International Business - Test 2

Free Trade

Adam Smith absolute advantage govt. does not attempt to influence through quotas or duties what its people can buy or produce from another country laissez-faire

________ is a pact among Argentina, Brazil, Paraguay, and Uruguay to establish a free trade area.

Mercosur

One focus of strategic trade policy is to help domestic companies gain

a first-mover advantage.

A(n) ________ has no barriers to trade among member countries, includes a common external trade policy, and allows factors of production to move freely among members, but does not have a common currency.

common market

According to Porter, which factor endowment would be classified as an advanced factor?

communication infrastructure

Porter's diamond theory

competitive advantage of certain industries in different nations

Which term indicates that the units of resources required to produce a good are assumed to remain fixed no matter where one is on a country's production possibility frontier?

constant returns to specialization

The extent to which a firm's future international earning power is affected by changes in exchange rates is known as

economic exposure.

Some countries have a policy that entirely restricts the export of coffee products. This is called a(n)

export ban.

Zero-sum game

flaw with mercantilism gain in one country is a loss in another

Key insight on international trade theory

limits on imports are often in the interests of domestic producers, but not domestic consumers

A country that wants to create the highest level of economic integration would enter into a(n)

political union

Absolute Advantage is

when a country is more efficient in producing a product than another country

A situation in which an economic gain by one country results in an economic loss by another is called a

zero-sum game.

Assume that the exchange rate between the euro and the dollar is €1.00 = $1.50. An American tourist in Germany is buying a product whose price is €80. How much in U.S. dollars would the tourist have to pay to buy the product?

$120

End of Bretton Woods

1973; gold standard abandoned; US dollar floats

________ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

A forward exchange

________ 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

The ultimate controlling authority with the EU is the

European Council

_______ was a multilateral agreement established in 1947 whose objective was to liberalize trade by eliminating tariffs, subsidies, import quotas, and the like.

General Agreement on Tariffs and Trade (GATT)

How did President Trump react to the two multilateral trade agreements, the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership, that were being pursued by the Obama administration?

He pulled the United States out of these negotiations.

How did the Smoot-Hawley Act affect employment?

It had a damaging effect on employment abroad.

Agri-Cor sells farm equipment throughout the euro zone. The company has noticed that some customers travel to countries where equipment sells for less to obtain a better deal. What implication of adopting the euro as a common currency does this situation demonstrate?

It makes it easier to compare prices across Europe.

What is a political argument for regional economic integration?

It reduces the potential for violent conflict

Mexico agreed to NAFTA after it was determined that the country's oil industry would be controlled by Mexico. Why did Mexico fight for this right?

It wanted to maintain national sovereignty.

Theory of national competitive advantage

Michael Porter points out the importance of country factors such as domestic demand and domestic rivalry in explaining a nation's dominance in production and export of particular products explains why certain nations achieve international success in a particular industry

________ justifies some limited government intervention to support the development of certain export-oriented industries.

New trade theory

New Trade Theory

Paul Krugman countries specialize in the production and export of particular products not b/c of underlying differences in factor endowments, but b/c for certain industries the world market can support only a limited number of firms ex: commercial aircraft

Heckscher-Ohlin theory

Swedish theorists

A failure in the Heckscher-Ohlin theory

The product life cycle theory 1) most new products are produced in and exported from the country they were developed in 2) as new product becomes widely accepted internationally, production starts in other countries 3) product would ultimately be exported back to the country of its original innovation

The European Community was established by the

Treaty of Rome

Bretton Woods System

US dollar as world currency every other currency dubbed as 'dollars' dollar was convertible to gold at $35/oz

Product life cycle

Vernon, mid 1960 comparative advantage initially resides with lead innovation nation and then goes to others as product goes through its life cycle stages

Which organization was created to implement the GATT agreement?

World Trade Organization

Paul Krugman characterizes strategic trade policy as being

a boost to national income at the expense of other countries.

