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Global Business Environment Ch 6-11

Absolute Advantage produce what you specialize in & then trade for goods that other countries specialize in
Comparative Advantage do what your most efficient at & let other countries do what they do best & then trade -even if you can produce both goods more efficient
History development of Trade Theory Mercantilism->Smith->Ricardo->Heckscher-Ohlin
Mercantilism -export more than you consume -encourage exports & discourage imports
Smith said you want the absolute advantage
Ricardo said you want the comparative advantage
Heckscher-Ohlin -export what you specialize in & import what you don't then trade -factor endowment: the extent to which a country is endowed with resources
Zero-sum game A gain in one country results in lose by another
Win-Win game Both countries produce what do best and then trade. Both countries win as apposed one country producing all the goods they need.
Porter - National Systems How do you get an advantage in a factory were the goods are produced?
Krugmen - New Trade Theory be the first to produce a good
Vernon - Product Life Cycle -about where a produce is produced -industrial nations have an incentive to develop new products
First-Mover Advantage the economic & strategic advantage that accrue to early entrants into an industry
Undered Unemployment Your level of education does not match the job you are in
Antidumping selling goods in another country for less than the cost to make it
Free Trade The absence of barriers to the free flow of goods & services between countries
Tariff A tax levied on imports or exports
Specific Tariff levied as a fixed charge for each unit of good imported
Ad Valorem Tariff Levied as a portion of the value of an imported good
Who gains from tariffs? Government and domestic producers
Who loses from tariffs? Consumers
Subsidy -a government payment to domestic producers -the payment is intended to lower their cost
Import Quota A direct restriction on the quantity of a good that can be imported into a country
Tariff Rat Quota Lower tariff rates applied to imports within the quota than those over the quota
Voluntary Export Restraint (VER) A quota on trade imports from the exporting country
Quota Rent Extra profit producers make when supply is artificially limited by an import quota
Local Content Requirement A requirement that a specific fraction of goods be produced domestically
Foreign Direct Investment (FDI) FDI occurs when a firm invests directly in production or other facilities over which it has effective control
Sovereign-wealth Funds extra capital the gov. has that they want to invest in other companies
Greenfield Investment Start a new business unit in another country that was not previously existing
Acquisition purchase of an existing business in another country
Free Trade Area No barriers with in -ex: NAFTA
Common Union Some external trade policy
Common Market Factors move freely
Economic Union Some currency, tax rates, monetary policy, and fiscal policy -ex: EU
Political Union Centralized economic, social, & foreign policy -ex: US states
Spot rate what you will get at a specific point in time for a currency
3 main factors that impact future exchange rates 1. A country's price inflation 2. A country's interest rate 3. Market psychology
law of one price same good much sell for the same price in each currency after factoring exchange rate
Purchasing power parity given relative effective markets the price of a "basket of goods" should be roughly equivalent in each country
International Fisher Effect any two countries, the spot exchange rate should change in an equal amount
Band Wagon Effect expectations on the part of traders turns into self-fulfilling prophecies, & traders join the band wagon & move the exchange rate
Degrees of Convertibility: 1. Freely convertible 2. Externally convertible 3. Nonconvertible 1. available to convert 2. only foreigners can convert 3. can't convert currency, which keeps the capital in
Floating exchange rate When the foreign exchange market determines the relative value of the currency
Pegged currency value is fixed relative to a reference currency
Dirty Float A country's currency is allowed to free float against other currencies, but the gov. may intervene by buying and selling the currency to keep it at a fair value
Managed Float system where some currencies are allowed to float freely but the majority are either managed by gov. in intervention or pegged another currency
Forward Exchange when two parties agree to exchange currency & execute a deal at some specific date in the future
Moral Hazard Aries when people believe recklessly because they know they will be saved if things go wrong
Created by: NickUD



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