WGU C211 - Global Economics for Managers --From Quizlet

Views on Globalization

New, Evolutionary, and Pendulum

"New" view on globalization

A force sweeping through the world in recent times.

"Evolutionary" view on globalization

A long-run historical evolution since the dawn of human history

"Pendulum" view on globalization

One that swings from one extreme to another from time to time

Foreign Direct Investment

Direct investment in, control, and management of value-added activities in other countries

Political views on FDI

Radical View, Free Market View, Pragmatic Nationalism

Benefits to a country receiving FDI

Capital Inflow, Technology Spillover, Advanced Management Know-How, Job creation

Costs to a country receiving FDI

Loss of Sovereignty, Adverse effects on competition,

Capital outflow.

How do resources and capabilities influence the competitive dynamics of a business?

Resource similarity and market commonality can yield a powerful framework for competitor analysis.

Resource similarity

The extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those of the focal firm.

How does resource similarity impact competitive dynamics?

Firms with a high degree are likely to have similar competitive actions. (Starbuck's instant coffee & McDonald's iced coffee)

Classical theories of international trade

Mercantilism, Absolute advantage, and Comparative advantage

Modern theory view

Dynamic

Classical theory view

Static

Absolute advantage

The economic advantage one nation enjoys that is superior to other nations

Comparative advantage

The advantage one economic activity nation enjoys in comparison with other nations (relative, not absolute)

Mercantilism

A theory that suggests that the wealth of the world is fixed and that a nation that exports more and imports less will be richer.

Features of the product life cycle?

New, Maturing, and Standardized

Strategic trade

Intervention by governments in certain industries can enhance their odds for international success.

How are supply and demand related to the exchange rate of a country?

The price of a commodity, a country's currency, is fundamentally determined by this. Strong demand leads to price hikes; oversupply results in price drops.

Which theory came first?

Mercantilism (although both are of the idea that governments should actively protect domestic industries from imports and vigorously promote exports)

If a company seeks to limit foreign exchange rate exposure in the forward direction, what is the most effective way to do this?

Forward transactions, an act know as currency hedging.

Transaction risk

The exchange rate risk associated with the time delay between entering into a contract and settling it.

Hedging

A transaction, such as forward transactions, that protects traders and investors from exposure to the fluctuations of the spot rate.

Currency hedging

A way to protect traders and investors from being exposed to the fluctuations of the spot rate

Strategic hedging

A means of spreading out activities in different currency zones in order to offset the currency losses in certain regions through gains in other regions (currency diversification)

First mover advantages

Proprietary, technological leadership, pre-emption of scarce resources, establishment of entry barriers to late entrants, avoidance of clash with dominant firms at home, relationships with key stakeholders, (such as governments.)

Late mover advantages

Opportunity to free ride on first-mover investments, Resolution of technological and market uncertainty, First mover's difficulty to adapt to market changes.)

Foreign market entries types

Non-equity and equity

Non-equity

Reflects relatively smaller commitments to overseas markets. Determines firms MNE status.

Equity

indicative of relatively larger, harder-to-reverse commitments. Determines firms MNE status.

How do institutions reduce uncertainty?

Establish "rules of the game" that economic players play by. A standard to follow in order to survive and prosper. By signaling which conduct is legitimate and which is not, institutions constrain the range of acceptable actions.

Regulatory pillar

The coercive power of governments (laws, regs, rules)

Normative pillar

Values, beliefs, and actions of other relevant players (norms, cultures, ethics)

Cognitive pillar

The internalized, taken-for-granted values and beliefs that guide behavior. (beliefs between right/wrong)

Formal institution

One that include laws, regulations and rules

Informal institution

One that includes norms, cultures and ethics

What core propositions lie at the root of the institution based view on global business?

(1) managers and firms rationally pursue their interests and make choices within institutional constraints (bounded rationality)

(2) in situations where formal constraints are unclear or fail, informal constraints play a larger role in reducing uncertainty and providing constancy to managers and firms (personal relationships and connections)

The institution based view global business is grounded upon

The dynamic interaction between institutions and firms, and considers firm behaviors as the outcome of such an interaction.