Adam Smith's argument

a country should never produce goods at home that it can buy at a lower cost from other countries no benefit from international trade

Rae feels it is best for her company to pay their foreign supplier in Panama this month even though they will receive product for another six months. She recently learned that the currency in Panama is expected to appreciate and, by paying the supplier now, her company will save money. This is an example of

a forecast strategy.

If Italy is more efficient at producing fine leather shoes and handbags, then Italy has a(n)

absolute advantage.

A customs union differs from a free trade area because it allows for

adoption of a common external trade policy.

Assume the euro/dollar exchange rate quoted in Tokyo at 6 a.m. is €1 = $1.00. If the New York euro/dollar exchange rate at the same time (5 p.m. New York time) is €1 = $1.35, a dealer could make a profit through

arbitrage.

Kendall Wood Products Corp. purchased securities on the London Stock Exchange and then immediately resold them on the New York Stock Exchange at a higher price. The profits from this transaction were used to buy new machinery for the mill. This company engaged in

arbitrage.

Assume that the interest rate on borrowings in Argentina is 3 percent, but the interest rate on deposits in British banks is 9 percent. A trader borrows 1 million Argentine pesos, then converts the money into British pounds and deposits it in a British bank. What is the trader involved in?

carry trade

An American company sold heavy building materials to the government of Taiwan. Instead of receiving U.S. dollars, the company agreed to take payment in the form of Taiwanese goods. This is an example of

countertrade.

Mercantilism

countries should simultaneously encourage exports and discourage imports trade surplus govt. intervention: tariffs and subsidies old doctrine gold and silver could only be earned through exporting

A(n) _____ refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

currency swap

Kyra works for a costume jewelry manufacturer and while their products are lower in cost, there is a high degree of consumer pressure to create the best quality jewelry possible and to constantly innovate with new jewelry designs. Which aspect of Porter's Diamond does this demonstrate?

demand conditions

The harmonization of member nations' tax rates is required to form a(n)

economic union

Leontief paradox

exporting labor intensive (software) and importing capital intensive (machinery)

What is the competitive advantage of new trade theory?

firms who enter the market first ability of firm in a given nation to capture first mover advantages ex: Boeing as a first-mover

Alana 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 were joined by the EFTA, all barriers to the free flow of goods and services between the countries was removed. Member nations are 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

Identify the correct sequence of economic integration starting from the least integrated to the most integrated.

free trade area, customs union, common market, economic union, and political union

Jacob is the chief financial officer for RinseAll Detergent products. His company is interested in investing in a facility in Indonesia, but he is worried about unpredictable fluctuations in future exchange rates, which could cost his company millions of dollars. One way to ensure against this exchange risk is for Jacob to use

hedging

One reason the British electorate voted to exit the European Union is because of an increase in ________ within Europe.

immigration

Translation exposure refers to the

impact of currency exchange rate changes on the reported financial statements of a company.

Italy has a direct restriction on the amount of metal products that may be imported into the country. Which instrument of trade policy does this reflect?

import quota

A tariff rate quota provides a lower tariff rate to

imports within the quota.

High tariff barriers and subsidies in the agricultural industry ultimately lead to

increased prices for consumers.

A(n) _____ market is one in which prices do not reflect all available information.

inefficient

The ________ argument was proposed by Alexander Hamilton in 1792 and is by far the oldest economic argument for government intervention.

infant industry

What do new trade theorists point to as the reason for gaining a first-mover advantage?

innovation and luck

According to the _____, for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.

international Fisher effect

Autarky

no trade, poor employment of resources

When the management team reviewed its government contract on office furnishings, they noticed that in order to bid on the project, at least 44 percent of the value of the office furniture had to be produced in the United States. This stipulation is an example of a(n)

local content requirement.

