Midterm Flashcards
Communist totalitarianism
Found in states where the communist party monopolizes power
Hofstedes 5 dimensions of culture
- Power distance: how a society deals with the fact that people are unequal in physical & intellectual capabilities
- Uncertainty avoidance: the relationship between the individual and his fellows
- Individualism vs. collectivism
- Masculinity vs. femininity
- Long term orientation
Theocratic totalitarianism
Found in states where political power is monopolized by a party group or individual that governs based on religion
Tribal totalitarianism
Political party that represents the interests of a particular tribe monopolizes power
Right wing totalitarianism
Permits some individual economic freedom but restricts individual political freedom
3 types of economic systems
- Market economies: all productive axtivites are privately owned and production is determined by the interaction of supply and demand
- Command economies: gov plans the goods and services that a country produces, the quantity that is produced, and the prices as which they are sold
- mixed economies: certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning
The view that your country is better then others
Ethnocentrism
Three types of legal systems
- Common law: based on tradition, precedent, and custom
- Civic law: based on detailed set of laws organized into codes
- Their oceanic law: law is based on religious teachings
How property rights can be violated
Private action: theft piracy blackmail
Public action: legally ex excessive taxation or illegally ex bribes
Human development index measures
Life expectancy at birth
Educational attainment
Whether average incomes are sufficient to meet the basic needs of life in a country
What does it take to have a economically growing environment
Good property rights Free market Individualistic Economic freedom Democratic
Countries with higher growth rates
Invest in education
Good geographic location for trade
Democratic revolution
Totalitarian gov have failed to deliver economic progress
New info & communication technologies have broken down gov from censoring communication
Economic advances have pushed for reforms by the middle class
Since 1980s two trends have emerged
Democratic revolution
A move away from planned and mixed economies
Shift to market based system involves
Deregulation: removing legal restrictions to the free play if markets
Privatization: transfer of the ownership of state property into private investors
Creating legal system
Benefits if doing business in a country
Market size
Purchasing power if it’s consumers
Likely future wealth
Costs of doing business in a country
Corruption
Lack of infrastructure
Legal costs
Risk of doing business in a foreign county
Political risk: social unrest/ anti-business trends
Economic risk: Liklyhood that economic mismanagement will cause drastic changes in profit or goals of company
Legal risk: likelihood that a trading partner will break a contract it expropriate property rights
Six theories of international trade
Mercantilism
Absolute advantage—Adams theory—free market
Comparative advantage—Ricardo -hecksher-Ohlin
Product life-cycle theory (Vernon)
New trade theory (krugman)
Free trade theory
Gov doenst try to influence through quotas or duties what it’s citizens can buy from other countries or vice versa
Mercantilism
Suggests that it is in a country’s best interest to maintain a trade surplus to export more then it imports.
Advocates government intervention to achieve a surplus
Zero-sum gain-gain in one county results in a loss in another one
Absolute advantage–Adam smiths theory
Countries have an absolute advantage in the production of a product when it is more efficient than any other country and should specialize in this production
Trade positive sum game
Ricardo comparative advantage
Countries should specialize in the production of those goods they produce most efficiently and buy goods they produce less efficiently even if they could produce the goods more efficiently at home
Both countries gain
Disadvantages of free trade
Immobile resources: resources don’t easily move from one activity to another
Diminishing returns: need more resources to increase one unit, quality of resources, different goods different % of resources
Dynamic effects & economic growth: increase stock of resources, increase the efficiency of the use of these resources
Hecksher-Ohlin theory
Comparative advantages arises from differences in national factor endowments. More abundant a factor the lower it’s cost.
Import goods that make intensive use of factors that are locally scarce & export goods that make intensive use of locally abundant factors
Product life theory (Vernon)
As products mature both the location of sales and the optimal production location will change affecting the flow and direction if trade
Initially products would be developed, produced and sold in the us, demand would then grow in ither developed countries so us would export and finally demand would grow making it worthwhile for foreign producers to produce it at home. Us would then set up production in foreign countries until it become more standardized making price the main competition. Other countries might develop a production advantage over advanced countries
New trade theory
Through its impact on economies I scale trade can increase variety of goods and decrease cost
Trade allows markets are able to support the production necessary to achieve economies of scale
Trade mutually beneficial bc it allows for the specialization of production, the realization if scale economies and prosecution of a greater variety of products at a lower cost
When output required to attain economies of scale are a significant portion of total world demand it makes it difficult for smaller enterprises
First mover advantage
Porter diamond comparative advantage
4 factors that promote comperatove advantage
- Factor endowments: natural resources, climate, skilled labor, infrastructure etc..
