IBUS 3001 Midterm
People who violate folkways may be thought of as eccentric or ill-mannered, but they are not usually considered to be evil or bad. In many countries, foreigners may be initially excused for violating folkways. True or false?
True
The concept of carry trade involves borrowing money in one currency where interest rates are low and then using the proceeds to invest in other currency where interest rates are high. True or false?
True
product life cycle theory
US develops new product → demand in developed countries grows → Foreign producers begin producing product → US firms set up facilities in other developed countries → product becomes standardized → Other countries with lower costs export to US → Developing countries develop production advantage → Production concentrates in lower cost countries US is importer of product
class consciousness
a belief that one is a member of an economic group whose interests are opposed to people in other such groups
caste system
a closed system of stratification in which social position is determined by the family into which a person is born, and change in that position is usually not possible during an individual's lifetime
inflation
a general increase in prices and fall in the purchasing value of money
inefficient market
a market in which prices do not reflect all available information
globalization
a process of economic integration by the increase of trade, foreign direct investment, and immigration
culture
a system of values and norms that are shared among a group of people and that when taken together constitute a design for living
The government of Bangladesh has not invested in infrastructure. According to Michael Porter, infrastructure is an example of what type of factor endowment?
advanced
forward exchange rate
agreed upon rate for forward exchange
free trade area
all barriers to trade of goods and services among member countries are removed, and each country is allowed to determine its own trade policies
positive sum game
all countries can benefit from trade
gold per value
amount of a currency needed to purchase one ounce of gold
For trade to happen and be beneficial, there must be
differences in endowments
power distance
dimension focused on how a society deals with the fact that people are unequal in physical and intellectual capabilities
underdog bias
do more to get resources and change the status quo by refusing to become complacent
better-off test
does expanding activities across borders enable the firm to create and capture more value than it could be remaining in current locations
fundamental analysis
draws on economic theory to construct econometric models
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
economic exposure
customs union
eliminates trade barriers between member countries, adopts a common external trade policy
economic exposure
extent to which a firm's future international earning power is affected by changes in exchange rates
social mobility
extent to which individuals can move out of the strata in which they were born
transaction exposure
extent to which the income from individual transactions is affected by fluctuations in foreign exchange values
globalization of markets
falling trade barriers, convergence of tastes and preferences, firms promoting same basic products worldwide
In a free trade area, countries are not allowed to determine their own trade policies with nonmembers. True or false?
false
Trade diversion occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area. True or false?
false
Which factors helps Bangladesh's goods stay competitive when compared to goods from China?
fear of relying on a single country
The most popular form of regional economic integration, accounting for almost 90% of regional agreements
free trade areas
efficient market
has no impediments to the free flow of goods
social strata
hierarchal way of dividing people into social categories
trade creation
high cost domestic producers are replaced by low cost producers within the free trade area
emphasis on individual
high individualism produces many entrepreneurs, but little company loyalty
Firm Structure, Strategy and Rivalry
how the firm operates, domestic rivalry, etc.
translation exposure
impact of currency exchange rate changes on the reported financial statements of a company
law of one price
in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency
absolute advantage
in the production of a product when it is more efficient than any other country in producing it
the lowering of trade and investment barriers among countries in a trade group has led to
increased price competition throughout the EU and NAFTA
international monetary system
institutional arrangements that govern exchange rates
emphasis on group
intense loyalty, jobs for life, but lack of entrepreneurship
GATT (General Agreement on Tariffs and Trade)
international agreement first signed in 1947 aimed at lowering trade barriers
globalization of production
internationalization of supply chain for cost-efficiency. Ex: Apple's global manufacturing locations, 787 Dreamliner part suppliers
According to the Heckscher-Ohlin theory, which of the following gives Bangladesh a cost advantage?
