MGT 302 Exam 1 Study Guide Fall 2009 Chapters: 1-3, 5-6, 8 and pages 631-639 Readings: Wall Street Journal articles announced in Blackboard Videos: Commanding Heights: Episode I The Pursuit of Happiness Buy American Terms and Concepts: Commanding Heights: Attempts to trace the rise of HYPERLINK "http://en.wikipedia.org/wiki/Free_markets" free markets during the last century, as well as the process of HYPERLINK "http://en.wikipedia.org/wiki/Globalization" globalization . It takes its title from a speech by HYPERLINK "http://en.wikipedia.org/wiki/Vladimir_Lenin" Vladimir Lenin , who used the phrase "commanding heights" to refer to the segments and industries in an economy that effectively control and support the others, such as HYPERLINK "http://en.wikipedia.org/wiki/Petroleum" oil , HYPERLINK "http://en.wikipedia.org/wiki/Rail_transport" railroads , HYPERLINK "http://en.wikipedia.org/wiki/Banking" banking and HYPERLINK "http://en.wikipedia.org/wiki/Steel" steel . Chronicles the shifts in economic thought during the 20th century and analyze critical concerns about how globalization will shape our lives in the interconnected world of the 21st century Keynesian Economic Theory (including the specific political events and economic conditions that contributed to its popularity and then unpopularity): Is a HYPERLINK "http://en.wikipedia.org/wiki/Macroeconomics" macroeconomic theory based on the ideas of 20th-century British economist HYPERLINK "http://en.wikipedia.org/wiki/John_Maynard_Keynes" John Maynard Keynes . It emphasizes the role of HYPERLINK "http://en.wikipedia.org/wiki/Supply_and_demand" demand-side factors, as opposed to HYPERLINK "http://en.wikipedia.org/wiki/Supply_and_demand" supply-side factors, in the determination of HYPERLINK "http://en.wikipedia.org/wiki/GDP" aggregate output . Keynesian economics argues that HYPERLINK "http://en.wikipedia.org/wiki/Private_sector" private sector decisions sometimes lead to HYPERLINK "http://en.wikipedia.org/wiki/Pareto_efficiency" inefficient macroeconomic outcomes, and therefore advocates active policy responses by the HYPERLINK "http://en.wikipedia.org/wiki/Public_sector" public sector , including HYPERLINK "http://en.wikipedia.org/wiki/Monetary_policy" monetary policy actions by the HYPERLINK "http://en.wikipedia.org/wiki/Central_bank" central bank and HYPERLINK "http://en.wikipedia.org/wiki/Fiscal_policy" fiscal policy actions by the government, to stabilize output over the HYPERLINK "http://en.wikipedia.org/wiki/Business_cycle" business cycle . More of a socialist view- government should intervene on well-oiled machine of economics; spend when hard times, save in good Keynes : wanted more govt regulation, believed in a more socialist view, worked only short term views; govt should manage the economy; if you ease the money supply then people will spend- fueled economic growth (one of the concerns is that it wipes out the savings of the middle class); manage so that people had jobs and would spend; when times were bad you save, when times are good you spend; govt should dictate economic policies; He was popular because it would stimulate jobs; easy answer; quick fix Send when times are bad, save when times are good More socialist Specific political events and economic conditions that contributed to popularity and unpopularity of Keynes? and Hayek?s views: Popularity: Through the 1950s, moderate degrees of government demand leading industrial development, and use of fiscal and monetary counter-cyclical policies continued, and reached a peak in the "go-go" 1960s, where it seemed to many Keynesians that prosperity was now permanent. In 1971, Republican US President Richard Nixon even proclaimed "we are all Keynesians now". During WW2 Keynes was at the top- because people thought the gov?t needed to help out and obviously during a time of war Unpopularity: After WWI, WW2 and with the oil shock of 1973, and the economic problems of the 1970s, modern liberal economics began to fall out of favor. During this time, many economies experienced high and rising unemployment, coupled with high and rising inflation, contradicting the Philip Curve's prediction. This stagflation meant that the simultaneous application of expansionary (anti-recession) and contractionary (anti-inflation) policies appeared to be necessary, a clear impossibility. This dilemma led to the end of the Keynesian near-consensus of the 1960s, and the rise throughout the 1970s of ideas based upon more classical analysis Under Keynesian shouldn?t happen= should be able to buy your way out of competition Return to Hayek as a result of in 70?s Hayek?s views returned as a result of Thatcher?s and Reagan?s vote into office at the same time War Repatriations Refer to the monetary compensation intended to cover damage or injury during a war. Generally, the term war reparations refers to money or goods changing hands, rather than such property transfers as the annexation of land Recent war reparations After the HYPERLINK "http://en.wikipedia.org/wiki/Gulf_War" Gulf War , HYPERLINK "http://en.wikipedia.org/wiki/Iraq" Iraq accepted HYPERLINK "http://en.wikipedia.org/wiki/United_Nations" United Nations HYPERLINK "http://en.wikipedia.org/wiki/Security_Council" Security Council resolution 687, which declared Iraq's financial liability for damage caused in its invasion of HYPERLINK "http://en.wikipedia.org/wiki/Kuwait" Kuwait . The HYPERLINK "http://en.wikipedia.org/wiki/United_Nations_Compensation_Commission" United Nations Compensation Commission ("UNCC") was established, and US$350 billion in claims were filed by governments, corporations, and individuals. Funds for these payments were to come from a 30% share of Iraq's oil revenues from the HYPERLINK "http://en.wikipedia.org/wiki/Oil_for_food" oil for food program. It was not anticipated that US$350 billion would become available for total payment of all reparations claims, so several schedules of prioritization were created over the years. The UNCC says that its prioritization of claims by natural people, ahead of claims by governments and legal people, "marked a significant step in the evolution of international claims practice." Payments under this reparations program continue; as of July 2004, the UNCC stated that it had actually distributed US$18.4 billion to claimants. There have been attempts to codify reparations both in the Statutes of the HYPERLINK "http://en.wikipedia.org/wiki/International_Criminal_Court" International Criminal Court and the UN Basic Principles on the Right to a Remedy and Reparation for Victims Stagflation: inflation and unemployment rising at the same time A condition of slow HYPERLINK "http://www.investopedia.com/terms/s/stagflation.asp" \l "%23" \n _blank economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation. Bretton Woods Conference: 1944 conference in which representatives of 40 countries met to design a new international monetary system. Main functions of 3 institutions that emerged from the Bretton Woods Conference and how each has impacted globalization: GATT: goal was to lower tariffs and taxes on imports; if you were part of the GATT treaty then same tariff on things no matter where you got it form (ie. Bananas from Costa Rica would be the same tariff as bananas from Bahamas) IMF (International Monetary Fund): help protect countries in economic crisis; also help trade with exchange rate fluctuations; facilitated transactions and pushed investors to go to more high risk business locations (b/c less concerns with exchange rate) World Bank: provides low interest loans and grants to developing countires for improvement projects (for infrastructure, bridges, etc) Disadvantages of State-Owned Enterprises Key historical events in the road to the global economy: economic theories of John Maynard Keynes and Friedrich von Hayek + and ? of command economies vs market economies ?commanding heights Chapter 1 Globalization The shift toward a more integrated and interdependent world economy. Drivers of globalization are declining trade and investment barriers and technological change. Foreign Direct Investment: when a firm invests resources in facilities to produce and/or market a product in a foreign country Exporting Wholly subsidiary of production facility Domestic production etc *****MORE FDI AT END OF DOCUMENT Intellectual Property/ Intellectual Property Rights Intellectual Property Property that is the product of intellectual activity. Intellectual Property Rights Intellectual rights establish ownership rights over intellectual property. IE: Patents, copyrights, and trademarks Patents, Copyrights, and Trademarks All three are intellectual property rights. Patents: grant the inventor of a new product or process exclusive rights for a defined period to manufacture, use or sale of that invention. Copyrights: exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit. Trademarks: designs and names by which firms designate and differentiate their products. Tariffs and Nontariff Barriers to Trademarks Trade barriers are government policies or regulations that restrict international trade. Tariff: a tax levied on imported goods. Non-tariff Barriers: any governmental regulation, policy or procedure other than a tariff that has the effect of delaying/holding back international trade. Such as? Factor Endowments / Factors of Production / Factor Cost Differences Factor Endowments: Human resources: quantity, skills and cost of personnel Physical resources: abundance, quality, accessibility and cost of the nation?s land, water, timber, or other physical traits; climate, location Knowledge resources: scientific, technical and market knowledge bearing on goods and services Capital resources: amount and cost of capital available to finance industry Infrastructure: type, quality and user cost of infrastructure (transportation, communications, mail) Factors of Production: are resources used in the production of goods and services. These include Land, Labor, and Capital (human made goods including machinery, tools, and buildings). By doing this companies hope to lower overall cost structure to improve quality of product and they can compete more competitively. Land: naturally-occurring goods including soil, minerals, plants, animals, water and weather Labor: human efforts, including physical and intellectual, provided in the creation of products Capital: human-made goods or means of production including machinery, tools and buildings General Agreement on Tariffs and Trade (GATT): Negotiated after World War II with the main objective of reducing barriers to international trade. Agreements on tariff barriers and subsidies were negotiated over eight rounds between 1947 and 1993. The last successful round of negotiations, the Uruguay Round, extended GATT to cover services, enhanced intellectual property right protections and created the World Trade Organization to oversee the international trading system. Goals were to try to eliminate high tariffs because it creates (tariff is a tax imposed on goods that are coming in the to the US) Result of a tariff is that it increases