BUS430 Test #2

Why has FDI grown more rapidly than world trade?

Executives of business firms see FDI as a way of circumventing future trade barriers.

What is meant by arbitrage?

The purchase of securities in one market for immediate resale in another to profit from a price discrepancy

Which of the following is a function of the foreign exchange market?

To provide some insurance against foreign exchange risk

_____ occurs when lower-cost external suppliers are replaced by higher-cost suppliers within a free trade area.

Trade diversion

Which of the following organizations, established in 1995 under the provisions of the Uruguay Round, has taken over the responsibility to arbitrate trade disputes and monitor the trade policies of member countries?

World Trade Organization

A country is said to have a(n) _____ in the production of a product when it is more efficient than any other country in producing that product.

absolute advantage

If a country's government does not control the rate of growth in money supply:

its currency could depreciate in the future

Foreign direct investment (FDI):

investments on new facilities to produce or market in a foreign country. Referred to multinational company or multinational enterprise.

In a floating exchange rate, the relative value of a currency:

is determined by market forces.

The objective of establishing the World Bank was to:

promote general economic development.

implications for international business

- Local Implications - First Mover Implications - Policy Implications

Why don't we have true free trade?

- political arguments - economic arguments

Schools of thought/political views for FDI:

1. Radical view 2. Free market view 3. pragmatic nationalism

Instruments of Trade Policy

1. Tariffs 2. Subsidies 3. Import Quotas 4. Voluntary Export Restraints 5. Local content requirements 6. antidumping policies 7. administrative policies

Greenfield venture

100% involvement & 100% investment Pro: total investment, 100% capital. Con: costly, risky, have to build from the ground up

Which of the following statements is most likely to be true regarding the effects of FDI on employment?

A beneficial employment effect claimed for FDI is that it brings jobs to a host country that would otherwise not be created there.

How does the International Monetary Fund (IMF) provide loans to deficit-laden countries?

A pool of gold and currencies contributed by its members provides the resources for the lending operations.

How are spot exchange rates determined?

By the interaction between demand and supply of a currency relative to other currencies

Mergers:

Company A and company B merge to form company C Pro: not starting from the ground and building up Con: Process of transition

David Ricardo

Comparative advantage

Which of the following are the two impediments to regional economic integration?

Costs and national

Which of the following is true of the political case for regional economic integration?

Countries can enhance their political weight in the world by grouping their economies.

_____ are unit cost reductions associated with a large scale of output.

Economies of scale

A(n) _____ refers to the rate at which one currency is converted into another.

Exchange Rate

Radical writers argue that:

FDI by the MNEs of advanced capitalist nations keeps the less developed countries of the world relatively backward.

Which of the following helps a firm to preempt available demand, gain cost advantages related to volume, and build an enduring brand ahead of later competitors?

First-mover advantages

The 1944 Bretton Woods system called for _____ exchange rates against the U.S. dollar.

Fixed

A(n) _____ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

Forward Exchange

Which of the following statements is true about the gold standard?

Given a common gold standard, the value of any currency in units of any other currency was easy to determine.

Which of the following was abandoned as per the Jamaica agreement of 1976?

Gold as a reserve asset

Which of the following groups benefits the most from the imposition of tariffs?

Government and domestic producers

Which of the following refers to the institutional arrangements that govern exchange rates?

International monetary system

Which of the following is a feature of the current monetary system

It has increased foreign exchange risk for businesses.

Which of the following is true with regard to establishment of the euro?

It required participating national governments to give up control over monetary policy.

In January 1976, the _____ revised the International Monetary Fund's Articles of Agreement to reflect the new reality of floating exchange rates.

Jamaica agreement

_____ occur(s) when employees move between firms within a region and when national industry associations bring employees from different companies together for regular conferences or workshops.

Knowledge flows

Meitneria and Seaboria specialize in the production of heavy machinery and textiles respectively. While Meitneria doesn't produce textiles, Seaboria is not as technologically advanced as Meitneria. In this situation, according to the Heckscher-Ohlin theory:

Meitneria will import textiles from Seaboria and export heavy machinery to it.

Which of the following is the most common political argument for government intervention in international trade?

Protecting jobs and industries from unfair foreign competition

Which of the following is true with regard to regional economic integration?

Regional economic integration is good for consumers because it lowers prices.

Which of the following is true about tariffs?

Tariffs reduce the overall efficiency of the world economy.

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days?

The dollar will appreciate against the euro.

Adam Smith

The invisible hand

Which of the following statements with regard to subsidies is true?

The main gains from subsidies accrue to domestic producers, whose international competitiveness is increased as a result.

The argument for unrestricted free trade is that both import controls and export incentives:

are self-defeating and result in wasted resources.

During inflation, an increase in the amount of currency available leads to:

changes in the relative demand and supply conditions in the foreign exchange market.

Offering subsidies to foreign MNEs in the form of tax breaks or grants is one way of:

courting FDI believed to be in national interest.

In the context of international trade, _____ is defined as selling goods in a foreign market at a price below their costs of production or as selling goods in a foreign market at below their "fair" market price.

dumping

Dumping involves foreign producers:

eliminating competition by subsidizing prices in a foreign market with home market profits and eventually raising prices to earn substantial profits.

H.O Theory

every country has factors of endowment & resources

According to the Heckscher-Ohlin theory, the pattern of international trade is determined by differences in _____.

factor endowments

A computer manufacturing firm from the United States invests in a microprocessor manufacturing plant in Taiwan. This is an example of

foreign direct investment

The _____ view argues that international production should be distributed among countries according to the theory of comparative advantage.

free market

When a firm insures itself against foreign exchange risk, it is said to be engaging in _____.

hedging

A key advantage of adopting the euro is that it:

lowers foreign exchange and hedging costs in Europe.

An argument against the North American Free Trade Agreement centered on the fear that ratification would result in:

mass exodus of jobs from the United States into Mexico.

A firm becomes a(n) _____, once it undertakes FDI.

multinational enterprise

A _____ 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 rate

According to the _____, FDI has both benefits and costs and should be allowed only if the benefits outweigh the costs.

pragmatic nationalist view

The United States has been an attractive target for FDI partly because of its:

stable and dynamic economy.

The most important concerns regarding the costs of FDI for the home-country center on:

the balance-of-payments and employment effects of outward FDI.

The main benefits of inward FDI for a host country arise from:

the resource-transfer effect, the employment effect, and the balance-of-payments effect.