Globalization and International Trade Concepts

A set of vocabulary flashcards covering key concepts and terms from the lecture notes on globalization and international trade.

Globalization

Deep interdependence of national economies via trade, FDI, capital, technology, and information.

Globalization of Markets

Convergence of consumer preferences globally.

Globalization of Production

Sourcing parts and services globally for cost, quality, and speed.

FDI

Foreign Direct Investment; investment made by a company in one country in business interests in another.

IMF

International Monetary Fund; institution that aims to promote global economic stability.

WTO

World Trade Organization; international body that regulates and facilitates international trade.

Deglobalization

Shifts towards reducing global economic dependencies, often due to geopolitical tensions.

Mercantilism

Economic theory that emphasizes national wealth as a means of increasing power, typically through protectionism.

Comparative Advantage

Economic theory that describes how countries can benefit from trade by specializing in goods they can produce more efficiently than others.

Absolute Advantage

Ability of a country to produce more of a good or service than another country using the same amount of resources.

Heckscher–Ohlin Theory

Theory that emphasizes the role of a country's factor endowments in determining its comparative advantage.

Porter's Diamond

Framework for analyzing the competitive advantage of nations, based on factor endowments, demand conditions, related industries, and firm strategy.

Tariffs

Taxes imposed on imported goods to protect domestic industries.

Subsidies

Financial support extended by the government to support domestic industries.

Trade Creation

Occurs when a regional integration agreement leads to trade shifts from higher-cost to lower-cost producers within the bloc.

Trade Diversion

Occurs when an integration bloc buys from a less efficient member instead of a more efficient non-member.

OLI Model

Eclectic Paradigm by Dunning which stands for Ownership, Location, and Internalization advantages.

Quotas

Limits on the amount of a product that can be imported.

PESTLE Analysis

Framework to analyze the external environment of an organization, focusing on Political, Economic, Social, Technological, Legal, and Environmental factors.

Globalization

Deep interdependence of national economies via trade, Foreign Direct Investment (FDI), cross-border capital flows, technology transfer, and information exchange, leading to a more integrated global economic system.

Globalization of Markets

Convergence of consumer preferences globally, leading to the standardization of products and marketing strategies across different countries, often facilitated by multinational corporations.

Globalization of Production

Sourcing parts, components, and services globally from various locations to take advantage of national differences in cost, quality, and speed of factors of production (like labor, land, and capital).

FDI

Foreign Direct Investment; an investment made by a company or individual in one country in business interests in another country, typically involving establishing new operations or acquiring substantial ownership stakes in existing foreign companies.

IMF

International Monetary Fund; an international organization that aims to promote global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world, often by providing financial assistance to countries in crisis.

WTO

World Trade Organization; an international intergovernmental organization that regulates and facilitates international trade between nations, providing a framework for negotiating trade agreements and a dispute resolution process aimed at ensuring predictable and fair trade.

Deglobalization

Shifts towards reducing global economic dependencies and increasing national self-sufficiency, often driven by factors like geopolitical tensions, supply chain disruptions, protectionist policies, and concerns over national security or resilience.

Mercantilism

An economic theory prevalent from the 16^{th} to the 18^{th} centuries that emphasizes national wealth as a means of increasing state power, typically achieved through protectionism (e.g., high tariffs on imports, subsidies for exports) to maximize exports and minimize imports, thereby accumulating gold and silver.

Comparative Advantage

An economic theory that describes how countries can benefit from trade by specializing in the production of goods and services they can produce at a lower opportunity cost than others, even if they don't have an absolute advantage in any good, leading to overall greater production and consumption.

Absolute Advantage

The ability of a country to produce more of a good or service than another country using the same amount of resources; this implies greater efficiency in production.

Heckscher–Ohlin Theory

A theory that emphasizes the role of a country's factor endowments (relative abundance of factors of production such as land, labor, and capital) in determining its comparative advantage, positing that countries will export goods that intensively use their relatively abundant and cheap factors of production.