the price point on an imported item World Trade Organization (WTO): The signatory nations of GATT agreed to create the WTO to supplant the GATT agreement. The WTO is an institutional body as compared to the series of trade rules that constitute GATT. Goals are to promote the lowering of barriers to trade and to police member countries? adherence to WTO agreements. Provides a forum for settling trade disputes and can impose trade sanctions if a member state has trade policies that violate regulations. The current round of negotiations, the Doha round, started in 2001 and has yet to achieve its goals, primarily due to conflicts over agricultural subsidies. International Monetary Fund (IMF): The IMF was created in 1944 to stabilize exchange rates and supervise the reconstruction of the world's international payment system. The IMF provides financial assistance to countries experiencing critical financial and economic difficulties, if the countries agree to IMF?s policy conditions. World Bank: It was also created in 1944 after the Bretton Woods meetings to promote economic development. It provides low-interest loans and grants to developing countries for education, health and infrastructure development Components of Globalization: Globalization of Markets/ Globalization of Production Globalization of Markets: the merging of distinctly separate national markets into a global marketplace. Idea of merging consumer preferences & tastes across the globe (Ex: nestle & coca-cola) Merging of distinctly separate national markets into a global marketplace Ikea Advances in transportation and IT more standardization (but culture and location still matter, just not as much, especially in b2b products) Significant differences still exist among national markets. The most global of markets are for industrial goods and materials that have universal applicability. Globalization of Production: The sourcing of goods and services from locations around the world to exploit differences in factors of production. Companies can outsource both production and service activities to low-cost producers in other nations. take advantage of low labor cost of production might have 100?s of different production facilities Factor cost differences advanced by changes in transportation, IT, etc, lower price by ?outsourcing? labor ?where should we manufacture parts? interconnected-ness Limits on Globalization of Markets: Significant differences still exist among national markets Most global of markets are for industrial goods and materials that hat universal applicability Impediments to Globalization of Production / Requirements for Globalization of Production: Impediments to Globalization of Production: Formal and informal barriers to trade Barriers to foreign direct investment Transportation costs Issues associated with economic risk Issues associated with political risk Requirements for Globalization of Production Little to no barriers to trade Little to no restrictions on foreign direct investment Low transportation costs Low economic risk Low political risk Economies of Scale Unit cost reductions associated with a large scale of output, spreading fixed costs over large volume. Drivers of Globalization: Declining Trade and Investment Barriers and Technological Change -Drivers of Globalization: Declining Trade and Investment Barriers Average tariff rates on manufactured products WAY down -Technological Change: Microprocessors and Telecommunications The Internet and World Wide Web Containerization (page 14) Simplifies transshipment from one mode of transport to another. It has revolutionized business transportation by significantly lowering costs of shipping goods over long distance. The world market of the 1960?s compared to the global economy of today: 1960?s: The U.S. dominated production output. The U.S. dominated foreign direct investment dollars. Large, multinational firms were U.S.-based. Many economies were centrally planned. Today: Shifting World Output and Trade Statistics (decreasing for U.S., increasing for Japan and China, foreign direct investment is changing. Multinationals are changing.) Changing Foreign Direct Investment Statistics Changing Nature of Multinationals The Changing World Order Arguments for and against globalization: For: Lowers prices for goods and services Stimulates economic growth Increases consumer income Creates jobs Countries will specialize in production of goods and services that are produced most efficiently Against: Destroys manufacturing jobs in wealthy, advanced countries Decreases wage rates of unskilled workers in advanced countries Encourages companies to move to countries with fewer labor and environment regulations Results in loss of national sovereignty (control) Challenges: Countries are different. Management problems are more complex. Must deal with multiple levels of government intervention. International transactions involve converting money into different currencies. Chapter 2 Socialism: The belief that the state should own enterprises and run them for public good rather than private profit. Some socialist systems focused on controlling the ?Commanding Heights? of economies. Many countries have moved away from state-run enterprises through privatization Totalitarianism: Communist Totalitarianism versus Theocratic Totalitarianism: Totalitarianism: One person or party exercises absolute control over all spheres of life. There is often political repression, no free elections, free speech or basic civil liberties Communist Totalitarianism: A version of collectivism (collective goals are more important than individual goals and individual rights are sacrificed for the good of the majority) that socialism can be achieved only through a totalitarian dictatorship Theocratic Totalitarianism: a political system in which political power is monopolized by a party, group or individual that governs according to religious principles Found in states where a party, group, or individual that governs according to religious principles monopolizes political power ISLAM limits freedom of political and religious expression. Market versus Command versus Mixed Economies Market Economies: All productive activities are privately owned, as opposed to being owned by the state The goods and services that a country produces are dictated through supply and demand. The role of the government is to promote vigorous free and fair competition. Command Economies The goods and services that a country produces, the quantity in which they are produced and the prices at which they are sold are all planned by the government All businesses are state owned. Mixed Economies Certain sectors of the economy are left to private ownership while other sectors have significant state ownership and government planning. Governments may also take over troubled firms that they consider to be vital to national interests. Fiscal versus Monetary Policy Fiscal Policy- attempts to influence the direction of the economy through changes in government taxes or through governmental spending. trying to stimulate economy through changing in government taxes or government in spending; usually takes a longer period of time to see the recovery of the economy and impact of government spending programs Monetary Policy: attempts to stabilize the economy by controlling interest rates and the supply of money. (Monetary Policy Rules: Banking reserve requirements, buying and selling of securities, discount rates, changing the monetary base) used to pep up or constrain an economy Monetary Policy Tools: Banking reserve requirements Buying and selling of securities Discount rates Changing the monetary base Common Law: A legal system Past court decisions act as precedents to form future policies. The judge plays a significant role as a law maker. An action is legal unless prohibited. Contracts tend to be very detailed with all contingencies specified. Common law prevails in England and in countries originally colonized by England. All of Canada except Quebec and all of the United States except Louisiana follow the common law system. Civil Law: A legal system Every law of the country is "codified" or written into comprehensive codes. An action is illegal unless specifically allowed by code. The duty of the judge is to apply the law as enacted. Contracts tend to be shorter and less specific. Used in many Western European countries including France, Germany and Italy. Theocratic Law: A theocratic law system is based on religious teachings. Islamic law is currently the most widely practiced form of theocratic law Islamic Law: A quasi-religious system mostly based on the Koran the teachings of the Prophet Mohammed. There is no separation of church and state and it regulates all public and private behavior. regulations for personal hygiene, prayers, fasting, giving to the poor, and many other religious matters Crimes with exact reference in the Koran are punishable by a pre-established punishment found in the Koran. murder, apostasy from Islam, theft, adultery and consumption of alcohol Usury is prohibited by the Koran and this has been interpreted to mean that interest payments are inappropriate Contract Law: A body of law that governs contract enforcement Contracts tend to be very detailed with all contingencies spelled out in a common law system United Nations Convention on Contracts for the International Sale of Goods (CIGS) Establishes a uniform set of rules governing certain aspects of making and performing everyday commercial contracts between sellers and buyers who have their places of business in different nations Problem: fewer than 70 nations have ratified the convention since 1988, Japan and United Kingdom have not ratified the CIGS Property Rights The legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource Can be violated through private action or public action Private Action ? theft, piracy, and blackmail by private individuals or groups (Mafia) Public Action ? occurs when public officials, such as politicians and government bureaucrats, extort income, resources, or the property itself from property holders Foreign Corrupt Practices Act: U.S. Law regulating behavior regarding the conduct of international business in the taking of bribes and other unethical actions. Makes it a criminal offense for an American to offer payment to the officials of other governments for the purpose of getting or maintaining business. Makes it illegal to bribe a foreign government official to obtain or maintain business over which that foreign official has authority, and it requires all publicly traded companies to keep detailed records that would reveal whether a violation of the act has occurred The law does not prohibit grease payments: minor payments to officials to get them to do what they are supposed to do anyway Grease Payments versus Bribes Grease payment: Expediting payments to secure the performance of a routine government action. minor payments to officials to get them to do what they are supposed to do anyway Payments made to speed up a process ? usually small and insignificant Bribes: sums of