of foreign exchange markets. It involves the short-term movement of funds from one currency to another in the hopes of gaining a profit.
If many people want euros and euros are in short supply, and a few people want Japanese yen and yen are in plentiful supply, the yen is likely to __________blank against the euro.
depreciate Reason: The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies. In this situation, the yen is likely to depreciate against the euro.
Assuming the 60-day forward exchange rate was $1 = ¥110 and the spot exchange rate was $1 = ¥120, the dollar is selling at a(n) __________blank on the 60-day forward market.
discount Reason: $1 would buy less yen with a forward exchange than with a spot exchange. In such a case, we say the dollar is selling at a discount on the 60-day forward market.
The extent to which a firm's future international earning power is affected by changes in exchange rates in the long run is known as __________blank exposure.
economic Reason: Economic exposure is the extent to which a firm's future international earning power is affected by changes in exchange rates. Economic exposure is concerned with the long-run effect of changes in exchange rates on future prices, sales, and costs.
Anderson, Smith, and Bayles—an investment firm—is interested in investing in a production facility in Mexico. However, the firm is worried about unpredictable fluctuations in future exchange rates which would have adverse consequences for the firm. One way to ensure against this exchange risk is by
engaging in hedging. Reason: A function of the foreign exchange market is to provide insurance against foreign exchange risk, which is the possibility that unpredicted changes in future exchange rates will have adverse consequences for the firm. When a firm insures itself against foreign exchange risk, it is engaging in hedging.
A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a __________blank rate.
fixed exchange Reason: A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate. To make this commitment credible, the currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100 percent of the domestic currency issued.
The first thing Analise does when she arrives in Italy is to convert her U.S. dollars to euros. She will do this through the
foreign exchange market. Reason: The foreign exchange market serves two main functions. One is for converting currency of one country into that of another country and the second is to provide some insurance against foreign exchange risk.
The lack of progress in the Doha Round negotiations has resulted in countries that are
forging ahead with their own bilateral agreements. Reason: In response to the apparent failure of the Doha Round negotiations to progress, many nations have pushed forward with multilateral or bilateral trade agreements. As of 2019, more than 470 regional or bilateral trade agreements were in force, compared to fewer than 100 in the early 2000s.
According to the ________blank view, international production should be distributed among countries according to the theory of comparative advantage.
free market Reason: The free market view argues that international production should be distributed among countries according to the theory of comparative advantage. Countries should specialize in the production of those goods and services that they can produce most efficiently. The free market view argues that international production should be distributed among countries according to the theory of comparative advantage.
The WTO argues that by removing all tariff barriers and subsidies to agriculture,
global economic growth would rise. Reason: The net effect of high tariff barriers and significant subsidies is to raise prices to consumers, reduce the volume of agricultural trade, and encourage the overproduction of products that are heavily subsidized. The WTO argues that removing tariff barriers and subsidies could significantly boost the overall level of trade, lower prices to consumers, and raise global economic growth by freeing consumption and investment resources for more productive uses.
The __________blank theory is also known as the market imperfections theory.
internalization Reason: Internalization theory, also known as the market imperfections approach, seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets.
A managed float is the exchange rate policy where the government
intervenes in the exchange rate system only in a limited way. Reason: In a managed float system, governments intervene in only a limited way. About 23 percent of IMF's members use this system.
A country in a state of fundamental disequilibrium suffers from
permanent adverse shifts in the demand for its products. Reason: 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.
Brew-at-Home is entering a foreign market and is spending significant funds on educating customers about the benefits of making beer at home with its beer-making system. The cost the company is spending on education is a type of ________blank cost.
pioneering Reason: Pioneering costs are costs associated with an early entry to a market. These costs are incurred due to the timing of entry.
The __________blank view is that FDI has both benefits and costs. FDI can benefit a host country by bringing capital, skills, technology, and jobs, but those benefits come at a cost.
pragmatic nationalist Reason: The pragmatic nationalist view is that FDI has both benefits and costs. When a foreign company rather than a domestic company produces products, the profits from that investment go abroad. Many countries are also concerned that a foreign-owned manufacturing plant may import many components from its home country, which has negative implications for the host country's balance-of-payments position.
A firm that has first-mover advantages with its products is able to
preempt rivals and capture demand. Reason: The advantages frequently associated with entering a market early are commonly known as first-mover advantages. One first-mover advantage is the ability to preempt rivals and capture demand by establishing a strong brand name. A second is the ability to build sales volume in that country and ride down the experience curve ahead of rivals. A third advantage is the ability of early entrants to create switching costs that tie customers into their products or services.
The __________blank suggests that given relatively efficient markets, the price of a "basket of goods" should be roughly equivalent in each country.
purchasing power parity theory Reason: If the law of one price were true for all goods and services, the PPP exchange rate could be found from any individual set of prices. By comparing the prices of identical products in different currencies, it would be possible to determine the "real" or PPP exchange rate that would exist if markets were efficient.
For a service firm, a franchising strategy is typically associated with
quickly building a global presence. Reason: The advantages of franchising as an entry mode are very similar to those of licensing. The firm is relieved of many of the costs and risks of opening a foreign market on its own. This creates a good incentive for the franchisee to build a profitable operation as quickly as possible. Thus, using a franchising strategy, a service firm can build a global presence quickly and at a relatively low cost and risk.
FDI's effect on a country's balance-of-payments accounts is an important policy issue for most governments. This is why a government would typically prefer to
see a current account surplus rather than a deficit. Reason: FDI's effect on a country's balance-of-payments accounts is an important policy issue for most host governments. A country's balance-of-payments accounts track both its payments to and its receipts from other countries. Governments normally are concerned when their country is running a deficit on the current account of their balance of payments. The current account tracks the export and import of goods and services. A current account deficit, or trade deficit as it is often called, arises when a country is importing more goods and services than it is exporting. Governments typically prefer to see a current account surplus rather than a deficit.
Keesha's company produces bicycles and wants to establish a wholly owned subsidiary in Holland. It can do this by acquiring an established firm in Holland or by
setting up a greenfield venture. Reason: Establishing a wholly owned subsidiary in a foreign market can be done in two ways. The firm can either set up a new operation in that country, often referred to as a greenfield venture, or it can acquire an established firm in that host nation and use that firm to promote its products.
A Japanese tourist in New York goes to a bank to convert his yens into dollars. The exchange rate that will be used for conversion will be the
spot exchange rate. Reason: The spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day.
The total accumulated value of foreign-owned assets at a given time is called the ________blank of FDI.
stock Reason: The flow of FDI refers to the amount of FDI undertaken over a given time period. The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time.
