international business midterm Flashcards
What expanded international trade? What dropped it?
- expanded when China entered the WTO
- dropped when financial crisis in 2008
What are the 4 country-based theories.
- mercantilism: we do not want to trade unless we must
- absolute advantage: focus on getting more and at a lower price, full specialization on what you do best and then you trade
- comparative advantage: which good a country should produce to maximize overall efficiency (opportunity cost)
- relative factor endowments (Heckscher-Ohlin theory and Leontief paradox)
- Heckscher-Ohlin theory: export goods we have the most of and import scarce goods
- Leontief paradox: Leontief tested Heckscher-Ohlin’s model, and the results were not consistent with the predictions of the model
What are the 4 firm-based theories.
- similarity theory: countries with similar per capita income have similar quality products
- product life cycle
- new trade theory: economies of scale (the more you do it, the more efficient you get, and costs go down), opening borders allows for more companies to compete and therefore creates a market
- national competitive advantage
What type of trade are country-based theories?
inter-industry trade (exchange of goods across different industries)
What type of trade are firm-based theories?
intra-industry trade (exchange of similar products within the same industry, cars for cars, phones for phones)
What is the difference between direct investments and portfolio investments? Give an example of both.
- direct investment: invest in a company and decide what to do with it, you have decision-making capabilities
- example of direct investment: opening a retail store
- portfolio investment: you do not get to decide what to do with a company that you invested in, no decision-making capabilities
- example of portfolio investment: lending money to someone in another country (you do not get to decide what they do with it)
What are the 2 main political factors?
- avoidance of trade barriers = if you do not make it into my country, and you ship it to my country, i will charge you the tariffs. if you make it to my country, i will not charge you the tariffs
- economic development incentives = invest in my country and i will give you money or give you tax credits
What is protectionism?
making decisions (at a country or regional level) that aim to protect things we consider important
What are stakeholders?
those that have the most to gain/lose are the most vocal in wanting to create change or to stop change
What are the 4 economic rationales?
- fighting unemployment: limit imports to increase employment
- protecting infant industries: new industry that you are trying to growth, try to protect it so you can compete with other players
- industrialization: established industry that you are trying to protect
- economic relationships with other countries: government compares its economic performance to other countries and enact policies to improve its relative position
What are the 4 noneconomic rationales?
- maintaining/extending spheres of influence: expanding political influence
- preserving national culture: limiting exports of items deemed to be part of their national culture
- maintaining essential industries: we are in power and there are industries that we have to protect (like health care)
- promoting acceptable practices abroad: use our economic influence to push the other region/country to change their behavior
What are 2 ways to control trade?
- quotas: directly influencing quantity
- tariffs: indirectly influencing quantity by directly influencing price
What are 3 ways you can directly influence quantity?
- quotas: there is a certain amount you can bring
- embargoes (type of quota): nothing can come into my country
- voluntary export restraint (type of quota): agreement between an exporting country and an importing country to limit the amount of a product that can be exported
What are 4 ways you can indirectly influence quantity by directly influencing price?
- specific duty: country assesses a tariff on a per unit basis
- ad valorem tariff: assessed as a percentage of the item’s value
- compound duty: when both a specific and an ad valorem tariff are assessed
- subsidies: given to help industries overcome market imperfections
What are tariffs?
- direct revenue stream for the government (if the government imposes them, they get the money)
- whoever brings it in the country must pay the tariff (and the money goes to the government)
What happens when a big country like the United States tariffs a small country like Iceland?
- prices stay the same in big country
- prices go down the entire amount of the tariff in small country
What happens when a small country like Iceland tariffs a big country like the United States?
- prices stay the same in big country
- prices go up the entire amount of the tariff in small country
What happens when a small, but not that small, country like Canada tariffs a big country like the United States?
- prices go up, but not the full amount of the tariff, in small country
- prices go down, but not the full amount of the tariff, in big country
What happens when a big country like the United States tariffs a small, but not that small, country like Canada?
- prices go down, but not the full amount of the tariff, in small country
- prices go up, but not the full amount of the tariff, in big country
What is the World Trade Organization?
- sign up to obey a set of rules about trade
- if there is a dispute, you go to the WTO
- a tiny country can take a large country to court (court = WTO) and win
What is the difference between a direct quote and an indirect quote?
- direct quote: how much of my currency do i need to buy one unit of foreign currency
- indirect quote: how much foreign currency you can buy with one unit of your currency
What is the difference between bid rate and ask rate?
- bid rate: price that a dealer is willing to pay to buy currency
- ask rate: price at which the dealer is willing to sell currency
What is spread?
difference between bid rate and ask rate
What is arbitrage? What are the 3 important things about it?
- free money (riskless profit)
- the three important things about arbitrage are: as fast as possible, put in as much money as possible and lock in the rates