money used to change someone?s mind/thinking used to obtain or maintain business First Mover Advantages Advantages accruing to the first to enter a market. According to new trade theory, first mover advantage can help you dominate the global trade of that product. Invest substantial financial resources in building a first-mover advantage ? the economic and strategic advantages that accrue to early entrants into an industry. International Business: any firm that engages in international trade or investment Risks in International Business: Political, Economic and Legal: Political ? any governmental action or politically motivated event that could adversely affect the long-run profitability or value of a firm the change in the value of a foreign investment caused by a change in governmental policies or actions Economic ? The likelihood that economic mismanagement will cause drastic changes in a country?s business environment that hurt the profit and other goals of a business enterprise. Inflation and debt levels are indicators of economic risk potential. (Inflation and debt= economic risk.) Legal ? Arise when a country?s legal system fails to provide adequate safeguards in the case of contract violations or to protect property rights. Countries differ significantly in the extent to which their legal systems protect intellectual property rights. Privatization The sale of state-owned enterprises to private investors. Transfers the ownership or state property into the hands of private individuals Goes hand in hand with deregulation Deregulation: Involves removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate Removal of government restrictions concerning the conduct of business Culture is that complex whole which includes knowledge, belief, art, morals, law, custom, and other capabilities acquired by man as a member of society. A system of values and norms that are shared among a group of people and that when taken together constitute a design for living. Everything that people have, think and do as members of their society. Culture (including the observable and non-observable ways that culture is manifested) Culture is that complex whole which includes knowledge, belief, art, morals, law, custom, and other capabilities acquired by man as a member of society. A system of values and norms that are shared among a group of people and that when taken together constitute a design for living (a member of their given society). Everything that people have, think and do as members of their society. Cross Cultural Literacy: having an understanding of how cultural differences impact behavior and business practices. The Iceberg Model of Culture ? Underneath the water is unspoken rules, and even further under that are unconscious rules. (Surface, Unspoken Rules, Unconscious Rules ? how society functions) Surface- things people can see (how you greet someone, the way you dress etc) Unspoken Rules- impact daily activities (i.e. proper etiquette in certain social situations, you know how to act without having to deeply reflect on it and could probably explain it fairly easily) Unconscious Rules- how culture impacts you without you know it (for instance your ?personal bubble?; deep understanding;) harder to articulate as to why ?this is why I am behaving this way? Visible layer and invisible layer Determinism: A theory that every event is causally determined by an unbroken chain of prior events Belief in predestination Ethnocentrism A belief that the superiority of one's own ethnic group or culture. Disregard or contempt for the culture of other countries Values Abstract ideas about what a group believes to be good, right, and desirable Shared assumptions about how things ought to be Provide the context within which a society?s norms are established and justified Include: society?s attitudes toward freedom, democracy, truth, justice, honesty, loyalty, role of women, sex, love, etc. Norms The social rules and guidelines that prescribe appropriate behavior in a particular situation. Subdivided into Folkways and Mores Folkways Patterns of conventional behavior in a society that apply to everyday matters (standing away from people in an elevator). Violating a folkways may cause the person to be laughed at, frowned upon, or scolded EX: meals in England should be eaten with fork in left hand Mores Norm seen as central to the functioning of a society and to its social life. Express fundamental values of a society and are much more strictly enforced than folkways Violating a more will offend others and may result in punishment or retribution EX: society?s views on marriage, sexuality, nudity, and religious expression Expatriates: Citizens of one country who are working in another country Sometimes the term inpatriates is used to identify a subset of expatriates who are citizens of a foreign country working in the home country of their multinational employer. Expatriate Failure: stay the whole time but are unhappy and upset the whole time, when they are in this low level and they basically give up, or the premature return of an expatriate manager to his or her home country Failure of the firm?s selection policies to identify individuals who will not thrive abroad Based on the inability for the spouse to adjust to a foreign environment The own inability to adjust to a foreign environment 16%-40% of all American employees sent aboard to developed nations return early 70% of all American employees sent abroad to undeveloped nations return early Culture Shock Phases: Honeymoon: The first stage you are happy and enthusiastic - it is euphoric and everything is an opportunity or fun Culture Shock: level of adjustment plummets - one of the big triggers is not knowing what to do - you may not know the rules of the new game and don?t know what to do or say. You may not understand someone, become depressed, frustrated *It is crucial on how this stage is managed Adjustment: Level of satisfaction is starting to increase and are starting to become more effective - work is improving Mastery: Almost native-like in that culture with language and social norms in the business world and professional world (Can take 2-3 years) Selection Criteria for International Assignments: knowledge, skills, abilities or individual characteristics used to predict future job performance Self-Orientation - high self esteem, self-confidence, and mental well-being - high degree of alignment are more likely to succeed in foreign postings. Others-Orientation: The more effectively the expatriate interacts with host-country nationals, the more likely he or she is to succeed Relationship development and willingness to communicate Perceptual Ability: why someone is acting the way they are - why culture is impacting decisions of other people (able to figure out the ?why?? issue) The ability to empathize Cultural Toughness or Cultural Distance: If you have a low level of cultural distance it is easier to adapt (sending someone over seas) Relationships between the country of assignment and how well an expatriate adjust to a particular posting Effective Expatriate Selection: The firm should use appropriate selection tools to assess and measure relevant selection criteria. The selection tools must be reliable and the selection process must be valid. The company should include the family-unit in the selection process. Training for Expatriate Managers: Cultural training, language training, and practical training all seem to reduce expatriate failure. Cultural training: Foster appreciation for the host country?s culture, understanding will help the manager empathize with the culture and will enhance his or her effectiveness in dealing with nationals. (Business practices, social etiquette, political environment, etc.) Should receive training in culture, history, politics, economy, religion, and social and business practices. Language Training: Willingness to communicate in the language of the host country, even if the expatriate is far from fluent, can help build rapport with locals and improve effectiveness. Practical Training: Aimed at helping the family ease into day-to-day life in the host country. The sooner the routine is established, the better are the prospects that expatriate and his or her family will adapt successfully. (Everyday adjustment concerns, currency, etc.) Cultural Distance: If you have a low level of cultural distance it is easier to adapt (sending someone over seas) Nonverbal Communication: Any message processed independent of the written or spoken word. The transfer of meaning through means such as body language and the use of physical space. Includes gestures, facial expression, posture and stance, interpersonal distance, touching, eye contact and silences. Hofstede?s Cultural Framework (including the 5 dimensions and the strengths and weaknesses of the model?s development): Many counties have more than one culture and Hofstede assumes they do not. The research team was composed of Europeans and Americans (Culture biases). Hofstede's informants worked for more than a single industry. Social classes were excluded from the study. Power Distance - the society?s tolerance for inequalities Individualism versus Collectivism - the relationship between the individual and his/her fellows Uncertainty Avoidance - the extent to which a culture accepts ambiguous situations and tolerates uncertainty Masculinity versus Femininity - the relationship between gender and work roles Time Orientation / Confucian Dynamism ? attitudes toward time, persistence and respect for tradition Strength: helps managers figure out how cultures differ. It shows how different culture values affect people in the workplace. Number of countries involved Size of sample Results replicated in later research Weaknesses Used average responses rather than individual responses Survey not designed to test culture Assumed one-to-one correspondence between culture and nation Potential cultural biases of researchers Data based on single industry and single firm Data becoming dated Social Strata Hierarchical social categories Differences in people and the status of people within a society Defined on the basis of characteristics such as family background, occupation, and income Individuals are born into a particular stratum; those born into a stratum toward the top of the social hierarchy tend to have better life chances than those born in a stratum toward the bottom Social Mobility The extent to which individuals can move out of the social strata into which they are born. How easy it is to move between the different castes or stratus of people in a society Varies significantly from society to society Class System versus the Caste System: Class System: a system of social stratification in which social status is determined by the family into which a person is born and by subsequent socioeconomic achievements. Less rigid form of social stratification in which mobility between classes is possible Caste System: a closed system of social stratification in which social position is determined by the family into which a person is born, and change