2nd unbundling key concepts

Question 1

Network Effects

Answer 1

Network effects: Equivalent to internal economies of scale: the average cost gets lower with more users

• Moreover, WIP for a network of each consumer increases with the density of the network
• So firm’s profit per user is higher for a dense network than for a less dense one
• Leads to monopoly power by firms in specific market segments subject to strong network effects (eg Youtube, Twitter…)

Question 2

Value and supply chain

Answer 2

Value Chain: Describes the full range of activities that firms and workers do to bring a product or a service from its conception to its end use and beyond. This includes design, production, marketing, distribution and support to the final customer.

Supply chain: Emphasizes the manufacturing and distribution-related steps

Global Value Chain: Worldwide network of units involved in the design, production, handling, and distribution of materials, finished products and/or services. These units may operate under the same ownership or be independent firms

Question 3

FDI and 4 types

Answer 3

Foreign direct investments (FDI): refer to investments made to acquire a lasting interest in enterprises operating outside of the investor’s own country. The purpose is to gain an effective voice in the management of the enterprise

• Greenfield FDI: Where a parent company builds its operations in a foreign country from scratch (new production facilities, new administration/research units, new distribution or sales units)
• Brownfield FDI: When a company purchases or leases existing production facilities to launch a new production activity
• Horizontal FDI: The investment is in the same “business” abroad as the investor operates domestically.
• Vertical FDI: the investment in made in a foreign business that plays the role of a supplier or a distributor with respect to the domestic main activity

Question 4

Commodity supercycle

Answer 4

Commodity super cycle: Commodity prices tend to go through extended periods of boom and bust, known as super cycles

-Super-cycles are the result of the interaction of large and long, unexpected demand surges and slow-moving supply responses

Question 5

Value Added

Answer 5

Value added (VA): The value added of an industry, also referred to as gross domestic product (GDP)-by-industry, is the contribution of an industry to overall GDP

• VA is equal to difference between an industry’s gross output (sales plus other operating income) and the cost of its intermediate inputs (including energy, raw materials, sem-finished goods, and services) that are purchased from other industries
• Value added can be computed at the firm (or GVC level) or at the industry level
• Value added not equal profits! At the firm level, VA is the difference between the value of its gross output and the value of what the firm buys from other firms. (to obtain profits, one has to deduct wages, loans etc)

Question 6

Intra-Industry Trade

Answer 6

Intra-Industry Trade (IIT): Exports and imports of products belonging to the same industry. These products are differentiated finished products (BMW vs Toyota) or intermediate products belonging to the same class of products (car seats vs car engine

Question 7

Bilateral Investment Treaty

Answer 7

Bilateral Investment Treaty: Agreement between two countries regarding the promotion, protection and liberalization of investments made by investors from respective countries in each other’s territory

-Provides a number of guarantees such as fair and equitable treatment (equivalent to non-discrimination for investments), protection from expropriation, free transfer of means, etc

Question 8

Deep trade agreements

Answer 8

Deep trade agreements include a wide range of issues beyond tariffs, such as services, investment, intellectual property protection, and competition policy.

• These policy areas involve domestic regulations (or behind-the-border measures).
• The effects of these measures are more difficult to assess than border agreements (trade creation and trade diversion) because changes to domestic regulations are difficult to tailor so that they favor only selected trade partners

Deep integration occurs because:

• As trade becomes more open, countries? Policies increasingly depend on each other (collective decision is better than unilateral decision-making)
• Deep integration agreements may be necessary to promote trade in certain sectors and economic integration more broadly. This applies to international production networks which require a governance structure beyond low tariffs.

Question 9

GDP, national income, and inequality

Answer 9

3 main causes:

1. Globalization triggered by 2nd unbundling
2. Technological changes triggered by ICT revolution
3. Increased firm monopoly power and concentration