The government of the Republic of Senna enforces tariffs and quotas to limit imported goods, while exports are subsidized. By using these instruments, the government seeks to achieve a surplus in the balance of trade. Based on this information, which approach most influences the Republic of Senna's approach to international trade?

mercantilism

Which approach suggests that nations may benefit from trade even when they do not differ in resource endowments or technology?

new trade theory

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

TransWare Inc., based in Atlanta, has a plant in Russia that builds road equipment. Each year this plant has been profitable, but TransWare Inc. is not able to convert the profits into U.S. dollars and take them out of the country. What type of convertibility does this represent?

nonconvertible

Subsidies and quotas are examples of ________ barriers a county might impose.

nontariff

Trade Related aspects of Intellectual Property rights (TRIPs)

patent protection is essential to the recovery of R&D costs problems with lack of enforcement / keep companies from trading

Basic message of the theory of comparative advantage

potential world production is greater with unrestricted free trade than with restricted trade trade is a positive sum game where all countries that participate realize economic growth supports free trade

A(n) ________ refers to the extra profit that producers make when supply is artificially limited by an import quota.

quota rent

An implication of trade barriers for business practice is that they

reduce the cost of importing products to a country.

The Single European Act was put in place in an attempt to

remove all impediments to the formation of a single market.

A foreign government was not enforcing its intellectual property rights, which resulted in massive copyright infringements. In turn, this was costing U.S. companies millions of dollars in lost sales revenues. To force the country to play by the rules, the United States threatened to impose trade sanctions on a range of imports from the country's businesses. The underlying motive for intervention by the U.S government was

retaliation.

Trade Related Investment Measures(TRIM)

rules that apply to the domestic regulations a country applies to foreign investors ex: NAFTA and 62.5% rule for automobiles

neo-mercantilist strategy

simultaneously boost exports and limit imports ex: China; keeping their currency value low against the U.S dollar to sell more goods to the U.S and other developed nations to create a trade surplus

A tax of 32 cents is levied for each pair of eyeglasses imported into a nation. This is an example of a(n)

specific tariff.

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.

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

the market mechanism

The Heckscher-Ohlin theory is based on the idea that

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

The creation of a single market increases price competition for business. In other words, it creates a(n)

threat

Gear Electronics used to buy all of its component parts from a local plant in Cleveland, Ohio, but this year it has decided to buy the parts from a lower-cost facility located in Tijuana, Mexico. This is an example of

trade creation

Two eastern European countries formed a free trade agreement. As a result, one of the countries that used to produce its own plastic bottles at a higher cost now imports them from the other country at a lower cost. This is an example of

trade creation

The United States imports sugar from several nations. If the NAFTA agreement caused the United States to import sugar only from Canada, even though it cost more to do so, it would be an example of

trade diversion

comparative advantage

unrestricted free trade David Ricardo differences in labor productivity

Foreign producers agree to ________ imposed by an exporting country because they fear more damaging punitive tariffs or import quotas might follow if they do not.

voluntary export restraints

According to the product life-cycle theory, once a new product becomes widely accepted internationally then production for that product

will start to take place in other countries.

Carlos is the manager of an American company. He expects the value of the British pound to appreciate in the near future and so delays the collection of payments from British customers until the next month. Which tactic is Carlos using to minimize the foreign exchange exposure?

lag strategy

Assume that the exchange rate between the U.S. dollar and the Japanese yen is $1 = ¥150. A book that retails for $10 in New York should sell for ¥1,500 in Tokyo, if there are no trade barriers and transportation costs, according to the

law of one price.

In order to encourage the agricultural industry, the French government provided low-interest loans for the purchase of seeds and fertilizers. The government also gave cash grants and made tax reductions. Which instrument of trade policy is being used by the French government?

subsidies

In terms of the approaches to exchange rate forecasting, _____ is based on the premise that there are analyzable market trends and waves and that previous trends and waves can be used to predict future trends and waves.

technical analysis

An economist would say that the benefits of regional integration are determined by

the amount of trade creation

The movement of traders like a herd, all in the same direction and at the same time, in response to each other's perceived actions, is called

the bandwagon effect.