Porter's Diamond

A framework for analyzing the competitive advantage of nations, based on four interrelated attributes that promote or impede the creation of competitive advantage: Factor Endowments (resources), Demand Conditions (sophistication of domestic buyers), Related and Supporting Industries (presence of clusters), and Firm Strategy, Structure, and Rivalry (conditions governing how companies are created, organized, and managed).

Tariffs

Taxes imposed on imported goods and services, designed to protect domestic industries by making foreign goods more expensive, and can be specific (fixed charge per unit) or ad valorem (percentage of value).

Subsidies

Financial support extended by the government to either producers or consumers, primarily to support domestic industries against foreign competition (e.g., cash grants, low-interest loans, tax breaks, government equity participation).

Trade Creation

Occurs when a regional economic integration agreement leads to trade shifts from higher-cost non-member producers to lower-cost member producers within the bloc, resulting in increased economic efficiency and welfare for members.

Trade Diversion

Occurs when an integration bloc buys goods or services from a less efficient and more expensive member country instead of a more efficient and cheaper non-member country, primarily due to preferential tariffs within the bloc, leading to a net reduction in welfare.

OLI Model

Also known as the Eclectic Paradigm by John Dunning, it explains why firms choose Foreign Direct Investment (FDI) over other modes of foreign market entry based on three advantages: Ownership-specific advantages (e.g., proprietary technology), Location-specific advantages (e.g., market size, resource availability in a foreign country), and Internalization advantages (e.g., avoiding transaction costs by keeping processes in-house).

Quotas

Quantitative limits imposed on the amount of a specific product that can be imported or exported during a defined period, used to restrict trade and protect domestic industries.

PESTLE Analysis

A strategic framework used to analyze the external macro-environmental factors that can impact an organization, focusing on six key areas: Political (e.g., government policies, stability), Economic (e.g., interest rates, inflation), Social (e.g., demographics, culture), Technological (e.g., innovation, automation), Legal (e.g., laws, regulations), and Environmental (e.g., climate change, resource availability) factors.

Globalization

Deep interdependence of national economies via trade, Foreign Direct Investment (FDI), cross-border capital flows, technology transfer, and information exchange, leading to a more integrated global economic system. This process is driven by technological advancements (e.g., internet, improved transportation), liberalization of trade and investment policies, and the strategies of multinational corporations. It encompasses economic, political, and socio-cultural dimensions, fostering increased competition and cultural exchange.

Globalization of Markets

The convergence of consumer preferences globally, leading to the standardization of products and marketing strategies across different countries, often facilitated by multinational corporations. This convergence is driven by global media, increased international travel, and internet access, creating a demand for similar products and services worldwide, though companies may still adapt products to local tastes (e.g., global fast-food chains offering localized menu items).

Globalization of Production

The sourcing of parts, components, and services globally from various locations to take advantage of national differences in cost, quality, and speed of factors of production (like labor, land, and capital). For example, a company might design a product in the U.S., manufacture components in China, assemble it in Mexico, and provide customer service from India. This strategy aims to lower overall cost structures or improve product quality and functionality, but it also increases supply chain complexity and potential risks.

FDI

Foreign Direct Investment; an investment made by a company or individual in one country in business interests in another country, typically involving establishing new operations or acquiring substantial ownership stakes in existing foreign companies. FDI can take two main forms: Greenfield Investment, where a company builds new facilities from scratch in a foreign country, or Mergers and Acquisitions (M&A), where a company acquires an existing foreign firm or merges with it. Motivations include market access, resource seeking, and efficiency seeking.

IMF

International Monetary Fund; an international organization that aims to promote global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world by providing financial assistance to countries in crisis. Its core functions include surveillance (monitoring member countries' economic policies), financial assistance (lending to countries with balance of payments problems, often with conditionality), and technical assistance (providing expertise and training in areas like fiscal policy, monetary policy, and statistics).