labor-intensive production
foreign exchange risk
likelihood of unpredicted changes in future exchange rates, which may have adverse consequences for the firm
banking crisis
loss of confidence in the banking system that leads to a run on the banks, as individuals withdraw their deposits
Samuelson critique
low-income country trading with a rich country may result in lower wages for the rich country
trade diversion
lower cost external suppliers are replaced by higher cost suppliers within the free trade area
foreign exchange market
market for converting the currency of one country into that of another
Globalization critics argue that the decline in unskilled wage rates is due to the
migration of low-wage manufacturing jobs offshore
basic factors of production
natural resources, climate, location
common market
no barriers to trade among member countries, common external trade policy, allows factors of production to move freely among members
economic union
no barriers to trade among member countries, common external trade policy, allows factors of production to move freely, common currency, common monetary and fiscal policy - harmonized tax rate
Fisher effect
nominal interest rate is the sum of the real interest rate and the expected value of inflation
mores
norms that are more widely observed, greater moral significance, central to the functioning of society & its social life
currency crisis
occurs when a speculative attack on exchange value of a currency results in a sharp depreciation in the value of the currency or forces government to expend large volumes of international currency reserves and sharply increase interest rates and defend a prevailing exchange rate
forward exchange
occurs when two parties agree to exchange currency and execute the deal at some specific date in the future
gold standard
pegging currencies to gold and guaranteeing convertibility
European Monetary System
prior to the EU, countries operated a fixed exchange rate
spot exchange rate
rate at which a foreign exchange dealer converts one currency into another on a particular day
exchange rate
rate at which one currency is converted into another - affects firm sales, profits, and strategy
Bangladesh's textile industry relies on inputs from other industries within the country. This supports which one of Michael Porter's attributes when it comes to competitive advantage
related and supporting industries
folkways
routine conventions of everyday life
currency speculation
short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates
currency swap
simultaneous purchase and sale of a given amount of foreign exchange for tow different value dates
foreign debt crisis
situation in which a country cannot serve its foreign debt obligations
advanced factors of production
skilled labor, infrastructure, technology
Globalization 3.0
started around 2000, shrinking the world from size small to a size tiny and flattening the playing field at the same time, the dynamic force is individuals and small groups globalizing
international Fisher effect
states that for any two countries, the spot exchange rate should change an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries
bandwagon effect
traders moving as a herd in the same direction at the same time
cross cultural literacy
understanding of how cultural differences across and within nations can affect the way business is practiced
Globalization 1.0
(1492-1800) World shrinks from large to medium - countries globalizing
economies of scale
unit cost reductions associated with large scale output - the more you produce, the cheaper each unit is
technical analysis
uses price and volume data to determine past trends, which are expected to continue into the future
pegged exchange rate
value of currency is fixed relative to a reference currency
fixed exchange rate
values of a set of currencies are fixed against each other at some mutually agreed-on exchange rate
dirty-float system
when a country does not adopt a pegged rate formally, but still tries to hold the value of their currency within some range against important currency such as USD
freely convertible currency
when a country's government allows residents and non-residents to purchase unlimited amounts of a foreign currency
balance of trade equilibrium
when a country's residents earnings from exports is equal to what they pay to other countries in imports
floating exchange rate
when foreign exchange market determines relative value of a currency
nonconvertible currency
when neither residents nor non-residents are allowed to freely convert currency
externally convertible currency
when only non-residents of a country may convert a currency into a foreign currency without limitations
capital flight
when residents & nonresidents rush to convert their holdings of domestic currency into foreign currency
free trade
when the government does not attempt either to reduce or to increase the levels of exports and imports that occur naturally as a result of supply and demand
purchasing power parity
when there is free trade, the price of a "basket of goods" should be the same. Country in which inflation is running high should expect to see its currency depreciate against countries with lower inflation rates. Theory may not hold if there is domestic government intervention
Managing an international business is different from managing a domestic one for at least four reasons
1. Countries are different 2. the range of problems confronted by a manager in an international business is wider and the problems are more complex 3. managers in IBUS must find ways to work within limits imposed by governments in international trade 4. international transactions involve converting money into different currencies
Globalization 2.0
1800-2000 shrank the world from a size medium to a size small and it was spearheaded by companies globalizing for markets and labor
factors of endowment
A nation's position in factors of production such as skilled labor or the infra-structure necessary to compete in a given industry.
AAA framework
Adaptation Aggregation Arbitrage How to go abroad
ADDING framework
Adding volume or growth Decreasing costs Differentiating or increasing willingness to pay Improving industry attractiveness/bargaining power Normalizing risk Generating knowledge, resources, and capabilities Explains why to go abroad
regional economic integration
Agreements among countries in a geographic region to reduce and ultimately remove tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other
mercantilism
An economic policy under which nations sought to increase their wealth and power by encouraging exports and discouraging imports. Leads to inflation, based on a view of trade as a zero-sum game.
Which of the following expresses one of the reasons why managing an international firm is different from managing a purely domestic business?
An international business must find ways to work within the limits imposed by government intervention in the international trade and investment system
CAGE framework
Cultural distance, administrative and political distance, geographic distance, economic distance. Explains where to go abroad
Bangladesh has a comparative advantage in textile production due to its low labor cost. The idea of comparative advantage was proposed by
David Ricardo
What characteristic is shared by the BRICS as national markets and how is this characteristic related with a main argument of new trade theory?
