international economics quiz 1

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Globalization

Definition: The worldwide process of increasing economic, cultural, and political integration between countries.
Example: Apple designs products in the U.S., manufactures in China, and sells worldwide.

WHY DID GLOBALIZATION GROW?

1. Better Technology

Technology made communication faster and cheaper.

2. Better Transportation

Shipping became cheaper and faster.

3. Lower Trade Barriers

After WWII, countries reduced taxes/tariffs on imports.

International Economics

The branch of economics that studies trade, investment, and financial interactions between countries.
Example: Canada exporting oil to the U.S.

Absolute Advantage

Definition: When a country can produce a good more efficiently than another country. (Adam Smith, 1776)
Example: Saudi Arabia producing oil cheaper than most countries.

Comparative Advantage

Definition: When a country specializes in producing goods it can make at a lower opportunity cost. (David Ricardo, 1817)

A country should specialize in what it produces MOST efficiently.

Even if it’s not the best at everything.

Example:

Brazil focuses on coffee.
Japan focuses on electronics.

Both trade and benefit.

Global Institutions

Definition: Organizations that regulate and manage international economic and political relations.
Example: The WTO setting global trade rules.

WTO (World Trade Organization)

World Trade Organization
Definition: Organization that polices world trade systems and ensures countries follow trade agreements.
Example: The WTO settling trade disputes between the U.S. and China.

IMF (International Monetary Fund)

International Monetary Fund
Definition: Gives loans to countries with money problems.
Example: Helping a country during a financial crisis.

World Bank

World Bank
Definition: Gives low-interest loans to help poorer countries grow.
Example: Paying for roads or schools in developing countries.

United Nations (UN)

Definition: Organization that works for peace and cooperation.
Example: Peacekeeping missions.

Globalization of Markets

Definition: Countries buying and selling the same products worldwide.
Example: Starbucks and mcdonalds in many countries.

Globalization of Production

Definition: Companies making products in different countries to save money.
Example: iPhones made in China.

Companies MAKING products in different countries.

Example:

Nike shoes made in Vietnam.

GOOD vs BAD OF GLOBALIZATION

GOOD

• cheaper products

• more trade

• more jobs created

• countries grow economically

• poverty decreases overall

BAD

• some workers lose jobs

• inequality can increase

• environmental problems

• countries depend too much on each other

Foreign Direct Investment (FDI)

Investing resources in business activities outside the firm's home country.

Multinational enterprise

An MNE is a company that owns or controls productive activities (like factories, offices, or service centers) in more than one country.

mini multinationals

small-to-medium-sized businesses and startups that operate internationally from their inception.

Why do firms engage in globalization of production?

• Lower labor costs

• Lower energy costs

• Lower transportation costs

• Improve quality

• Access specialized resources

• Increase competitiveness

What are the main arguments FOR globalization

• Economic growth

• Lower prices

• More jobs created globally

• Faster technology transfer

• Increased innovation

• Poverty reduction

What are the main arguments AGAINST globalization?

• Outsourcing

• Income inequality

• Loss of manufacturing jobs

• Environmental concerns

• Supply-chain dependence

• Loss of national sovereignty

Trade Barriers

Definition: Rules that make trade harder between countries.
Example: Taxes and tariffs on imported goods.

Moore’s Law

Definition: Computer technology gets faster and cheaper over time.
Example: New phones being more powerful every year.

Drivers of Globalization

Definition: Things that make globalization grow.
Example: Internet, planes, and lower trade barriers.

Global Supply Chain

Definition: Different countries helping make one product.
Example: A car using parts from many countries.

Hedging

Definition: Protecting against financial risk.
Example: Buying fuel early before prices rise.

Gini Coefficient

Definition: Measures how unequal wealth is in a country.
Example: A high score = rich people have much more money than poor people.

Benefits of Globalization

Definition: Good effects of globalization.
Example: Lower prices and more jobs.

Problems with Globalization

Definition: Bad effects of globalization.
Example: Some workers lose jobs because companies move factories overseas.