- demand conditions: nature of home demand
- relating & supporting industries: presence or absence of supplier related industries that are competitive
- Firm strategy, structure & rivalry: how companies are created, organized, managed, & nature of domestic rivalry
Methods governments use to intervene
Tariffs: taxes levied on imports
Subsidies: government payment to local producers
Import quotas: restrict quantity that may be imported to a country
Voluntary export restraints: quotas on trade imposed by the exporting country
Local content requirements: demand that some specific fraction if a good be produced domestically
Administrative policies: bureaucratic rules designed to make it difficult for imports to enter a country
Anti dumping policies: selling goods in a foreign market below their cost of production fined by domestic government
Why is it so important for regional economy’s to integrate
Globalization
Members of EFTA
Norway Iceland Lichtenstein & Switzerland
North American free trade association
Us Canada Mexico
Free trade area
Eliminates all barriers to the trade of goods and services amount member countries
Customs unions
Eliminates trade barriers between member countries and adopts a common external trade policy
Common market
No barriers to trade
Common external trade policy
Free November of the factors of production for all members
Economic union
Free flow of products & factors of production Common external trade policy Common currency Harmonized tax rate Common monetary & fiscal policy Ex. Eu
Political union
Central political apparatus that coordinats the economic, social and foreign policy of member states
Reasons countries should integrate
All countries gain
More incentive for political cooperation between countries
Gives them bigger clout with other countries
Difficulties of integration
Lose some national sovereignty
Certain groups lose
Problem if trade diversion is more then trade creation
How Mexico benefits from nafta
Increased jobs as low production cost moves south, economic growth
Us & canda benefit from nafta
Large and profitable market
Lower prices bc of low production costs
Low cost labor
Increased imports from Mexico
Why does the government intervene in the market
Political: to protect certain groups within a nation often at the expensive of others
Economic: to boost the overall wealth of a nation
Political reasons for government to intervene in trade
- Protect jobs
- Protecting industries deemed important for national security
- Retaliation for unfair foreign competition
- Protecting consumers from dangerous products
- Furthering the goals of foreign policy
- Protecting the human rights of individuals in exporting countries
- Protecting the environment
Economic arguments for government intervention in international trade
- The infant industry argument: industry should be protected until it can develop & compete with international competition
- Strategic trade policy: first mover advantages can be very important to success
3.
Arguments against strategic trade
Boost national income at the expense of others
Provokes retaliation of other countries
Lobbies will distort this to their own benefit
Importance of trade theory on business practice
Location implications
First mover implications
Policy implications: work to support governments to encourage free trade
When to use the foreign exchange market
Payments received for exports, income from foreign investments or licensing agreements are in foreign currencies
Must pay a foreign country in their currency
Spare cash they want to invest in short term money markets
Currency speculation
How are exchange rights determined
- Country’s price inflation
- A country’s interest rate
- Market philosophy
Purchasing power parity theory
Argues that given relatively efficient markets the price of a basket of goods should be roughly equivalent in each county.
Predicts changes in relative prices will result in exchange rates
International fisher effect
For any two countries the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between two countries
Band wagon effect
Traders join the bandwagon and move exchange rates based on groups expectations
Fundamental analysis
Uses economic factors like interest rates, inflation rates etc… To predict exchange rates
Technological analysis
Past trends can predict future trends
Transaction exposure
Extent to which the income from individual transactions is affected by fluctuations in foreign exchange values
Translation exposure
Impact if currency exchange rate changes on the reported financial statements of a company
Economic exposure
The extent to which a firms future international earning power is affected by changes in exchange rates
How managers can minimize translation & transaction
Buy forward
Use swaps
Lead and lag payables and receivables
How managers can reduce economic exposure
Diatribute productive assets to various locations
Ensure assets aren’t too concentrated in countries where Likely rises in currency values will lead to increases in the foreign prices