Emerging markets, large countries with access to large markets. Specialization - low opportunity cost, efficiency. Benefit from economies of scale. The slowdown and failing of these countries supports the NTT idea that certain industries can only support a limited number of firms
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. True or false?
False
Globalization resulted in a decrease in non-US firms' investment across national borders. True or False?
False
If the spot rate is US 1=MEX 20 and the 30 day forward rate is US 1=MEX 23, the Peso is selling at a premium in the forward market. True or false?
False
The PPP theory tells us that a country with a high inflation rate will see an appreciation in its currency exchange rate. True or false?
False
The emergence of single markets will make the business environment within each grouping less competitive. True or false?
False
A firm needs to develop a mechanism for ensuring it maintains an appropriate mix of tactics and strategies for minimizing its foreign exchange exposure. Which of the following is one of the common tactics that should be employed?
Firms need to, as far as possible, model and forecast future exchange rate movements.
Podcast Overview
Specialize - means whoever can do it cheaper. Trade is good for the US, but not everyone in the US all the time. Trade raises the wealth/standard of living, but also raises the wealth gap. In the end, the future has more options/opportunities, even though international trade hurts low skilled workers. China's rise has lifted many people out of poverty, and China produces labor intensive products in direct competition with the US manufacturing base
Why is it so difficult to identify the effect of China on the U.S. labor market?
The US is losing out to technological advancement and so it is hard to pinpoint what is specifically the result of China's rise.
comparative advantage
The ability of a country to produce a good at a lower cost than another country can. Produce goods at the lower opportunity cost, and buy goods with the highest opportunity costs
Explain why it is suggested that trade with China is positive on balance for the US but a negative when analyzing specifics
More cheaper options is better, but you are taking away the US' manufacturing base, dependence on China is bad, and their cheap labor force cannot be competed with
What is the argued implication of the rise of China as an international trade player on welfare in the US? And whose welfare?
Overall, it improves welfare, by providing more and cheaper options and allowing the US to focus on capital intensive work. It may not improve things for everyone, but future generations will enjoy more prosperity and opportunities.
A mudarabah contract of Islamic banks is similar to a profit-sharing scheme. True or false?
True
moral hazard
arises when people behave recklessly because they know they will be saved if anything goes wrong
group
association of two or more individuals who have a shared sense of identity and interact in structured ways based on common set of expectations
lead strategy
attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables
countertrade
barter-like agreements by which goods and services can be trades for other goods and services
social structure
basic social organization, which is both emergent from and a determinant of behaviors of an individual
carry trade
borrowing in one currency where interest rates are low and using the proceeds to invest in another country where interest rates are high
multinational enterprise
business organization that sells, buys, rents or hires human or material resources in two or more countries
arbitrage
buying a currency low, selling it high - occurs with goods with the law of one price does not happen
political union
central political apparatus coordinates the economic, social, and foreign policy of member states (the US is one)
currency board
commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate
Heckscher-Ohlin theory
comparative advantage is the result of factor endowments - more endowment in a factor means lower costs
An obstacle to integration arises from
concerns over national sovereignty
lag strategy
delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate
determinants of currency
cost of living, as determined by prices, exchange rate, and interest rates
new trade theory
countries specialize in the production and export of particular goods not because of underlying differences in factor endowments, but because for certain industries, the world market can only support a limited number of firms. This theory promotes some limited government intervention
four types of distance
cultural, economic, geographic, administrative
Eliminates trade barriers between member countries and adopts a common external trade policy, but does not allow free movement of factors of production
customs union
Leontief paradox
the US should export more capital intensive products and import labor intensive ones, but it's exports are less labor intensive than imports
As countries get richer, there seems to be a shift from survival values to well-being values according to
the World Values Survey
It has been argued that the success of Japanese enterprises in the global economy has been based partly on
the cooperation between a company and its suppliers on issues such as design, quality control, and inventory reduction
Which aspect of Protestantism paved the way for the subsequent emphasis on individual economic and political freedoms?
the emphasis on individual religious freedom
liability of foreignness
the inherent disadvantages foreign firms have over domestic incumbents because of a relative lack of knowledge and legitimacy and the added complexity of managing a geographically diversified organization
demand conditions
the nature of home demand for the industry's product or service
WTO (World Trade Organization)
the only global international organization dealing with the rules of trade between nations
related and supporting industries
the presence or absence of supplier industries and related industries that are internationally competitive
the stock of foreign direct investment refers to
the total cumulative value of foreign investments
What international trade theory should Pena Nieto have used to respond to Trump's concerns?
theory of comparative advantage - the numbers used by Trump are out of context, because the US and Mexico are trading more. High deficits are good when coupled with high imports/exports