in that position is usually not possible during that person?s lifetime IE: India Class Consciousness Refers to a condition where people tend to perceive themselves in terms of their class background, and this shapes their relationships with members of other classes Chapter 5 Mercantilism: An economic philosophy advocating that countries should simultaneously encourage exports and discourage imports Theory contends a country should maintain a trade surplus to accumulate wealth by exporting more than it imports. Maximize exports through subsidies. Minimize imports through tariffs and quotas. Economists later argued that no country could sustain a surplus in the balance of trade in the long run. Old theory: main premise is the idea that exports are good, and imports are bad. Thinking was that precious metals were the conduits of trade Theory of Absolute Advantage: A country has absolute advantage when it is more efficient in the production of a product that any other country producing it Countries should engage in trade when they have an absolute advantage in their ability to a produce good efficiently. A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient. Key difference b/w it and absolute- you can still import products even though u have the absolute advantage; but of those products where does the country get the most bang for its buck. Production Possibility Frontier The various output possibilities that a country can produce from its resource pool. Ricardo?s Theory of Comparative Advantage: Demonstrates that countries can benefit from trade even if one country has an absolute advantage of production in all products. A country should specialize in the production of goods that it produces most efficiently and to buy the goods it produces less efficiently from other countries. Subsequent work removed the unrealistic assumptions of Ricardo?s theory and the data support the basic proposition of the model. (Immobile resources, diminishing returns, dynamic effects and economic growth) Immobile Resources: Resources do not always move easily from one economic activity to another. EX: a textile worker is not qualified to write software for Microsoft, so if we switch from producing textiles to producing computer software, he/she loses their job Can usually only be used in a specific area Diminishing Returns: (applied to international trade theory) The more of good that a country produces, the greater the units of resources required to produce each addition item; of trade knowledge, weather, continue to specialize your going to loose efficiency (production possibility frontier should be curved rather than straight line) Will occur when more units of resources are required to produce each additional unit Suggests that gains from specialization are likely to be exhausted before specialization is complete EX: while 10 units of resources can increase output from 12 tons to 13 tons, 11 units may be needed to increase from 13 tons to 14 tons Static versus Dynamic effects of Trade Static: Simple comparative advantage model assumed that trade does not change a country?s stock of resources or the efficiency with which is utilizes those resources Makes no allowances for the dynamic changes that might result from trade Dynamic: Free trade might increase a country?s stock of resources as increased supplies of labor and capital from abroad become available for use within the country Free trade might also increase the efficiency with which a country uses its resources Economies of large-scale production might become available as trade expands the size of the total market available to domestic firms The Samuelson Critique Looks at what happens when a rich country enters into a free trade agreement with a poor country that rapidly improves its productivity after the introduction of a free trade regime EX: US entering free trade agreement with China, the lower prices US consumers pay for goods imported from China may not be enough to produce a net gain for the US economy Heckscher-Olin Theory Purports that differences in factor endowments and factor costs determine comparative advantage. Countries should export goods that intensively use factor endowments which are locally abundant and import goods made from locally scarce factors. Why Saudi Arabia is a lead oil producer- use what you have on your land Comparative advantage arises from differences in national factor endowments (extent to which a country is endowed with such resources as land, labor, and capital) Predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce Attempts to explain the pattern of international trade that we observe in the world economy Leontief Paradox: Used the Heckscher-Ohlin theory to see if the US was an exporter of capital-intensive goods and an importer of labor-intensive goods Found that US exports were less capital intensive than US imports Actual trade patterns are not always consistent with predictions based on the Heckscher-Olin Theory. A limitation of the Heckscher-Olin Theory is that it assumes that technology is the same across countries but differences in technology may lead to differences in trade patterns. Statistically controlling for differences in technology in empirical studies increases the predictive power of the Heckscher-Olin Theory. (Nations have a lot of capital, we should export goods that have factor endowments.) Product Life-Cycle Theory Originally based on conditions in the mid 20th century when U.S. firms created new products and initially made and sold them in the U.S. Then sales in advanced nations were followed by local production in advanced nations. As the industry matured in the U.S. and advanced nations, price became the main competitive weapon. Production then shifted to lower labor cost countries As products mature, both location of sales and optimal production location changes. This affects the direction and flow of imports and exports. Globalization and integration of the economy makes this theory less valid. The competitive environment of the mid 20th century does not exist today. Contends that firms undertake FDI at particular stages in the life cycle of a product they have pioneered. Production is initially in the home market, then is supplemented with production in advanced nations and then moved to low-cost countries when price becomes the key criteria New Trade Theory ? Through impact on economies of scale, trade can increase the variety of goods available to consumer and decrease the average costs of those goods In those industries when output required to attain economies of scale represents a significant proportion of total world demand, the global market may only be able to support a small number of enterprises World trade in certain products may be dominated by countries whose firms were first movers in their production Contends that countries sometimes specialize in the production and export of certain products not because of underlying differences in factor endowments but because of economies of scale. Economies of scale can be achieved by targeting the global market rather than just the national, domestic market. Economies of scale can increase the variety of goods available to consumers and decrease the average costs of those goods if each nation specializes in producing a narrower range of products. When the output required to attain economies of scale represents a significant proportion of total world demand, an industry may only be able to support a limited number of firms. First-mover advantages would then be particularly important and this would discourage new entrants. produce a lot of product in one fashion (therefore most efficient) i.e. Netflix (1st mover of DVDS, economies of scale bc have very large DC to be able to get the movies out quickly) Implications of New Trade Theory: Nations may benefit from trade even when they do not differ in resource endowments or technology. Countries may dominate international trade as a result of being first. The desire to create first-mover advantages may compel governments to intervene in free trade. Theory of National Competitive Advantage ? ?Porter Model? The theory attempts to explain the reasons for a nation?s success in a particular industry. Why some nations succeed and others fail in internation competition Proposes four broad attributes shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage. Porter?s Determinants of National Advantage (DIAMOND) Factor Endowments A nation?s position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry Demand Conditions The nature of home demand for the industry?s product or service Relating and Supporting Industries The presence or absence of supplier industries and related industries that are internationally competitive Firm Strategy, Structure, and Rivalry The conditions governing how companies are created, organized, and managed and the nature of domestic rivalry Factors of Production-basic versus advanced; generalized versus specialized Basic Factors passively inherited or require only modest investment natural resources, climate, location and unskilled labor Advanced Factors require time and effort to develop and usually more relevant for competitive advantage highly skilled labor, communication infrastructure and education Generalized Factors can be used by many sectors infrastructure system, capital markets Specialized Factors focused application opportunities skilled personnel in a specific industry specialized factors provide more decisive and sustainable bases for competitive advantage Balance-of-Payments Accounts ? National accounting system that tracks both payments to and receipts from other countries. Include payments to foreigners for imports of goods and service, and receipts from foreigners for goods and services exported to them Uses a double-entry system where each international transaction creates two offsetting entries within the three accounts. Debits (-) = payments to another country Credits (+) = receipts from other countries Current Account, Capital Account, and Financial Account Current Account - Records transactions involving the import and export of goods, services, and investment income (i.e., income receipts and income payments). (import and export of goods) merchandise, clothes, computers- some sort of physical type of product; you can also have services: financial consulting, shipping (transactional value that doenst involve physical good); investment income Income Receipts ? income earned on assets held abroad, records as credit EX: when individual investors receive dividend payments from foreign companies Income Payments ? income paid to entities in other nations that is earned on assets they hold in the country, records as debits EX: dividend payments to foreign holders of company stock Capital Account ? What is now referred to as the capital account includes transactions formerly listed in the current account. It is used to track one-time changes in the stock of assets, such as debt forgiveness and migrant transfers. (the goods and financial assets that accompany migrants as they enter or