IB Test 2
A country that relies on the pragmatic nationalist view would say that...
FDI should be allowed so long as the benefits outweigh the costs
Brianna lives in a nation that encourages the production of goods for exporting and to satisfy the needs of the nation's citizens. This results in the nation relying less on importing goods. Which trade theory does this reflect?
Mercantilism
______ is a pact among Argentina, Brazil, Paraguay, and Uruguay to establish a free trade area
Mercosur
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 (Many firms apparently believe that if they do not acquire a desirable target firm, then their global rival will)
______ arises when two or more enterprises encounter each other in different regional markets, national markets, or industries
Multipoint competition
Which approach suggests that nations may benefit from trade even when they do not differ in resource endowments or technology?
New trade theory
Translation exposure refers to the
Impact of currency exchange rate changes on the reported financial statements of a company
A South American nation has a direct restriction on the amount of vegetables that may be imported into the country. Which instrument of trade policy does this reflect?
Import quota (A direct restriction on the quantity of some good that may be imported into a coutnry)
A tariff rate quota provides a lower tariff rate to
Imports within the quota (A lower tariff rate is applied to imports within the quota than those over the quota)
Assume that the exchange rate between the euro and the dollar is € 1 = $1.50. Jenna is an American tourist in Italy buying a leather wallet whose price is €60. How much in US dollars will Jenna have to pay to buy the product
$90 US ($1.50 x €60) = $90
The mercantilist doctrine promoted government intervention in order to achieve...
A surplus in the balance of trade
An economist would say that the benefits of regional integration are determined by the
Amount of trade creation
The Treaty of Rome provided for the establishment of a(n)
Common market (The European Community was established. The treaty of Rome provided the creation of a common market)
Tavis lives in southern Florida where there is sufficient land and labor to successfully grow gourds and melons. Heckscher-Ohlin would consider the land and labor to be...
Factor endowments
Simone lives in a country in which the government does not impose quotas on what can be imported or on what businesses can produce and sell to another country. What type of situation does this describe?
Free Trade
When Norway, Iceland, Liechtenstein, and Switzerland established the EFTA, all barriers to the free flow of goods and services between the countries were removed. Member nations were allowed to determine the level of trade protection for goods coming from all other nations. What level of economic integration does this represent?
Free trade area (All barriers to the trade of goods and services among member countries are removed. Each country, however is allowed to determine its own trade policies with regard to nonmembers)
New trade theorists would agree that a country might become dominant in the export of a good simply because it was
Lucky to be the first to produce the good
Which theory stresses that in some cases, countries specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries the world market can support only a limited number of firms?
New trade theory
Subsidies and quotas are examples of ______ barriers a country might impose
Nontariff
A(n) ______ refers to the extra profit that producers make when supply is artificially limited by an import quota
Quota rent (The extra profit that producers make when supply is artificially limited by an import quota)
A country that imports more goods than it exports experiences a
Trade deficit (When a country is importing more goods and services than it is exporting)
A tax of 14 cents is levied for each ceramic plate imported into a nation. This is an example of a(n)
Specific tariff (Levied as a fixed charge for each unit of a good imported)
The rate at which a foreign exchange dealer converts one currency into another currency on a particular day is the
Spot exchange rate
A currency is considered freely convertible when
The country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it
The basic message of the _______ is that potential world production is greater with unrestricted free trade than it is with restricted trade
Theory of comparative advantage
The creation of a single market increases price competition for business. In other words, it creates a(n)
Threat (The business environment within each grouping has become more competitive. The lowering of barriers to trade and investment among countries has led to increased price competition throughout the EU and NAFTA
Which organization was created to implement the GATT agreement?
World Trade Organization (WTO)
Paul Krugman characterizes strategic trade policy as being
A boost to national income at the expense of other countries (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)
One focus of strategic trade policy is to help domestic companies gain
A first-mover advantage (Government helps raise national income if it can ensure the firm(s) that gain FMA in an industry are domestic rather than foreign enterprises)
One form of FDI is ________, which involves the establishment of a new operation in a foreign country.