Political System

Definition: How a country is governed.
Example: Democracy in Canada.

Collectivism

Definition: The group is more important than the individual.
Example: Government controlling businesses.

Socialism

Government controls major industries/businesses.

Idea:
Resources should benefit everyone.

Problems:

• inefficiency

• corruption

• less motivation

Communism

Definition: Extreme socialism with total government control.
Example: Old Soviet Union.

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Social Democracy

People choose leaders through voting.

Features:

• elections

• freedom of speech/expression

• free media

• fair courts

Example:

Canada, U.S.

Democracy

Definition: People choose their government through voting.
Example: Elections in the U.S.

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Representative Democracy

Definition: People elect leaders to make decisions for them.
Example: Parliament in the UK.

Totalitarianism

One ruler or party controls EVERYTHING.

Features:

• censorship

• no real elections

• limited freedoms

• political repression

Example:

North Korea.

Communist Totalitarianism

Government controls economy + politics.

Example:
Stalin’s USSR.

Theocratic Totalitarianism

Religion controls government.

Example:
Iran.

Tribal Totalitarianism

Definition: One tribe or ethnic group controls power.
Example: Certain dictatorships in Africa.

Right-Wing Totalitarianism

Definition: Economic freedom exists, but political freedom is limited.
Example: Chile under Pinochet.

Pseudo-Democracy

Definition: Looks democratic but freedoms are limited.
Example: Elections happen but are unfair.

Laissez-Faire

Definition: Government stays out of the economy as much as possible.

Pure capitalism.
Example: Businesses making their own decisions.

Market Economy

Definition: People and businesses mostly control the economy.
Example: The U.S. economy.

Command Economy

Definition: Government controls the economy.
Example: North Korea.

GDP

Total value of goods and services produced in a country.

PPP-Purchasing Power Parity

: GDP adjusted for cost-of-living differences

HDI-human development index

Human Development Index measuring quality of life

big mac index

is a lighthearted economic tool created by The Economist in 1986 to measure Purchasing Power Parity (PPP) between different currencies. It operates on the theory that exchange rates should adjust to equalize the cost of an identical basket of goods worldwide

What conditions are necessary for long-run economic growth?

• Property rights

• Innovation

• Entrepreneurship

• Education

• Stable legal system

• Market-oriented reforms

Deregulation

reducing or removing government rules and restrictions on businesses and industries.

The idea is that with fewer regulations, companies have more freedom to compete, innovate, and operate efficiently.

Privatization

government-owned business or service is sold to or taken over by private companies or investors.

Why countries privatize

✅ Increase efficiency
✅ Reduce government spending
✅ Raise money from selling the business
✅ Encourage competition

Possible drawbacks

❌ Higher prices for consumers
❌ Job cuts to reduce costs
❌ Less focus on public service and more focus on profit

CULTURE

Q: Culture?
A: Shared values and norms creating a design for living.

Q: Society?
A: Group sharing common values and norms.

Q: Social mobility?
A: Ability to move between social classes.

HOFSTEDES cultural dimensions

explain how cultures differ across countries and how that affects business behavior.

The main idea

👉 Different countries have different cultural “rules”
👉 These differences affect how people work, lead, and do business

The 4 main dimensions of Hofstedes cultural dimensions

• Power Distance: How much people in a country accept unequal power between bosses and employees.

• Individualism vs Collectivism: Whether people focus more on personal goals (“me”) or group goals (“we”).

• Masculinity vs Femininity: Whether a society values competition and success or caring and quality of life.

• Uncertainty Avoidance: How comfortable people are with uncertainty and how much they prefer rules and structure.

Which religion was not founded by one individual?

Hinduism.

Foreign Corrupt Practices Act

This is a U.S. law that makes it illegal for U.S. companies and individuals to bribe foreign government officials in order to gain or keep business.

Utilitarianism

Choose the action producing the greatest good for the greatest number.

Kantian Ethics

people should always be treated with respect and dignity, never used merely as a tool to achieve someone else's goals.