leave the country) This new capital account is very small for the United States and for many other countries. Prob not answer on a test Theoretically should debits and credits should balance out (The current, capital and financial account balances should always add up to zero but never do as a result of statistical discrepancies) (A government is often concerned when the country is running a deficit on the current account) Current Account Surpluses: current account surpluses occur when a country exports more goods, services, and income than it imports. Current Account Deficits: occur when a country imports more goods, services, and income than it exports. Financial Account: Records transactions that involve the purchase or sale of assets, including claims on banks, foreign direct investment, and stocks and bonds. There is a separate category for holding of assets by official institutions (i.e., official reserves) since they can be used to intervene in the foreign exchange market. Should always add up to zero, but never do as a result of ?statistical discrepancies? (different sources/illegal activities) Merchandise Goods, Services, Income Receipts, and Income Payments (CURRENT ACCOUNT) Merchandise Goods ? export or import of physical goods such as agricultural foodstuffs, autos, computers, chemicals Services ? intangible products such as banking and insurance services Income Receipts and Income Payments ? income from foreign investments and payments that have to be made to foreigners investing in a country Income Receipts ? Income earned on assets held abroad (money you are earning in a diff. country) Examples include when a company?s subsidiary in another country remits profits back to the parent or when individual investors receive dividend payments from foreign companies. Recorded as credits on the current account. Income Payments ? Income paid to entities in other nations that is earned on assets they hold in the country. An example is dividend payments to foreign holders of company stock. Recorded as debits on the current account. Repatriation of Earnings Statistical Discrepancies Reason for all balance accounts not always equaling zero. Implications of a deficit in merchandise trade and the current account ? Current account deficits occur when a country imports more goods, services, and income than it exports. The country is running a trade deficit. Money that flows to other countries is being used to purchase assets rather than current account goods and services. Chapter 6 Free Trade Refers to a situation in which a government does not attempt to restrict what its citizens can buy from or sell to another country The absence of barriers to the free flow of goods and services between countries. non-regulated trade between countries Strategic Trade Policy: government policy aimed at improving the competitive position of a domestic industry and/or domestic firm in the world market By appropriate actions, a government can help raise national income if it can somehow ensure that the firm or firms that gain first-mover advantages in an industry are domestic rather than foreign enterprises A government should use subsidies to support promising firms that are active in newly emerging industries Protectionism is the HYPERLINK "http://en.wikipedia.org/wiki/Economic_policy" economic policy of restraining trade between nations, through methods such as HYPERLINK "http://en.wikipedia.org/wiki/Tariffs" tariffs on imported goods, restrictive HYPERLINK "http://en.wikipedia.org/wiki/Import_quota" quotas , and a variety of other restrictive government regulations designed to discourage imports, and prevent foreign take-over of local markets and companies. This policy is closely aligned with HYPERLINK "http://en.wikipedia.org/wiki/Anti-globalization" anti-globalization , and contrasts with HYPERLINK "http://en.wikipedia.org/wiki/Free_trade" free trade , where government barriers to trade are kept to a minimum. The term is mostly used in the context of HYPERLINK "http://en.wikipedia.org/wiki/Economics" economics , where protectionism refers to policies or doctrines which "protect" businesses and workers within a country by restricting or regulating trade with foreign nations. The idea of lets try and keep foreign products out and try to sell domestic products. Don?t want to let exports in, want domestic firms Protectionism often leads to payback from other countries Caused world trade to decrease- thus didn?t promote economic growth Specific versus Ad Valorem Tariffs: Specific tariff: are levied as a fixed charge for each unit. Is a tariff of a specific amount of money that does not vary with the price of the good. These tariffs may be harder to decide the amount at which to set them, and they may need to be updated due to changes in the market or inflation. Ad Valorem Tariffs: are levied as a proportion of the value of the imported good. HYPERLINK "http://www.businessdictionary.com/definition/duty.html" Duty or other HYPERLINK "http://www.businessdictionary.com/definition/charge.html" charges levied on an item on the basis of its HYPERLINK "http://www.businessdictionary.com/definition/value.html" value and not on the basis of its HYPERLINK "http://www.businessdictionary.com/definition/quantity.html" quantity , size, HYPERLINK "http://www.businessdictionary.com/definition/weight.html" weight , or other factor. Subsidies Government payments to domestic producers that lower production costs. These include cash grants, low-interest loans, tax breaks, or government equity participation in domestic firms. Import Quotas Restriction on the quantity of a good to be imported into a country. Can be enacted by issuing import licenses to a limited number of firms. Limit on how much could bring in (limits supply, so demand gets higher) Tariff Rate Quota With a tariff rate quota, a lower tariff rate is applied to imports within the quota than those above the quota. EX: 1 million tons of rice is quota, 10% on that; 2 million tons of rice is 10% for first million and 80% for second million Voluntary Export Restraints (VER) Quota on trade imposed by exporting country, typically at the request of the importing country. Countries agree to voluntary export restraints to avoid other trade actions. Quota Rent Extra profit producers make when supply is artificially limited by an import quota. Local Content Requirements Requires some specific fraction of a good to be produced domestically. Requirement can pertain to a minimum percent of component parts or to a percent of the value of the good. Used by developing nations to promote economic development. If a certain part is made or produced locally then they would help ensure some are purchased to keep up own manufacturing base and Jobs etc (shirts from china, but buttons made and stitched on here) Administrative Trade Policies Adopted by government bureaucracies that can be used to restrict imports or boost exports. Bureaucratic rules designed to make it difficult for imports to enter a country. Japan?s inspection of tulip bulbs and Federal Express packages France?s customs processes for imported videotape recorders Dumping Selling goods in a foreign market for less than their cost of production or below their ?fair? market value. Fair market value of a good is normally judged to be greater than the cost of producing the good because the former includes a ?fair? profit margin. Dumping is viewed as a method by which firms unload excess production in foreign markets. Anti-dumping Policies Punish foreign firms that engage in dumping and thus protect domestic producers from unfair foreign competition. Designed to prevent foreign firms from: Selling goods below production costs Selling goods below fair market value Countervailing duties are assessed if the government believes that the foreign firm has engaged in dumping. Countervailing Duties Are assessed by the Commerce Department if the government believes that the foreign firm has engaged in dumping May be a special tariff which can be fairly substantial and stay in place for up to 5 years The Political and Economic Arguments for Intervention in International Trade Political Arguments for Intervention: protecting jobs and industries, national security, retaliation, protecting consumers, furthering foreign policy objectives, protecting human rights. Economic Arguments for Intervention; infant industry, strategic trade policy Infant Industry Many developing countries have a potential comparative advantage in manufacturing but new manufacturing industries cannot initially compete with established industries in developed countries Governments should temporarily support new industries Strategic Trade Policy A government should use subsidies to support promising firms that are active in newly emerging industries Infant Industry Argument: The idea that many countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. new industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations idea to find a way to protect this industry from foreign interruption long enough for this to become large and wealthy- ?incubator idea?, once it is fully grown, then you remove protection and let international competition enter Protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient Relies on the assumption that firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital market Smoot-Hawley Act 1930, enacted by U.S. Congress, erected an enormous wall of tariff barriers against imports into the U.S. High tariff rate that way people would only want to buy American Aimed at avoiding rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products. Beggar thy neighbor trade policies: in the short run policies help nation, long term other nations are going to retaliate; A strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry Boosts national income at the expense of other countries, will probably provoke retaliation Trade Wars/Retaliation: Affects taxpayers. Happens when domestic firms become in a dominant position in a global industry. A country that attempts to use a strategic trade policy will provoke retaliation, and a trade war between two or more interventionist governments will leave all countries involved worse off than if they had adopted a hands-off approach in the first place Accomplishments of the Uruguay round of trade negotiations Reduced tariffs on industrial and manufactured goods. Reduced agricultural subsidies. Extended provisions to services. Enhanced IPR protection. (Intellectual Property Rights) Reduced barriers to trade on textiles. Created the WTO. Goals of and challenges with the Doha Round of trade negotiations: Goals: Limit use of antidumping policies. Reduce high levels of protectionism in agriculture. Provide greater protection of IPRs. Further reduce tariffs on industrial goods and services. Challenges US wants developing economies to cut tariffs and to open markets to industrial goods, and US wants better access to agricultural markets in developing economies in exchange for reducing its domestic farm subsidies Developing countries want US and EU to cut aid in agriculture