How is global business affected by democracy?

An individual's right to freedom of expression and organization. For example, starting up a firm is an act of economic expression

How is global business affected by totalitarianism?

These countries often experience wars, riots, protests, chaos, and breakdowns, which result in higher political risk.

Democracy

Citizens elect representatives to govern the country on their behalf.

Totalitarianism

One person or party exercises absolute political control over the population.

Civil law

Law that uses comprehensive statutes and codes as a primary means to form legal judgments.

Common law

Law shaped by precedents and traditions from previous judicial decisions.

Theocratic law

A legal system based on religious teachings.

How do civil, common and theocratic laws compare?

Relative to civil law, common law has more flexibility because judges have to resolve specific disputes based on their interpretation of the law. Civil law has less flexibility because judges only have the power to apply the law.

Property right

The legal rights to use an economic resource and to derive income and benefits from it. Can be used as collateral for starting a firm; not as common in developing countries, therefore hindering economic growth.

Intellectual property right

Rights associated with the ownership. They primarily include rights associated with patents, copyrights, and trademarks.

Market economy

One that is characterized by the "invisible hand" of market forces-all factors of production should be privately owned.

Command economy

One that is defined by a government taking all factors of production to be government-owned or state-owned, and all supply, demand, and pricing are planned by the government.

Mixed economy

One has elements of both a market economy and a command economy. It boils down to the relative distribution of market forces versus command forces.

Indifference curve

A curve that shows consumption bundles that give the consumer the same level of satisfaction (i.e. combinations of pizza and Pepsi with which the consumer is equally satisfied.)

Four properties of an indifference curve

(1) Higher indifference curves are preferred to lower ones. People usually prefer to consume more goods rather than less.

(2) Indifference curves are downward sloping. The slope of an indifference curve reflects the rate at which the consumer is willing to substitute one good for the other.

(3) Indifference curves do not cross.

(4) Indifference curves are bowed inward. The slope of an indifference curve is the marginal rate of substitution—the rate at which the consumer is willing to trade off one good for the other.

Marginal rate of substitution.

The rate at which the consumer is willing to trade off one good for the other (i.e. how much Pepsi the consumer requires to be compensated for a one-unit reduction in pizza consumption)

Budget constraint

The consumption bundles that the consumer can afford.

How might a budget constraint be impacted by an increase in income?

Additional bundles could be consumed with an increase in income.

Graphical elements needed to determine a consumer's optimal point of consumption

Indifference curve and budget constraint.

How is a consumer's optimal point of consumption determined precisely? What is the condition that must be met?

The point at which this indifference curve and the budget constraint touch (the best combination of pizza and Pepsi available to the consumer.) The marginal rate of substitution equals the relative price of the two goods.

Marginal cost

The increase in total cost that arises from an extra unit of production

How is marginal cost related to total cost?

The portion of total cost resulting from an extra unit of production.

Formula to calculate marginal cost

Change in total cost divided by change in quantity

If Dave's company has a total cost of $100 when quantity output is 5, and a total cost of $115 when quantity output is 6, what is the marginal cost of producing the 6th unit?

$15

Total cost is made of two types of costs, what are they?

Fixed and Variable.

How does a firm determine to shut down in the short-run? What rule characterizes this?

If the revenue that it would earn from producing is less than its variable costs of production. P

Market structure characterized as being "price takers"

Competitive markets

Price taker

One who must accept the price as the market determines

When a market is characterized as being a price taker, what fundamental shape does the demand curve for this market take?

Horizontal line.

Demand curve for a perfectly competitive firm

Horizontal line

Demand curve for a monopolistic market

Downward-sloping

What does "downward" sloping with regards to a demand curve mean?

The monopoly has to accept a lower price if it wants to sell more output.

Where do firms with market power determine the quantity of product/service they will produce?

A firm chooses a quantity of output such that marginal revenue equals marginal cost. The firm chooses quantity so that price equals marginal cost. Thus, the firm's marginal-cost curve is its supply curve.

Primary goal/objective of a firm

Maximize profit.

If the firm has price setting capacity, how will they use information about marginal costs and marginal revenues in order to accomplish their primary objective?