A greenfield investment (Establishment of a new operation in a foreign country)
Alayana feels it is best for her company to pay their foreign supplier in Argentina this month even though they will not receive products they ordered from the supplier for another six months. She recently learned that the currency in Argentina is expected to appreciate and, by paying the supplier now, her company will save money. This is an example of
A lead strategy (Involves attempting to collect foreign currency receivables (payments from customers) early when a foreign currency is expected to depreciate and paying foreign currency payables to (suppliers) before they are due when a currency is expected to appreciate)
Assume that the interest rate on borrowings in Chile is 4%, but the interest rate on deposits in British banks is 8%. A trader borrows 1 million Chilean pesos, then converts the money into British pounds and deposits it in a British bank, What is the trade involved in?
Carry trade (Involves borrowing in one currency where interest rates are low, and then using the proceeds to invest in another currency where interests are high)
According to Porter, which factor endowment would be classified as an advanced factor?
Communication infrastructure
the extent to which a firm's future international earning power is affected by changes in exchange rates is known as
Economic exposure
The harmonization of a member nations' tax rates plus a common monetary and fiscal policy are all required to form a(n)
Economic union (Involves the free flow of products and factors of production among member countries and the adoption of a common external trade policy, but it also requires a common currency, harmonization of members' tax rates, and a common monetary and fiscal policy)
When a nation put government-backed insurance programs in place to cover major types of foreign investment risk, it has the effect of...
Encouraging outward FDI by a home country (Risks of expropriation, war losses, and the inability to transfer profit back home)
Some countries have a policy that restricts the export of honey. This is called a(n)
Export ban
Most economists would agree that the best interests of international business are found in a nation with a
Free trade policy (Best long-run interests of the business community to encourage the government to aggressively promote greater free trade)
How did President Trump react to the two multilateral trade agreements, the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership, which were pursued by the Obama administration?
He pulled the US out of these negotiations
Shreya is the CFO for Home Safe Security Inc. Her company is interested in investing in a facility in Indonesia, but she is worried about unpredictable fluctuations in future exchange rates, which could cost her company millions of dollars. One way to ensure against this exchange risk is for Shreya to use
Hedging (When a firm insures itself against foreign exchange risk, it is engaging in hedging)
According to the USMCA, 40 percent of parts for any tariff-free vehicles must come from a ______ by 2023.
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)
Assume that the exchange rate between the U.S. dollar and the Japanese yen is $1 = ¥150. A pair of shoes that retail for $100 in New York should sell for ¥15,000 in Tokyo, if there are no trade barriers and transportation costs, 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)
Dolby Fashion House, an Italian manufacturer of evening dresses, granted US company On the Runway Inc. the right to produce and sell Dolby Fashion's products in the US. In return, On the Runway Inc. has to pay a royalty fee on every unit sold. According to this information, what form of FDI is Dolby Fashion House using?
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)
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 (Dunning argues that location-specific advantages are also of are of considerable importance in explaining both the rationale for and the direction of foreign direct investment.)
Hudson Oil and Gas Inc., based in Houston, has a plant in Norway that builds cargo ships used to transport the company's products around the world. Each year this plant has been profitable, but Hudson Inc. is not able to convert the profits into US dollars and take them out of the country. What type of convertibility does this represent?
Nonconvertible
A firm might justify a preference for licensing over FDI because licensing...
Results in the licensee bearing the costs and risks (When a firm exports, it need not bear the costs associated with FDI, and it can reduce the risks associated with selling abroad by using a native sales agent. Similarly, when a firm allows another enterprise to produce its products under license, the licensee bears the costs and risks)
A European nation has the world's most efficient computer monitor manufacturing industry, while a country in Central America has the world's most efficient agricultural machines industry. The European nation trades computer monitors with the Central American country in exchange for agricultural machinery. This form of trade between the two countries illustrates...
The theory of absolute advantage
Licensing is a good option to enter a foreign market when...
Tight control of the foreign operation is not required (Licensing is a good option only when the firm does not need tight control over a foreign entity to maximize its market share and earnings in that country)
Two South American countries formed a free trade agreement. As a result, one of the countries that used to produce its own refrigeration units at a higher cost now imports them from the other country at a lower cost. This is an example of...
Trade creation (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)
The US imports sugar from several nations. If the NAFTA agreement caused the US to import sugar only from Canada, even though it cost more to do so, it would be an example of...
Trade diversion (Trade diversion occurs when lower-cost external suppliers are replaced by higher suppliers within the free trade area)