chapt 2

Question 1

Free trade

Answer 1

a trade policy that does not restrict imports or exports.

Question 2

Comparative Advantage Theory

Answer 2

Supports the idea of free economic exchange.

Specializing and trading creates a mutually beneficial
exchange.

Question 3

comparative advantage

Answer 3

an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners.

The U.S. has a comparative advantage in producing goods and
services

Question 4

absolute advantage

Answer 4

the ability of an individual, company, region, or country to produce a greater quantity of a good or service with the same quantity of inputs per unit of time,

Other countries have an absolute advantage in things like
growing coffee and making shoes.

Question 5

Balance of trade

Answer 5

Difference between money coming in and money leaving country

Question 6

Trade surplus

Answer 6

the amount by which the value of a country’s exports exceeds the cost of its imports.

Question 7

Trade deficit

Answer 7

the country is importing more goods and services than it is exporting

Question 8

Balance of payments.

Answer 8

Goal is to have more money flowing into the country than out

Question 9

Dumping

Answer 9

Used to reduce surplus products in foreign markets or to gain a
foothold in a new market

Question 10

Strategies for Reaching Global Markets

Answer 10

from Least Amount of commitment, control, risk and profit potential to Most

Licensing
Exporting
Franchising
Contract Manufacturing
international joint ventures and strategic alliances
Foreign direct investment

Question 11

Licensing

Answer 11

Getting help with distribution, promotion, and consulting.
* Gaining revenue it wouldn’t have otherwise generated.
* Spending little or no money to produce or market its products.

Drawbacks.
* If a product experiences remarkable growth in the foreign market,
the bulk of the revenues belong to the licensee.
* The licensing firm is selling its expertise and trade secrets.

Question 12

Exporting

Answer 12

Export Assistance Centers help small and medium
companies with exporting.
* Indirect exporting is working with export-trading companies for help with negotiating and trading relationships.

Question 13

Franchising

Answer 13

• Franchisors need to be careful to adapt their product to
  the countries they serve.
• Domino’s Pizza has learned that preferred toppings for its product vary widely—from curry in India to squid and sweet mayonnaise in Japan.

Question 14

Contract Manufacturing

Answer 14

• A form of outsourcing.
• Contract manufacturing can be used to:
• Allow a company to experiment in a new market without incurring
  heavy start-up costs such as building a manufacturing plant.
• Temporarily meet an unexpected increase in orders.

Question 15

International Joint Ventures and Strategic Alliances

Answer 15

• Often mandated by countries as a condition of doing
  business (China).
• Can increase a company’s footprint and global growth.
• Can be used to join forces.

Benefits of joint ventures.
* Shared technology and risk.
* Shared marketing and management expertise.
* Entry into markets where foreign companies are often not allowed
unless goods are produced locally.

Drawbacks of joint ventures.
* Stolen or obsolete technology.
* Becoming too large to be flexible.

Question 16

Strategic alliances.

Answer 16

• Companies don’t share costs, risks, management, or even profits.
• Provides broad access to markets, capital, and technical expertise.

Question 17

Foreign Direct Investment (FDI)

Answer 17

an ownership stake in a foreign company or project made by an investor, company, or government from another country.

Most common form is a foreign subsidiary.

• Primary advantage: Parent company maintains complete control
  over its technology or expertise.
• Primary disadvantage: Must commit funds and technology within
  foreign boundaries.

Question 18

Multinational corporations.

Answer 18

Includes firms that have manufacturing capacity or some other physical presence in different nations.

Question 19

Sociocultural Forces

Answer 19

• Culture may include social structures, religion, manners
  and customs, values and attitudes, language, and
  personal communication.
• It’s important to understand cultural differences and think
  globally.
• U.S. businesspeople sometimes accused of ethnocentricity.
• Many foreign countries good at adapting to U.S. culture.

Question 20

Exchange rate.

Answer 20

a relative price of one currency expressed in terms of another currency

• Affects global markets.
• A high value of the dollar means a dollar is trading for more foreign currency than previously.

Question 21

Devaluation

Answer 21

lowers the value of a nation’s currency
relative to others.
* Bartering may be an alternative if a nation’s currency is weak.

Question 22

Countertrading

Answer 22

a situation when goods or services are traded for other goods or services rather than real currency

accounts for over 20 percent of all global
exchanges, especially with developing countries.

Question 23

Trade Protectionism

Answer 23

Advocates of protectionism believe it allows
domestic producers to survive, grow and produce
jobs.
Some countries use it because they are wary of
foreign competition.
Tariffs:
* Protective tariffs.
* Revenue tariffs.

Question 24

Import Quotas

Answer 24

*government-imposed limits on the quantity of a certain good that can be imported into a country.

• Used to protect domestic companies and preserve jobs.
• Nations also prohibit the import of certain products.
• Embargo.
• Nontariff barriers.
• Import licensing, product testing requirements, lengthy customs
  procedures, local content requirements

Question 25

The World Trade Organization

Answer 25

• General Agreement on Tariffs and Trade (GATT)
• Government leaders from 23 nations (1948).
• Global forum for reducing trade restrictions on goods, services,
  ideas, and cultural programs.
• Uruguay Round (1986) establishes World Trade
  Organization.
• Independent entity of 164 member nations whose purpose is to
  oversee cross-border trade issues and global business practices.
• Has not solved all global trade issues.

Question 26

Common Markets

Answer 26

A common market is a formal agreement where a group is formed amongst several countries that adopt a common external tariff.

• • A regional trade alliance.
• The European Union (EU), Mercosur, the ASEAN and the
  COMESA are common markets.
• African Continental Free Trade Area (AfCFTA) is largest
  free-trade area in the world in terms of member nations