The monopolist's profit-maximizing quantity of output is determined by the intersection of the marginal-revenue curve and the marginal-cost curve.

Describe the basic distinctions between the market models with respect to: number of market participants, type of product being marketed, ease of entry/exit into the market and the prevalence of advertising/marketing

Monopoly and Oligopoly have one to few firms, with limited products (cable TV), entry is difficult, and advertising is a natural feature. Monopolistic competition/perfect competition have many firms, mono comp has differentiated products (novels/movies) and perfect comp has identical products, entry is easy, and spend very little on advertising.

Fundamental truth realized when studying the behavior of an oligopolistic firm within the context/model called "prisoner's dilemma"

Self-interest makes it difficult for the oligopolists to maintain the cooperative outcome. Relentless logic of self-interest drives the participants toward the non-cooperative outcome, which is worse for both parties.

How might an oligopolistic firm behave like a monopoly? What forces may prevent this?

Forming a cartel and acting like a monopolist, but self-interest drives them towards competition.

Federal Reserve's monetary control

FOMC - Federal Open Market Committee and the open market operation, the purchase and sale of U.S. government bonds.

Open market operations

The purchase and sale of U.S. government bonds.

When the Fed buys bonds, what impact does this have on the money supply and aggregate demand?

After the purchase, these dollars are in the hands of the public. Thus, an open-market purchase of bonds by the Fed increases the money supply.

When the Fed sells bonds, what impact does this have on the money supply and aggregate demand?

After the sale, the dollars the Fed receives for the bonds are out of the hands of the public. Thus, an open-market sale of bonds by the Fed decreases the money supply.

Discount rate

The interest rate banks pay when borrowing from the Federal Reserve.

When the Fed reduces the discount rate, what impact will this have on the money supply and the aggregate demand?

A lower discount rate encourages banks to borrow from the Fed, increasing the quantity of reserves and the money supply.

When the Fed increases the discount rate, what impact will this have on the money supply and the aggregate demand?

Higher discount rate discourages banks from borrowing reserves from the Fed, reducing the quantity of reserves in the banking system, which in turn reduces the money supply.

Reserve ratio

The fraction of total deposits that a bank holds as reserves.

What would the Fed need to do with the reserve ratio in order to increase the money supply and aggregate demand in the economy?

Decrease the reserve requirements; therefore lowering the reserve ratio.

What would the Fed need to do with the reserve ratio in order to decrease the money supply and aggregate demand in the economy?

Increase the reserve requirements; therefore raising the reserve ratio.

If the Fed uses monetary policy in a way that increases money supply, what effect will this have on interest rates and aggregate demand (consider them separately)?

Interest rates lower and aggregate demand expands.

If the government uses fiscal policy to increase government spending what impact will this have on interest rates and aggregate demand?

Raises interest rates and an increase in aggregate demand.

If the government uses fiscal policy and cuts taxes, what effect will this have on interest rates and aggregate demand?

Raises interest rates and an increase in aggregate demand.

Explain the effect an income change might have on shifting the demand curve?

Lower income=less to spend in total=lower demand.

Higher income=more to spend in total=raise demand.

Normal good

A good for which an increase in income leads to an increase in demand

Inferior good

a good for which an increase in income leads to a decrease in demand (car vs bus ride)

Explain how the price of related goods is related to changes in the demand curve?

When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes (yogurt for ice cream).

When a fall in the price of one good raises the demand for another good, the two goods are called complements (hot fudge and ice cream).

If Luke and I are the only sellers of paper in a given market, and Luke drops his prices for paper, how will this impact the demand for my paper? Which way will the demand curve shift?

As Luke drops his price, your demand will decrease. Your demand curve will shift to the left.

What other factors might influence the position of the demand curve?

Price of the good itself, income, price of related goods, tastes, expectations, and number of buyers.

Numerical value that determines whether or not a product/service is considered price elastic versus inelastic

1 - greater than or less than

Income elasticity

A measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income.

Price elasticity of demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

Elastic

Quantity moves proportionately more than the price (Price increase results in drastically lower demand).