WTO

World Trade Organization; an international intergovernmental organization that regulates and facilitates international trade between nations. It provides a framework for negotiating trade agreements and a dispute resolution process aimed at ensuring predictable and fair trade. Key principles include Most-Favored-Nation (MFN) treatment (treating all trading partners equally), National Treatment (treating foreign and domestic goods equally once they have entered the market), tariff binding commitments, transparency, and a structured dispute settlement mechanism to enforce agreements and reduce trade tensions.

Deglobalization

Shifts towards reducing global economic dependencies and increasing national self-sufficiency and regionalization, often driven by factors like geopolitical tensions (e.g., trade wars, sanctions), supply chain disruptions (e.g., pandemics, natural disasters), rising protectionist policies (e.g., increased tariffs, import quotas), and concerns over national security or economic resilience. This can manifest as reshoring (bringing production back home) or nearshoring (moving production to neighboring countries).

Mercantilism

An economic theory prevalent from the 16^{th} to the 18^{th} centuries that emphasizes national wealth as a means of increasing state power, typically achieved through protectionism (e.g., high tariffs on imports, subsidies for exports) to maximize exports and minimize imports, thereby accumulating gold and silver (bullionism). It promoted the idea that a nation's wealth and power were best served by increasing exports and decreasing imports, often through colonial expansion and state control over trade. Modern forms, sometimes called neo-mercantilism, involve similar protectionist policies to support domestic industries.

Comparative Advantage

An economic theory that describes how countries can benefit from trade by specializing in the production of goods and services they can produce at a lower opportunity cost than others, even if they don't have an absolute advantage in any good, leading to overall greater production and consumption. For example, if Country A can produce 10 units of Corn or 5 units of Wheat per hour, its opportunity cost for 1 unit of Wheat is 2 units of Corn. If Country B can produce 8 units of Corn or 4 units of Wheat per hour, its opportunity cost for 1 unit of Wheat is also 2 units of Corn. If Country C produces 6 units of Corn or 5 units of Wheat, its opportunity cost for 1 unit of Wheat is 1.2 units of Corn. Country C has a comparative advantage in Wheat as its opportunity cost is lower. Trade allows both countries to consume more than if they were self-sufficient.

Absolute Advantage

The ability of a country to produce more of a good or service than another country using the same amount of resources, or to produce the same amount of a good or service using fewer resources; this implies greater efficiency in production. For instance, if Country A can produce 100 widgets with 10 laborers, and Country B can only produce 80 widgets with the same 10 laborers, Country A has an absolute advantage in widget production. A country may have an absolute advantage in several goods, but trade is still beneficial due to comparative advantage.

Heckscher–Ohlin Theory

A theory that emphasizes the role of a country's factor endowments (relative abundance of factors of production such as land, labor, and capital) in determining its comparative advantage, positing that countries will export goods that intensively use their relatively abundant and cheap factors of production, and import goods that intensively use their relatively scarce factors. For instance, a labor-abundant country will export labor-intensive goods (e.g., textiles), while a capital-abundant country will export capital-intensive goods (e.g., machinery). The Leontief Paradox challenged this theory initially by finding the U.S., a capital-abundant country, exported more labor-intensive goods.

Porter's Diamond

A framework for analyzing the competitive advantage of nations, based on four interrelated attributes that promote or impede the creation of competitive advantage, along with two other external variables. These four attributes are: 1. Factor Endowments (e.g., skilled labor, infrastructure; distinguishing between basic and advanced factors), 2. Demand Conditions (e.g., size, growth, and sophistication of domestic buyers, pushing firms to innovate), 3. Related and Supporting Industries (e.g., presence of globally competitive supplier industries and complementary industries creating clusters), and 4. Firm Strategy, Structure, and Rivalry (e.g., conditions governing how companies are created, organized, and managed, and the intensity of domestic competition driving innovation and efficiency). Additionally, government and chance play roles in supporting or disrupting these attributes.