US believes that imports should have to increase 40% to trigger these safeguards whereas India wants a 10% trigger to be able to increase duties 25% Presidential Fast Track: President can negotiate agreements that the congress can approve or disapprove but cannot amend Loss of Presidential Fast Track Authority in the US ?love it or leave it? you can only vote yes or no - NO PROVISIONS Chapter 8 Regional Economic Integration Regional economic integration refers to agreements among countries in a geographic region to reduce, and ultimately remove, tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other. Levels of Economic Integration: Free Trade Area, Customs Union, Common Market, economic Union and Political Union: Free Trade Area: remove internal barriers Customs Union: remove internal barriers, and common external barriers Common Market: remove internal barriers, common external factors, and free movement of factors. Economic Union: remove internal barriers, common external factors, free movement of factors, common economic policy. Requires a common currency, harmonization of members? tax rates, and a common monetary and fiscal policy Political Union: remove internal barriers, common external factors, free movement of factors, common economic policy and political integration. A central political apparatus coordinates the economic, social, and foreign policy of the member states (EU on the road to this) -Free Trade Area of the Americas Proposal to expand NAFTA to include all countries in the Western Hemisphere, except Cuba. This region has 850 million people and $13.5 trillion economy. Talks are stalled and stronger support would be needed by the USA and Brazil for this agreement to become a reality. The Case for and the Case against Regional Integration For Regional Integration Economic Case: Increases world production, stimulates economic growth, can provide additional gains from free trade beyond the international agreements such as GATT and WTO. Political Case: Economic interdependence creates incentives for political cooperation, reduces potential for violent confrontation, countries have more economic clout to enhan]\ce trade with other countries or trading blocs Against Regional Integration Benefits are determined by the extent of trade creation (low-cost producers within the free trade area replace high-cost domestic producers), as opposed to trade diversion (when higher cost suppliers replace lower cost external suppliers within the free trade area) A regional trade agreement is beneficial only if it creates more trade than it diverts Impediments to Regional Integration Nation as a whole may benefit but certain groups within countries may be hurt. Concerns about loss of national sovereignty and control over the nation's monetary, fiscal and trade policies. Trade Creation vs. Trade Diversion Trade Creation: occurs when free trade leads to the substitution of inefficient domestic production for efficient production in another member country. Trade Diversion: occurs when efficient non-member production is replaced by inefficient production by a member nation as a result of high trade barriers for non-members. Principles of the World Trade Organization: It?s a set of rules Documents provide the legal ground-rules for international commerce for signatory nations. It?s a negotiating forum Provides a process for member governments to try to sort out the trade problems they face with each other and to help trade flow as freely as possible. It?s a forum for settling disputes Provides neutral procedures for interpreting and enforcing WTO agreements. Trade without discrimination ? The ?most-favored-nation? policy requires member nations to treat other members equally. Favor one, favor all. Nations cannot discriminate between a nation?s own and foreign products or services. improving trade through negotiation ? Comprehensive trade packages discussed in a series of rounds ensuring predictability ? Nations promise not to increase tariffs above the ?bound? rate and to disclose trade policies and practices promoting fair competition ? Supports open and undistorted competition by discouraging subsidies and dumping Most-Favored-Nation Policy: Requires member nations to treat other members equally Applied Tariffs versus Bound Tariffs: GATT Article 24: allows regional trade arrangements if: an agreement impacts substantially all sectors of trade among the members and non-members are not exposed to more restrictive trade than before the agreement. (You cannot make it an agreement for just one item, but can for an entire sector of the economy - cannot make it more restrictive for other countries though) The European Union (EU): The EU is composed of 27 member countries, covers an area of 4 million square kilometers and has approximately 460 million inhabitants. The EU's member states combined represents the world's largest economy by GDP, the seventh largest territory in the world by area and the third largest by population. Bulgaria and Romania joined on January 1st, 2007. Macedonia, Croatia, and Turkey are candidate countries set to join once conditions are met (Turkey has the farthest way to go) Political Structure of the European Union: European Commission, Council of the European Union, European Parliament and Court of Justice European Commission Represents the interests of the EU as a whole and is the executive arm of the EU Commissioners nominated by their national governments to serve 5 year terms and must be approved by European Parliament One commissioner per member state, each commissioner has a specific policy area of focus Proposes legislation to Parliament and the Council, manages and implements policies and the budge, monitors compliance with EU laws by members states, and represents the US in external trade and the WTO Council of the European Union Represents the individual member states and is the legislative arm of the EU Consists of ministers from the national governments with one representative per member state per topic 9 configurations of the Council depending on the topic to be discussed Votes are proportional to country size but the votes are weighted in favor of smaller countries, most decisions made by majority vote but some sensitive issues require unanimity European Parliament Represents the EU?s citizens and is the directly elected legislative arm of the EU 736 members are elected every 5 years by the people of the member states Number of seats per country is based on population, and members sit based on political group Parliament, in consultation with the Council, passes laws presented by the Commission Court of Justice Judicial arm of the EU, final arbiter in disputes about EU law Ensures EU law is interpreted and applied in the same way in all EU countries One judge from each member country, serve renewable terms of 6 years Euro Zone: Benefits and Costs of the Euro A subset of fifteen member states (16 total) that use the euro as a single currency, creating the ?euro zone?. Benefits: lowers foreign exchange costs, facilitates price comparisons, fosters efficiency and cost reductions, creates a pan-European capital market, increases the range of investment options for individual and institutions. Costs: countries lose monetary policy control (European Central Bank controls policy for the Euro zone and it is supposed to be free from political pressures), EU is not an ?optimal currency area (the country economies are different and they could react differently to economic shocks), need a stronger, centralized political structure than the EU currently has. Optimal Currency Area Similarities in the underlying structure of economic activity make it feasible to adopt a single currency and use a single exchange rate as an instrument of macroeconomic policy. Example: Finland and Portugal are very different and could have very different reactions to change in the Euro. Many economies in the Euro Zone are dissimilar, so the country economies could react differently to economic shocks Copenhagen Criteria Rules that define whether a nation is eligible to join the European Union. The criteria require that a nation have the institutions to preserve democratic governance and human rights, a functioning market economy, and that the nation accept the obligations and intent of the EU. Lisbon Treaty Treaty needs to be ratified by all 27 members, 26 of 27 have ratified it Greater role for European Parliament and national parliaments ? would have new powers over legislation and would be on a more equal footing with the Council of the EU Efficiency in decision-making process ? allows for qualified majority voting for more types of decisions by the Council, unanimity would be required for issues such as taxes, foreign policy, defense, and social security Increased coherence externally ? a High Representative for Foreign Affairs position would be created Been around since December 2007. A greater role for the European Parliament and national parliaments. Efficiency in the decision-making process. Increased coherence externally. When it expanded from 14-24 members, it became harder to coordinate. They had to begin facilitating the decision making process because of tension about who should have more say/power. A greater role for the European Parliament and national parliaments, Efficiency in the decision-making process, Increased coherence externally. The European Parliament would have new powers over legislation, budgets and international agreements and would be on a more equal footing with the European Council, National parliaments would have greater opportunities to be involved in the work of the EU, Allows for qualified majority voting for more decisions, Unanimity required for issues such as taxes, foreign policy, defense and social security, The size of the Commission would be reduced and the size of the Parliament would be limited, The President of the European Council would be elected and the term would be for 30 months rather than the current six-month rotating system, Scope of the EU's ability to act in new policy areas such as energy policy, climate change, public health, combating terrorism and humanitarian aid would be expanded, Civil, political, economic and social rights would be strengthened and expanded. It has not been ratified yet. The North American Free Trade Agreement (NAFTA): Pros and Cons of NAFTA Pros- Labor-intensive industries move to Mexico, resulting in better resource allocation, Mexico gets investment and employment, Increased Mexican income to buy US/Canadian goods, Demand for goods increases jobs, Consumers get lower prices. Cons- Loss of jobs to Mexico for people who don?t have other employment options, Mexican firms have to compete against efficient US/Canadian firms, Environmental degradation, Loss of national sovereignty. Horizontal FDI versus Vertical FDI: Horizontal FDI: investment in the same industry in which a firm operates at home Vertical FDI: investment in an industry that provides inputs for a firm?s domestic operations or that sells the outputs of the firm?s domestic operations Backward