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INTR test2
International Business
| Question | Answer |
|---|---|
| What is free trade? | A government does not attempt to influence what its citizens can buy, produce or sell from another country. |
| How has international trade theory evolved? | Mercantilism- encourage exports and discourages imports. Adam smith promoted unrestricted free trade. David ricardio built on adam smith ideas. Eli heckscher and bertil ohlin refined ricardo's work. |
| Why is it beneficial for countries to engage in free trade? | -Specialization. -Import products that cn be produced more efficintly in other countries. |
| Ricardo's theory of comparitive advantage | Trade patterns reflect differences in labor productivity |
| Paul Krugman's new trade theory | world market can only suport a limited number of firms in some industries. Trade will move toward countries with firms that have the first mover advantages. |
| Mercantilism mid 16 century | Its in a countries best interest to maintain trade surplus- To Export more than it imports.Wants government intervention in order to achieve a balance of surplus and trade. (Zero Sum game, when 1 country wins another country losses.) |
| Absolute Advantage | More efficient than other countries in production |
| According to Smith on absolute advantage: | Trade is not a zero-sum game. Countries should specialize in the production of goods they have an absolute advantage in and trade for other needs. |
| Ricardo's proposed theory of Comparative advantage | A country should specialize in the production of goods it produces efficiently and buy goods it produces less efficiently from other countries. |
| Theory of Comparative Advantage | Positive Sum-game, all gain: strongly encouraged free trade. Greater production with unrestricted trade. |
| Heckscher and Ohlin Theory | Comparative advantage reflects differences in national factor endowments (Land, labor, capital) |
| Product Life Cycle Theory(Vernon mid-1960) | As products mature the location of sales and the optimal production lovation will change affecting the flow and direction of trade. |
| New Trade Theory (1970) | 1. Trade increases the variety of goods available and decreases the average cost of goods. 2. The global market might only be able to suport a small number of firms. |
| Free trade | Government does not try to restrict what citizens buy, sell, from another country. |
| How do governments intervene in international trade? | Tarifs, subsidies, import quotas, voluntary export restraints, local content requirements, antidumping policies, and administrative policies. |
| Tariff | Tax levied on imports. raises the cost of imported products. |
| Specific Tariffs | A fixed charge for each unit of a good imported |
| Ad Volorem tariffs | Levied as a proportion of the value of the imported good. |
| Why do governments impose tariffs? | Increase government revenue. provide protection to domestic producers against foreign competitors. Force consumers to pay more for certain imports. |
| Subsidy | A government payment to a domestic producer |
| Subsidies help domestic producers: | Compete against low-cost foreign imports. Gain export markets. |
| Import Quota | A direct restriction on the quantity of some good that may be imported into a country. |
| Tariff Rate Quota | A hybrid of a quota and a tarrif where a lower tariff is applied to imports within the quota than to those over the quota. |
| Voluntary export restraint | Quota on trade imposed by the exporting country, typically at the request of the importing country's government |
| Quota rent | The extra profit that producers make when supply is artificially limited by an import quota. |
| Who benefits from import quotas abd voluntary export restraints? | Domestic producers by limiting import competition. |
| A local content requirement | Demands some specific fraction of a good be produced domesticaly. BENEFITS DOMESTIC PRODUCERS AND JOBS. |
| Administrative trade policies | Bureaucratic rules designed to make it difficult for imports to enter a country. |
| Dumping | Selling goods in a foreign market below their cost of production or "Fair market value" |
| Antidumping policies | Punish foreign firms that engage in dumping. Goal is to protect domestic producers from unfair foreign competition. |
| Why do governments intervene in trade? Political argument | Concerned with protecting the interests of producers at the expense of consumers. |
