Chapter 3 (Globalization) Flashcards
Nations trade because:
they don’t produce all the products that their inhabitants need
Why Import/Export?
not all countries are good at producing or are able to produce the same products
These factors of production vary greatly throughout the world (3):
natural resources
The cost of labor
the level of know-how
Absolute Advantage
country is the only source of a particular product or can make more of a product with the same amount of or fewer resources than other countries
Comparative Advantage
when a country can produce a product at a lower opportunity cost than other nations
Balance of Trade
subtracting the value of a country’s imports from the value of its exports
Trade Surplus
If a country sells more products than it buys and has a favorable balance
Trade Deficit
If it buys more than it sells, it has an unfavorable balance
Balance of Payments
the difference, over a period of time, between the total flow coming into a country and the total flow going out (biggest factor is imports and exports)
Other transactions included in balance of payments (4):
- cash received from or paid for foreign investment loans
- tourism
- military expenditures
- foreign aid
Importing
involves purchasing products from other countries and reselling them in one’s own
Exporting
entails selling products to foreign customers
Franchise Agreement
a company grants a foreign company the right to use its brand name and sell its products
Licensing Agreement
allows a foreign company to sell a company’s products or use its intellectual property in exchange for royalty fees
International Contract Manufacturing (Outsourcing)
a company has its products manufactured or services provided in other countries
Strategic Alliance
an agreement between two companies to pool talent and resources to achieve business goals that benefit both partners
Joint Venture
a specific type of strategic alliance in which a separate entity funded by the participating companies is formed to manage the alliance
Foreign Direct Investment (FDI)
the formal establishment of business operations on foreign soil
Offshoring
when a company sets up facilities in a foreign country that replaces U.S. manufacturing facilities to produce goods that will be sent back to the United States for sale
Foreign Subsidiary
an independent company owned by a foreign firm
Multinational Corporation
a company that operates in many countries
Cultural Challenges stem from differences in (3):
language
concepts of time and sociability
communication styles
Protectionism
the use of controls to restrict free trade, usually to protect a nation’s own economy
Tariffs
taxes on imports. Because they raise the price of the foreign-made goods, they make them less competitive
Quotas
restrictions on imports that impose a limit on the quantity of a good that can be imported over a period of time. They’re used to protect specific industries, usually new industries or those facing strong competitive pressure from foreign firms
Embargo
a quota that, for economic or political reasons, bans the import or export of certain goods to or from a specific country
Dumping
the practice of selling exported goods below the price that producers would normally charge in their home markets (and often below the costs of producing the goods)
The General Agreement on Tariffs and Trade (GATT)
encourages free trade by regulating and reducing tariffs and by providing a forum for resolving disputes
World Trade Organization (WTO)
encourages global commerce and lower trade barriers, enforces international rules of trade, and provides a forum for resolving disputes
Trading Blocs
groups of countries that have joined together to allow goods and services to flow without restrictions across their mutual borders
International Monetary Fund (IMF) and the World Bank
provide monetary assistance to some of the poorest nations in the world
North American Free Trade Association (NAFTA)
an agreement among the governments of the United States, Canada, and Mexico to open their borders to unrestricted trade
European Union (EU)
a group of twenty-seven countries that have eliminated trade barriers among themselves
Criticisms of MNC’s (3):
- Destroys livelihoods in home-country
- Traditional lifestyles/values weakened or destroyed
- Irreversible damage to environment
Defense of MNC’s (4):
- Better, cheaper products
- Creates jobs
- Raises standard of living
- Increases cross-cultural understanding
Pros to trade control (3):
- Protect specific industries
- Protect new or struggling industries
- Shield industries vital to national defense
Cons of trade control (4):
- Restricts free trade; countries cannot compete freely
- Doesn’t promote level playing field; gives special privileges to some
- Cannot bring goods to fair/open market
- Detrimental to world economy; nations cannot focus on what they do best
What is Globalization?
the movement towards a more interconnected and interdependent world economy