Tariffs

Taxes imposed on imported goods and services, designed to protect domestic industries by making foreign goods more expensive, and can be specific tariffs (a fixed charge per unit of an imported good, e.g., $$3 per barrel of oil) or ad valorem tariffs (a percentage of the imported good's value, e.g., 10% on imported cars). Tariffs increase the cost of imported goods, benefiting domestic producers through reduced competition and potentially generating revenue for the government, but they also lead to higher prices for consumers and can spark retaliatory tariffs from other countries.

Subsidies

Financial support extended by the government to either producers or consumers, primarily to support domestic industries against foreign competition or to achieve specific social/economic goals. Types of subsidies include cash grants, low-interest loans, tax breaks, government equity participation, and 'buy local' policies. Subsidies reduce production costs for domestic firms, enabling them to compete more effectively against imports and gain export markets, but they can be costly to taxpayers and may distort international trade by giving an unfair advantage.

Trade Creation

Occurs when a regional economic integration agreement (like a free trade area or customs union) leads to trade shifts from higher-cost non-member producers to lower-cost member producers within the bloc. This is a positive outcome, as it results in increased economic efficiency, resource allocation improvement, and overall welfare gains for member countries because they are now importing goods from a more efficient source than before, often due to the elimination of internal tariffs.

Trade Diversion

Occurs when an integration bloc's preferential tariffs cause member countries to buy goods or services from a less efficient and more expensive member country instead of a more efficient and cheaper non-member country. This happens because the tariff applied to non-members makes their goods more expensive than the duty-free (though less efficient) goods from within the bloc. Trade diversion can lead to a net reduction in welfare for the bloc as a whole because resources are allocated less efficiently than they would be in a free trade setting.

OLI Model

Also known as the Eclectic Paradigm by John Dunning, it explains why firms choose Foreign Direct Investment (FDI) over other modes of foreign market entry (like exporting or licensing) based on leveraging three types of advantages: 1. Ownership-specific advantages (O): proprietary assets or capabilities globally mobile with the firm (e.g., patented technology, strong brand reputation, superior management skills, economies of scale). 2. Location-specific advantages (L): attractive features of a foreign country that make it a desirable investment location (e.g., large market size, abundant natural resources, low labor costs, favorable government policies, developed infrastructure, political stability). 3. Internalization advantages (I): benefits gained by undertaking an activity in-house rather than contracting it out (e.g., avoiding transaction costs, protecting intellectual property, maintaining quality control, ensuring strategic control over operations, or reducing risks associated with external market failures).

Quotas

Quantitative limits imposed by a government on the amount of a specific product that can be imported or exported during a defined period, used to restrict trade and protect domestic industries. Import quotas are most common, limiting foreign goods to protect domestic producers (e.g., limiting the number of foreign cars or steel allowed in). Export quotas are less common and might be used to preserve domestic supplies of a resource, or to raise world prices. Quotas typically lead to higher domestic prices due to reduced supply, benefitting domestic producers but harming consumers and potentially leading to rent-seeking behavior among those who obtain import licenses.

PESTLE Analysis

A strategic framework used to analyze the external macro-environmental factors that can impact an organization, focusing on six key areas:

• Political factors (e.g., government policies, political stability, trade regulations, tax policies, anti-trust laws)

• Economic factors (e.g., economic growth rates, interest rates, inflation, exchange rates, consumer disposable income, unemployment trends)

• Social factors (e.g., demographics, cultural norms and values, lifestyle trends, consumer preferences, education levels, public health)

• Technological factors (e.g., R&D activities, automation, innovation rate, technological obsolescence, digitalization, infrastructure for technology)

• Legal factors (e.g., employment laws, health and safety regulations, intellectual property laws, consumer protection laws, competition law)

• Environmental factors (e.g., climate change policies, pollution control, resource scarcity, sustainability efforts, corporate social responsibility, weather patterns)
  This analysis helps businesses understand the broader forces shaping their operating environment and identify potential opportunities and threats.