Vertical FDI versus Forward Vertical FDI Backward Vertical FDI: an investment in an industry abroad that provides inputs for a firm?s domestic production processes Forward Vertical FDI: an investment in an industry abroad that sells the outputs of a firm?s domestic production processes Stock versus Flow of FDI Stock Flow Theoretical Explanations for FDI: Transportation Costs: Market Imperfections: When there are impediments to the free flow of products between nations. When there are impediments to the sale of technological, marketing or management know-how Some sort of reason you can rent out your intellectual property Benefits and Costs of FDI for a Host Country: The balance of payments account is improved by the inward flow of repatriated earnings. The balance of payments account is improved if the foreign subsidiary needs home country equipment, component parts, etc Resource-Transfer Effects Employment Effects Balance-of-Payments Effects Effect on Competition and Economic Growth Greenfield investments increase the amount of competition. Increased competition tends to stimulate capital investments. Long-term results of FDI may include increased productivity, product and process innovations and greater economic growth Home Country Policies to Encourage and Restrict Outward FDI Encourage Foreign Risk Insurance Capital Assistance Tax Incentives to Invest Abroad Political Pressure Restrict Limits on Capital Outflows Tax Incentives to Invest at Home Nation-Specific Prohibitions Host Country Policies to Encourage and Restrict Inward FDI Encourage Incentives To gain from the resource-transfer and employment effects of FDI. To capture FDI away from other potential host locations Restrict Ownership Restraints Performance Requirements Balance-of-Payments Effects of FDI for the Home and Host Countries Host country benefits from initial capital inflow when MNC establishes business. CREDIT TO FINANCIAL ACCOUNT Host country benefits if FDI substitutes for imports of goods and services. VOIDS Host country benefits when MNC uses its foreign subsidiary to export to other countries. CREDITS TO CURRENT ACCOUNT (BECAUSE YOURE EXPORTING) Balance of payments effects of FDI for the Home Countries Adverse Effects on Competition Adverse Effects on the Balance of Payments Initial capital outflow has a negative impact on the balance of payments. It is detrimental if the purpose of the foreign investment is to serve the home market from a low-cost production location. It is detrimental if the FDI is a substitute for exports. National Sovereignty and Autonomy Subsidiary earnings will eventually be repatriated back to the home country. Repatriations (debits on current accounts bc its going back) Foreign subsidiaries could import a substantial number of component part inputs and this will reduce the positive impact of subsequent exports. diminish value of exports (debits on the current account CHAPTER ONE TEST The most global markets currently are markets for industrial goods. Companies hope to lower their overall cost structure or improve the quality or functionality of their product offering which allows them to compete more effectively by engaging in globalization of production. Which of the following observations concerning the World Trade Organization is NOT true? It is often seen as the lender of last resort to nation-states whose economies are in turmoil. Which of the following observations concerning the WTO are true? It is primarily responsible for policing the world trading system. Its members collectively account for about 97 percent of world trade. It promotes lowering barriers to cross-border trade and investment. Lower barriers to international trade allow firms to base production at the optimal location for that activity. The relative decline in the U.S. share of world output reflects the growing economic development and industrialization of the world economy. The "stock of foreign direct investment" refers to the total cumulative value of foreign investments. If the critics of globalization are correct, this is one of the three things that must be shown. Decline in labor's share of national income must be due to moving production to low-wage countries. As an economy grows and income levels rise, initially pollution levels also rise. Which of the following observations is true of an international business? It should engage in international trade or investment Which of the following is NOT true of managers in international businesses? They should find ways to work outside the limits imposed by specific governmental interventions. _____ refers to the shift toward a more integrated and interdependent world economy. Globalization. Identify the term that refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production. Globalization of production Which of the following was set up to promote economic development globally? World Bank What has revolutionized the transportation business, significantly lowering the costs of shipping goods over long distances? Containerization. The "stock of foreign direct investment" refers to the total cumulative value of foreign investments. Which of the following is a distinct trend in the demographics of the multinational enterprise since the 1960s? Growth of mini-multinationals. Which of the following statements is NOT true? Barriers to the free flow of goods, services, and capital have been increasing. Identify the incorrect statement concerning globalization. It is skilled labor in developed nations that has seen its share of national income decline over the last two decades. Critics of globalization argue that the gap between the rich and poor nations of the world has gotten wider. Which of the following statements concerning international differences in business is true? Differences require that an international business vary its practices country by country. CHAPTER TWO TEST Political systems can be assessed according to two dimensions. Which of the following is one among them? The degree to which they are democratic or totalitarian. _____ refers to a political system in which the government is by the people, exercised either directly or through elected representatives. Democracy To guarantee that elected representatives can be held accountable for their actions by the electorate, an ideal representative democracy has a number of safeguards. Which of the following is NOT one among them? Unlimited terms for elected representatives. Which form of totalitarianism is exemplified by states such as Iran and Saudi Arabia? Theocratic Totalitarianism A supply restriction occurs when a single firm monopolizes a market. _____ is based on precedent, tradition, and custom. Common Law Which term refers to theft, piracy, blackmail, and the like by individuals or groups? Private Action To account for differences in the cost of living, one can adjust GNI per capita by purchasing power. Which of the following is NOT a valid generalization as to the nature of the relationship between political economy and economic progress? Totalitarian regimes are more conducive to long-term economic growth. The global changes in political and economic systems have several implications for international business. Which of the following is a positive effect of these global changes? The long-standing ideological conflict between collectivism and individualism that defined the twentieth century is less in evidence today. Communists believed that socialism can be achieved only through violent revolution and totalitarian dictatorship. Individualism lays emphasis on the importance of guaranteeing individual freedom and self expression by letting people pursue their own economic self-interest. This is a form of government in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties. Totalitarianism. Which of the following is a safeguard enshrined in constitutional law so that elected representatives can be held accountable for their actions? Individual's right to freedom of expression, opinion, and organization. Which of the following observations is true of a market economy? The government's role is to encourage free and fair competition between private producers. Which of the following is a typical characteristic of a command economy? Firms have little incentive to control costs and become efficient. Identify the correct statement concerning CIGS. It helps resolve contract disputes that arise in international trade. Which of the following does not hold true of "GNI?" GNI per person figures are ideal because they consider differences in the cost of living. (can be misleading because they DON?T consider differences in the cost of living) The Human Development Index (HDI) is based on all of the following EXCEPT labor force participation rates. _____ involves removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate. Deregulation. CHAPTER THREE TEST _____ are the routine conventions of everyday life. Folkways What are mores? Norms that are seen as central to the functioning of a society and to its social life. This is an association of two or more individuals who have shared a sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other's behavior. A group. Which term refers to the extent to which individuals can move out of the strata into which they are born? Social Mobility. Which of the following observations is true of a caste system? Social position is determined by the family into which a person is born. What are ethical systems? Set of moral principles, or values, that are used to guide and shape behavior. All of the following observations about economic implications of Islam are true EXCEPT it does not protect the right to private property. All of the following observations about economic implications of Islam are true: it speaks approvingly of earning legitimate profit through trade and commerce, it stresses the importance of living up to contractual obligations, it prohibits interest receipt or payment. The power distance dimension focuses on how a society deals with the fact that people are unequal in physical and intellectual capabilities. This dimension captures attitudes toward time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts and favors. Confucian Dynamism. _____ is the belief in the superiority of one's own culture. Ethnocentrism. Which of the following best defines the term culture? System of values and norms that are shared among a group of people and that when taken together constitute a design for living. Norms are social rules and guidelines that prescribe appropriate behavior in particular situations. All of the following observations concerning the emphasis on individualism in the United States are true EXCEPT it lowers the costs of doing business due to its positive impact on managerial stability and cooperation. Which of the following observations concerning social stratification is NOT true? A class system is a highly rigid form of social stratification in which social mobility is limited. According to Max Weber, the Protestant work ethic paved the way for the development of capitalism in Western Europe. Which of