globalization, free trade and protection

define globalization

the process by which the world’s economies become increasingly interdependent and interconnected

define multinational corporation

an organization that operates in two or more countries

advantages of MNCs

job creation = better standard of living

EOS

more profit due to large customer base

spread risks

avoid trade restrictions by producing in that country

reduced transportation costs

expand to countries with low corp tax

disadvantages of MNCs

-unethical cost-cutting practices

-local firms that are less competitive struggle to survive

-exploitation of foreign government by market domination power

-overreliance, hard when they shift

-lack of local knowledge

-fluctuating exchange rates

-products don’t meet local consumer needs

define international trade

refers to exchange of goods and services beyond national borders

define free trade

means that international trade takes place without protectionist measures (barriers to international trade)

advantages of free trade

access to resources that cannot be locally produced

low prices due to low trade barriers

economies of scale

greater choice

increased market size = higher revenue and profits

efficiency gains: competition to domestic producers = quality increase and price decrease

improved international relations

define protection

use of trade barriers to restrain foreign trade, thereby limiting overseas competition.

different types of protection methods

tariffs

import quotas

subsidies

embargo

define import quotas

a quantitative limit on the sale of foreign goods

what are tariffs

a tax on import aimed at increasing COP for foreign firms.

define subsidies and their relevance

government assistance to lower COP of domestic firms and increase their competitiveness

define embargo

a ban on trade with a certain country.

arises due to trade dispute or political conflict

reasons for protection

safeguard infant industries from foreign competition

safeguard domestic jobs

prevents foreign countries dumping goods in domestic economy

source of government revenue

overcome BOP defecit

discourage overdependence on g&s from other countries

negative effects of protectionism

distorts market signals leading to global misallocation of resources

higher prices for import good consumers

retaliation and trade barriers against this country

domestic firms ineffeciency