Econ 2 - Globalization & Local Economies Flashcards
The primary sources of funds for sovereign wealth funds are
export earnings from commodity (energy)-based exports and the trade surplus generated by the export of manufactured goods. The trade surplus is often tied to the country having a weak currency that causes a country’s goods and services to be priced lower in terms of a foreign currency.
Global companies that deal with the political and financial risks of conducting business in a particular foreign location face
country risk
Principal risk
relates to changes in the value of a particular note usually caused by changes in interest rates
Interest Rate risk
the chance that future interest rates will change, causing a gain or loss to the holder of notes
Commodity Price risk
the chance that cost of a particular commodity may vary do to variables in the supply and demand for that commodity
Effect from opening markets to foreign investment
- Increase in correlation of emerging stock markets with world markets (b/c new opportunity is subject to same market forces)
- Change in volatility of emerging stock market returns (new opportunity will changes prices)
- Decrease in local firms’ cost of capital (will increase investment in the market)
- Increase in investment growth rates
Foreign Direct Investment (FDI) may be described as having
investment flow from emerging market economies to other emerging market economies and more developed economies, as many of these emerging economies capture an increasing amount of foreign exchange earnings either from the sale of raw materials or rising trade surpluses from the export of manufactured goods
Globalization is a process by which nations of the world become integrated through global networks of communication. Its current success is tied to a number of socioeconomic effects, with one of the key effects being
the relatively large labor force in emerging markets and declining birth rates that have historically been associated with dynamic positive economic change.
In relation to the balance of trade, all international transactions involving the purchase or sale of physical products between domestic and foreign countries are reflected i
the trade balance in the current account
Key characteristics of emerging market economies include
- low debt-to-GDP ratios
- a significant increase in trade among and between emerging market economies
- low-cost labor
- high savings rates
- large currency reserves
- high investment in infrastructure
- significant growth in # of middle class
- improving supply-chain effectiveness
US Balance of Trade
US Exports - US Imports; largest and most important part of nation’s current account
Positive (favorable) Balance of Trade aka Trade Surplus
Exports > Imports
Negative (unfaborable) Balance of Trade aka Trade Deficit
Imports > Exports
When is a Trade Deficit good?
Expansionary phase of business cycle (as more goods are imported, prices stay low due to more competition)
When is a Trade Surplus good?
Recessionary phase of the business cycle (creates more jobs and increases demand for goods)
Factors that influence Balance of Trade
- Currency exchange rates
- Tax based trade restrictions
- Production cost diff b/n importing and exporting countries
- Political based barriers to trade
Globalization suggests that firms need to take a serious look at the variety of implications of globalization for business strategies. Among the major factors that need to be considered are:
the need for scenario planning, which causes the firm to look at a number of different future possibilities for the firm under varying conditions of high uncertainty.
A key rationale or cause for the changing pattern of investment in agriculture by sovereign wealth funds would be:
to ensure food security in the event that crop shortages would cause export bans that might curtail their ability to import crops.
The effects of rapid technological change on nations in the global economy
- There has been a dispersion of lean production methods with the combination of innovations within productive organizations.
- Flexible computer-aided manufacturing systems that allow for the production of custom output have been combined with systems providing mass production at a low cost to meet the tastes of ever-smaller groups.
- If immigration restrictions limit the migration of skilled workers to the countries with advanced information technology, then technology begins to migrate to the location of skilled workers.
Primary benefits of globalization have allowed for
- new technologies to be effectively utilized in areas where low-cost labor is available
- foreign direct investment to bring new technology and labor market skills to underdeveloped areas
- caused capital to flow to areas where its marginal product is higher, resulting in increased world output.
A significant decline in the exchange rate of the U.S. dollar generally will have
a benefit for US exporters (make goods produced in the U.S. less expensive in foreign currencies, improving the competitiveness of U.S. exporters)
What would not be a successful business strategy resulting from rebalancing due to the shifting balance of power in the international economy?
Engaging in specialized production for a significant number of local markets by constructing manufacturing facilities in several locations to ensure that products produced would meet local tastes and preferences
Sovereign Wealth Funds (SWF) are
government investments funded by foreign currency reserves that are managed separately from official currency reserves and invested for profit.
Primary use to which SWF would be put
- Investing in land in another country to produce staple crops for export to their country in a way designed to circumvent the workings of world commodity markets
- Diversifying the use of foreign exchange reserves and attempting to improve food and energy security
- Acquiring technologies, brands, and resources designed to improve productivity and improve management techniques
Balance of Payaments (BOP) is
a record of all payments or monetary transactions between a particular country and other nations during a specific time period
Categories of the BOP Account (3)
Current account, Capital account, & Financial account
Current Account includes
the exchange of any FG and services (for consumption purposes) ex. tourism.
Selling Country records CR to BOP current account
Purchasing Nation records DR to BOP current account
Capital Account is
the tracking of the movement of capital going in and out of a country for investment purposes ex. person migrates from 1 nation to another
Departing Nation records DR to BOP capital account
Arriving Nation records CR to BOP capital account
Financial Account is
the record of payment flows related to the change of ownership in international financial assets and liabilities. Flows include (direct investment, portfolio investment, reserve assets) ex. 1 nation invests in foreign securities from another nation
Buying Nation records DR to BOP financial account
Selling Nation records CR to BOP financial account
BOP should =
0; Current Account = Capital Account + Financial Account
1 Major Benefit of BOP
allows a country to identify any LT trends that could be troublesome to its economy
Current Account Balance (CAB) =
Exports - Imports + NI abroad + Net current transfers
When currency conversion goes from 1.5:1USD to 1.7:1USD, it means
exports are less expensive for the US
