⭐️ Study Guide Qs 5,7, & 10

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33 Terms

1
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Trade Deficit

a nation imports more than it exports

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Trade Surplus

a nation EXPORTS more than it IMPORTS

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<p>Balance of Trade</p>

Balance of Trade

Exporting, Selling more = Surplus → More Money! 🙂

Importing, Buying more = Deficit → Less Money

“More exports? Yay! 🙂 || More imports? Gotta pay!

<p>Exporting, Selling more = Surplus → More Money! <span data-name="slightly_smiling_face" data-type="emoji">🙂</span> </p><p>Importing, Buying more = Deficit → Less Money  <span data-name="frowning_face" data-type="emoji">☹</span></p><p></p><p>“More exports? Yay! <span data-name="slightly_smiling_face" data-type="emoji">🙂</span> || More imports? Gotta pay! <span data-name="frowning_face" data-type="emoji">☹</span> “</p>
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<p>Mercantilism</p>

Mercantilism

The old idea that a country gets richer by selling more to other countries (exports) and buying less from them (imports).


The goal: bring in more gold and silver.

“Sell more, buy less, get rich with gold.”

  • Exports = 💰 coming in

  • Imports = 💰 going out

  • More exports = More treasure 🪙

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<p>Absolute Advantage</p>

Absolute Advantage

Abundantly producing a specific resource over other countries

🍌 Example: The U.S. and Brazil

  • The U.S. can produce 100 tons of wheat or 30 tons of bananas in a year.

  • Brazil can produce 50 tons of wheat or 100 tons of bananas in a year.

📊 Who has the absolute advantage?

  • The U.S. makes more wheat → it has an absolute advantage in wheat.

  • Brazil makes more bananas → it has an absolute advantage in bananas.

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<p>Comparative Advantage</p>

Comparative Advantage

A country focuses its energy on what they do best. (Manufacturing, services, or agriculture) and trades for what others produce more efficiently.

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Product Life Cycles (International Trade Theory)

| Stage | Goal |

| ------------------- | ----------------------------------------- |

| Development 🛠 | Build and test the product (no sales yet) |

| Introduction 🌱 | Create awareness and attract early users |

| Growth 🚀 | Increase sales and market share |

| Maturity 🌳 | Maximize profits and defend market share |

| Decline 🍂 | Cut losses or reinvent the product |

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Strategic Trade (International Trade Theory)

Governments can strategically intervene in big industries by providing funding — like Boeing and Airbus

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Diamond (International Trade Theory)

Brains, Buyers, Buddies, Battles — build advantage!

<p><span>Brains, Buyers, Buddies, Battles — build advantage!</span></p>
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Exchange Rate

Exchange rate tells the trade fate—how much of one money you swap for another on any given date.

Exchange rates move like a seesaw — always going up and down depending on what people think and do. Like at Bed Bath and Beyond, prices changed daily

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What are the determinants of supply and demand for an exchange

rate market?

| Exchange Rate | | Supply or Demand? | __________________________________________________

| 🔼 Exchange Rate ↑ | 📈 Demand ↑ or 📉 Supply ↓ |

| 🔽 Exchange Rate ↓ | 📉 Demand ↓ or 📈 Supply ↑ |

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Purchasing Power Parity

🛒🌍💵 = 🛒🌍💶
“Same stuff, same price, no matter the country.”

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What does it mean if a country’s currency depreciates?

Appreciates?

Depreciation – Currency loses value

Appreciation – Currency gains value

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Fixed Exchange Rate

High and strict govt intervention

Keeps currency at a fixed value by buying/selling currency reserves constantly

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Pegged Exchange Rate

High but Flexible Govt Intervention

Allows currency to fluctuate within a set range; intervenes when it goes outside band

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Floating (Clean) Exchange Rate

None or Minimal Govt Intervention

No direct intervention; market forces fully determine exchange rate

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Managed (Dirty) Float Exchange Rate

Moderate and Occasional Govt Intervention

Mostly lets market decide but occasionally steps in to prevent excessive fluctuations

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Exchange Rate Relationship Chart

| Factor | Effect on Exchange Rate (📈 = up, 📉 = down) |

| ----------------- | --------------------------------------------- |

| 🔼 Interest Rate | 🔼📈 Exchange rate up (currency stronger) |

| 🔽 Interest Rate | 🔽📉 Exchange rate down (currency weaker) |

| 🔼 Inflation Rate | 🔼📉 Exchange rate down (currency weaker) |

| 🔽 Inflation Rate | 🔽📈 Exchange rate up (currency stronger) |

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🔼 Interest Rate goes UP

Exchange Rate GOES UP (currency value increases)

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🔽 Interest Rate GOES DOWN

Exchange rate down (currency value gets weaker)

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🔼 Inflation Rate GOES UP

Exchange rate GOES DOWN (currency gets weaker)

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🔽 Inflation Rate GOES DOWN

Exchange Rate GOES UP (currency value is stronger)

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Transaction Risk (foreign countries) Example

  • You agree today to pay 100 euros for a cool gadget.

  • Today, 1 euro = 1.10 dollars, so you expect to pay $110.

  • But on payment day, if 1 euro = 1.20 dollars, suddenly you need $120 instead — that extra $10 is the transaction risk!

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Currency Hedging

Locking in a price (This occurs in forward transactions)

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🟩 Spot Transactions

🟩 Exchange currency right now (within 2 days)

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🟦 Forward Transactions

🟦 Agree today to exchange currency at a fixed price later to avoid surprises

(Currency Hedging)

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🟧 Swap Transactions

Buy one currency now and agree to sell it back later at a set price — like a two-step exchange happening at the same time.

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If a company seeks to limit foreign exchange rate exposure in the

forward direction, what is the most effective way to do this?

The company should enter a forward contract to fix the exchange rate now for future currency payments or receipts

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An example of first mover advantage

Amazon was one of the first to launch a large online marketplace.

Advantages:

  • Builds strong brand recognition early

  • Can set the standards and customer expectations

  • Gains early access to key resources and locations

Disadvantages:

  • Faces higher risks and costs (uncertain demand)

  • Has to educate the market

  • Competitors can learn from their mistakes

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Late mover example

Walmart entered the online marketplace after Amazon.

Advantages:

  • Can learn from the first mover’s mistakes

  • Can improve on products or services

  • Usually lower initial costs

Disadvantages:

  • Harder to build customer loyalty

  • May face tough competition from established firms

  • Less control over market standards

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Two modes of foreign market entry

  1. Exporting

  2. Federal Direct Investment

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What is EXPORTING?

What it is: Selling products made in your home country to customers in another country.

  • Scale: Usually a smaller-scale, low-risk way to enter a foreign market.

  • Example: A U.S. coffee company shipping its beans to cafes in Europe.

ONE WAY TO ENTER THE FOREIGN MARKET

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What is FDI?

Foreign Direct Investment

  • What it is: Setting up operations or buying assets inside the foreign country (like factories, offices, or stores).

  • Scale: A large-scale, higher-risk entry method involving more commitment.

  • Example: Toyota building a manufacturing plant in the U.S.

ANOTHER WAY TO ENTER THE FOREIGN MARKET