Session 5: International economics

Question 1

The ‘big question’ is: “What determines the success and failure of
firms around the globe?”

Answer 1

• Institution-based view: Formal and informal rules of the game
• Resource-based view: Firm-specific resources and capabilities

Question 2

Why nations trade?

Answer 2

• Most nations actively participate in international trade, consisting of
  exporting (selling abroad) and importing (buying from abroad).

Question 3

Trade theories - Mercantilism

Answer 3

• International trade is a zerosum-
game – trade deficit is dangerous
• Governments should protect
domestic industries and promote

Question 4

Trade theories - Absolute advantage

Answer 4

• Nations should specialize in economic activities in which they have an absolute
advantage and with others
• By specializing and trading, each nation produces more and consumes more, wealth increases

Question 5

Trade theories - Comparative advantage

Answer 5

• Nations should specialize in economic activities in which they have a comparative advantage and trade with others
• Even if one nation is absolutely inferior to another, the two nations can still gainfully trade
• Factor endowments underpin comparative advantage

Question 6

Trade theories- Product life cycle

Answer 6

• Comparative advantage first
resides in the lead innovation nation, which exports to other nations
• Production migrates to other advanced nations and then developing nations in
different product life cycle stages

Question 7

Trade theories - Strategic trade

Answer 7

• Strategic intervention by governments (Subventionen) may help domestic firms reap firstmover advantages in industries with high barriers to entry
• First mover firms may have better odds at winning internationally

Question 8

Trade theories Porter - National competitive advantage of industries

Answer 8

• Competitive advantage of different industries in different nations depends on
the four interacting aspects of a diamond
• The four aspects are 1. Firm strategy
and rivairy 2. Domestic demand conditions 3. Country resource endowments 4. Related and supporting Industries

Question 9

Two types of trade barriers

Answer 9

• Tariff barriers: reduces or eliminate international trade

- nontariff barriers (NTBs) include: Import Quotas, export restraints

Question 10

exchange rate

Answer 10

The exchange rate is the price of one currency in another currency

Question 11

The market for currency

Answer 11

The currency exchange market is a market where individuals, firms,
governments and banks buy and sell foreign currencies.

Question 12

Purchasing power parity (PPP)

Answer 12

Theory implies that in the absence of trade barriers (such as tariffs),
the price for identical products sold in different countries must be the same

Question 13

Managing exchange risk

Answer 13

• Rechnungserstellung in eigener Währung - Spot market
• Strategic edging by balancing currencies of cost and revenue streams - Forward market
• Diversification by trading in multiple currencies - Swap Market