the following observations agree with the economic implications of Hinduism? The caste system limits individuals' opportunities to adopt positions of responsibility and influence in society. The Chinese concept of "guanxi" refers to relationship networks supported by reciprocal obligations. Uncertainty avoidance dimension measures the extent to which different cultures socialized their members into accepting ambiguous situations and tolerating uncertainty. Which of the following is a criticism of Hofstede's research? His informants worked in a single company. Several studies have suggested that economic advancement and globalization may be important factors in societal change. The following are the reasons for this shift EXCEPT education and urbanization leads to increasing emphasis on the traditional values associated with poor rural societies. CHAPTER FIVE TEST _____ refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country. Free Trade When a gain of one country results in a loss by another it is called a zero-sum game. When a country is more efficient than any other country in producing a particular product it is said to have an absolute advantage. What does the acronym 'PPF' stand for? Production Possibility Frontier. The theory of comparative advantage suggests that trade is a positive-sum game. What is meant by constant returns to specialization? Units of resources required to produce a good are assumed to remain constant no matter where one is on a country's PPF. Which theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce? Heckscher-Ohlin theory. Identify the most contentious implication of the new trade theory. The argument it generates for government intervention and strategic trade policy. Michael Porter theorizes that four broad attributes of a nation shape the environment in which local firms compete. Which of the following is NOT one among them? First-mover advantages. According to Michael Porter, which of the following is an example of an advanced factor? Skilled Labor. Which of the following theories stresses that some countries specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries the world market can support only a limited number of firms? New Trade. Identify the main flaw with mercantilism. Viewing trade as one in which a gain by one country results in a loss by another. Country A can produce 10 tons of cotton and 25 tons of sugarcane. Country B can produce 8 tons of cotton and 26 tons of sugarcane. Country C can produce 11 tons of cotton and 23 tons of sugarcane, while country D can produce 6 tons of cotton and 25 tons of sugarcane. All these countries use the same amount of resources. Which country is said to have an absolute advantage in the production of both the products in this simple assumption? Country A What is the basic message of the theory of comparative advantage? Potential world production is greater with unrestricted free trade than it is with restricted trade. Which of the following observations is NOT true of diminishing returns to specialization? Ricardo's comparative advantage model assumes diminishing returns to specialization. According to the Heckscher-Ohlin theory, comparative advantage arises from differences in national factor endowments. What are economies of scale? The cost reductions associated with a large scale output. Which of the following observations concerning the new trade theory is NOT correct? It is at variance with the theory of comparative advantage. According to Michael Porter, this is an example of a "basic" factor of production. Demographics Identify one of the most pervasive findings of Porter's study. Successful industries within a country tend to be grouped into clusters of related industries. CHAPTER SIX TEST What is a tariff? Tax levied on imports and exports. Which of the following best describes an import quota? Direct restriction on the quantity of some good that may be imported into a country. This is a quota on trade imposed by the exporting country at the request of the importing country's government. Voluntary export restraint According to the text, this is the most common political argument for government intervention in trade. Protecting jobs and industries from unfair foreign competition Identify the oldest economic argument for government intervention. Infant industry Identify the legislation passed in 1930 that erected an enormous wall of tariff barriers. Smoot-Hawley Act The GATT was superseded by the WTO. The _____ round of GATT negotiations extended global trading rules to cover trade in services. Uruguay Which of the following WTO members reported implementation of the maximum number of antidumping actions between January 1995 and mid-2006? India Which of the following observations is true? When trade barriers are targeted at exports from a particular nation, firms based in that nation are at a competitive disadvantage to firms of other nations. These are levied as a proportion of the value of the imported good. Ad Valorem tariffs How does a subsidy influence international trade? By competing against foreign imports. Which of the following best describe a tariff rate quota? A lower tariff rate is applied to imports within the quota than those over the quota. _____ is defined as selling goods in a foreign market at below their costs of production or as selling goods at below their "fair" market value. Dumping. Which of the following observations concerning the infant industry argument is NOT true? The GATT has not recognized this argument as a legitimate reason for protectionism. A government, by appropriate actions, can help raise national income by ensuring that firms that gain first-mover advantages in an industry are domestic and not foreign enterprises. All of the following are the arguments against strategic trade policies EXCEPT helping domestic firms overcome the first-mover advantages enjoyed by foreign competitors. Which of the following is NOT a provision of the Uruguay Round of GATT negotiations? Total abolishment of tariffs on industrial goods. Which of the following is not a reason why WTO is being criticized by those opposing free trade? Its lack of ability to force any member nation to take an action to which it is opposed. Which of the following is a negative outcome for firms due to intervention by the government? It is unlikely to be well executed, given the opportunity for such a policy to be captured by special-interest groups. CHAPTER EIGHT TESTS The level of economic integration is highest in a political union. All of the following are characteristics of a customs union EXCEPT it requires a common currency. What occurs when low-cost producers within the free trade area replace high-cost domestic producers? Trade Creation Which institution is responsible for proposing EU legislation, implementing it and monitoring compliance with EU laws by member states? European Commission Which treaty signed by the EC members in 1991, committed them into adopting a common currency by the year 1999? The Maastricht Treaty All of the following are the disadvantages of the Euro EXCEPT difficulty in comparing prices across Europe. Who are the member nations of the NAFTA? America, Canada, and Mexico Identify the statement that does NOT hold true of the Andean pact. They were successful in establishing a common market by 1995. What was the initial aim of MERCOSUR? To establish a full free trade area by the end of 1994. Which of the following is an advantage from the adoption of regional economic development? Production of standardized product for a single multicountry market. An economic union involves all of the following EXCEPT a central political apparatus which coordinates the economic, social, and foreign policy of the member states. Unlike a common market, an economic union involves a common currency. What occurs when higher cost suppliers replace lower cost external suppliers within the free trade area? Trade diversion Due to which particular concern about economic integration did the British opt out of any single currency agreement? Reluctance to relinquish control of the country's monetary policy to the EU. Which of the following is NOT an advantage of the Euro? Economists identifying the EU as an optimal currency area. Which of the following is seen as a disadvantage of the euro? National authorities losing control over monetary policy. On average, studies indicate that NAFTA's overall impact has been small but positive. According to Alexander Yeats, the trade diversion effects of MERCOSUR outweigh its trade creation effects. Which of the following observations is NOT true of the ASEAN? It has been highly successful in achieving cooperation in its industrial policies. Which of the following is a disadvantage of regional economic integration from the management's perspective? Increase in price competition within each grouping. Week of September 28. Forelle, C., & Clark, D. (2009, September 22). EU shows its cards behind Intel case. Wall Street Journal, p. B1. HYPERLINK "http://online.wsj.com/article/SB125352664532127359.html" Click Cohen, A. & Forelle, C. (2009, September 24). EU?s watchdog plan faces uphill battle. Wall Street Journal, p. C2. HYPERLINK "http://online.wsj.com/article/SB125370008413633619.html" Click Week of September 21. Fritsch, P., & Boles, C. (2009, September 16). How 'Buy American' can hurt U.S. firms. Wall Street Journal, p. A5. HYPERLINK "http://online.wsj.com/article/SB125306012124114135.html" Click Miller, J. W. (2009, September 15). Protectionist measures expected to rise, report warns. Wall Street Journal, p. A5. HYPERLINK "http://online.wsj.com/article/SB125295068841109309.html" Click Week of September 14. Gonzalez, A., & Johnson, K. (2009, September 3). Spain?s solar-power collapse dims subsidy model. Wall Street Journal, p. A10. HYPERLINK "http://online.wsj.com/wsjgate?subURI=%2Farticle%2FSB125193815050081615-email.html&nonsubURI=%2Farticle_email%2FSB125193815050081615-lMyQjAxMDI5NTExMTkxMzE4Wj.html" Click Yap, C. (2009, September 3). Will China tighten 'rare earth' grip? Wall Street Journal, p. C12. HYPERLINK "http://online.wsj.com/wsjgate?subURI=%2Farticle%2FSB125188565571379063-email.html&nonsubURI=%2Farticle_email%2FSB125188565571379063-lMyQjAxMDI5NTExMTgxODE1Wj.html" Click Week of September 7. Solomon, D. (2009, September 2). U.S. economy gets lift from stimulus. Wall Street Journal, p. A8. HYPERLINK "http://online.wsj.com/article/SB125185379218478087.html" Click Chao, L. (2009, September 1). Hero worship in software piracy case complicates China efforts. Wall Street Journal, p. B1. HYPERLINK "http://online.wsj.com/article/SB125174411034873381.html" Click Week of August 31. Aeppel, T. (2009, August 24). Coming home: Appliance maker drops China to produce in Texas. Wall Street Journal, p. B1. HYPERLINK "http://online.wsj.com/article/SB125107636394652753.html" Click Weisman, J., & Solomon, D. (2009, August 26). Decade of debt: $9 trillion. Wall Street Journal, p. A1. HYPERLINK "http://online.wsj.com/article/SB125119686015756517.html" Click
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