| Why do governments intervene in trade? Economic argument | Concerned with boosting the overall wealth of a nation. BENEFIT PRODUCERS and CONSUMERS |
| Political Argument for Government intervention in trade. | 1. Protecting jobs and industries 2. National security 3. Retaliation 4. Protecting Consumers 5. Furthering Foreign policy objectives 6. Protecting Human rights |
| Economic Argument for Government intervention in trade. | 1. The Infant Industry Argument 2. Strategic Trade Policy |
| 2 Situations where restriction on trade is inappropriate. | Retaliation and Domestic Policies |
| The Uruguay Round (1986)focuses on: | 1. Services and Intellectual Property. 2. The World Trade Organization |
| The World Trade Organization focuses on: | 1. Anti-dumping 2.Protectionism in agriculture 3.Protecting Intellectual Property 4.Market access for non agricultural goods and services 5.A new round of talks: Doha |
| A new round of talks: Doha focuses on | cutting tariffs, phase out subsidies, reducing barriers, limiting the use of anti-dumping laws |
| Why should international managers care about the political economy of free trade or about the relative merits of arguments for free trade and protectionism? | 1.Trade barriers impact firm strategy. 2.Firms can play a role in promoting free trade or trade barriers |
| Two ways to look at FDI (Foreign Direct Investment) | 1.The flow of FDI 2.The stock of FDI |
| The Flow of FDI | The amount of FDI undertaken over a given time period. OUTFLOWS-flow of FDI out of the country. INFLOWS-flow of FDI into country. |
| The Stock of FDI | The total accumulated value of foreign-owned assets at a given time. |
| What is FDI (Foreign Direct Investment) | When a firm invests directly in new facilities to produce or market in a foreign country.(MULTINATIONAL ENTERPRISE-A COMPANY ENGAGED IN FDI) |
| Two Forms of FDI | 1. Greenfield investment- establishment of a new operation in a foreign country. 2.Acquisition or merging with an existing firm in the foreign country. |
| The U.S has been the largest source country for FDI since? | World War 2 |
| Why are acquisitions attractive? | Quicker to execute, easier and less risky, and increase the efficiency |
| Producing a good at home and then shipping them to the receiving country for sale | Exporting |
| Granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit that the foreign entity sells. | Licensing |
| 1. Limitations of Exporting(Theory of FDI) | Transportation costs and trade barriers |
| 2.Limitations of Licensing- Internalization theory | 1.Could result in giving away technological info. 2.Does not give a firm the tight control over manufacturing, marketing and strategy. 3.May be difficult if the firm's competitive advantage is not amendable to it. |
| 3.Advantages of FDI-Favor Exporting | Transportation Costs and Trade Barriers are High |
| 3.Advantages of FDI (cont.)-Favor Licensing | Firm wants control over technological know-how, operations and business strategy. And the firms's capabilities are not amendable. |
| The Pragmatic nationalist view | FDI should be allowed only if benefirs outweigh the costs |
| Host Country Benefits of FDI | 1.Resource Transfer Effects. 2.Employment Effects. 3.Balance-of-payments Effects. 4.Effects on Competition and Economic Growth |
| Host Country Costs of FDI | 1.Adverse effects on Competition. 2.Adverse Effects on the Balance of Payments. 3.National Sovereignty and Autonomy |
| Home Country Benefits of FDI | 1.effect on capital account. 2.Employment effects. 3.gains of learning valuable skills. |
| Home Countries Costs of FDI | The balance of payments, and Employment effects of outward FDI |
| International Trade Theory | Home Country concern about the negative economic effects of offshore production may not be valid |
| Regional Economic Integration | agreements btw countries to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other. |
| Levels of Economic Integration | 1.Free Trade Area. 2.Customs union 3.Common Market 4.Economic Union 5.Political Union |
| Two main impediments to integration: | It can be costly, and loss of national soverignty |
| Europe has 2 trade blocks: | 1.The European Union with 27 members. 2.The European Free Trade Association with 4 members |
| The EU is a result of: | The devastation of 2 world wars, the desire for peace and political and economic stance in the world. |
| The 4 main institutions of the EU are: | 1.The European Commission 2.The Council of the EU 3.The European Parliament 4.The Court of Justice |
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