Righteous Moralist

a company should follow its home country's ethical standards wherever it operates in the world, even if local customs or laws are different.

Naive Immoralist

if local companies in a country engage in a practice, then a multinational company should do it too—even if the practice would be considered unethical at home.

Mercantilism

a country becomes wealthy by exporting more goods than it imports and accumulating wealth (historically gold and silver).

Main Idea

📦 Export more than you import = wealth increases

does not support free trade and minimal government intervention

Mercantilists viewed trade as what?

A zero-sum game.

basically meaning: 📊 Win = someone else loses the same amount

Who created Absolute Advantage?

Adam Smith.

Producing a product more efficiently than another country.

Who created Comparative Advantage?

David Ricardo.

Specialize in what has the lowest opportunity cost.

Comparative advantage says trade is what?

Positive-sum game.

MEANING

a situation where everyone involved can benefit, so the total gains are greater than the total losses (the “pie” actually gets bigger).

Heckscher-Ohlin Theory

based on factor endowments=what a country “has a lot of” to produce things

Countries export goods that use their abundant (plentiful) resources and import goods that use their scarce resources.

👉 Countries sell what they have a lot of
👉 Countries buy what they don’t have much of

weakness of Heckscher-Ohlin Theory

Leontief Paradox challenged it

the finding that the U.S. (capital-abundant country) exported labor-intensive goods instead of capital-intensive goods, contradicting Heckscher–Ohlin theory.

“America was supposed to export machines… but exported people-work stuff instead.”

Product Life Cycle Theory-Raymond Vernon.

explains how a product’s production and trade patterns change over time as it moves through different stages of its life.

• Intro: Made and sold in developed countries

• Growth: Demand rises, spreads to other rich countries

• Maturity: Production shifts to cheaper countries

• Decline: Mostly made in developing countries

Simple idea:

Products start in rich countries, then production moves to cheaper countries as they become common.

Free Trade

Free trade means countries can buy and sell goods and services between each other with very few or no government restrictions.

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Simple idea

🌍 Trade is allowed to flow freely across borders

Why it’s used

✅ Lower prices for consumers
✅ More variety of goods
✅ More competition
✅ Countries specialize in what they do best

countries also all gain

New Trade Theory

👉 Countries may specialize in certain industries just because producing more lowers costs (economies of scale)
👉 Then they trade those similar products with each other

📉 The more you produce, the cheaper each unit becomes

So countries:

• Focus on producing a few things in large quantities

• Trade with other countries doing the same

New Trade Theory focuses on what

Economies of scale- each unit becomes cheaper

and first-mover advantages.

Economies of Scale

👉 The more you produce, the cheaper each unit becomes

Why?

Because fixed costs (machines, factories, setup) get spread out over more units.

First-Mover Advantage

👉 The first company/country to enter a market gets a big advantage over others.

Why?

Because they can:

• Build strong brand recognition

• Lock in customers early

• Gain experience and efficiency

• Take control of the market before competitors arrive

Why do similar countries still trade with eachother?

New Trade Theory

Porters Diamond

A country becomes competitive in an industry because of 4 interacting factors (the “diamond”).

1. Factor conditions

👉 Resources a country has
(like skilled workers, tech, infrastructure)

2. Demand conditions

👉 How demanding local customers are
(hard customers = better products)

3. Related industries

👉 Strong suppliers and support businesses nearby

4. Firm rivalry

👉 Strong competition between companies at home
(more competition = better firms)

all these things together= a strong industry

Who created Porter's Diamond?

Michael Porter.

What is protectionism?

Government policies that restrict imports to protect domestic industries from foreign competition.

What are the main tools of protectionism?

• Tariffs (taxes on imports)

• Quotas (limits on import quantity)

• Subsidies (government support to domestic firms)

Why do countries use protectionist policies?

• Protect domestic jobs

• Support infant industries

• National security concerns

• Reduce dependence on foreign countries

What is a tariff?

A tax placed on imported goods that raises their price to make domestic goods more competitive.

Quota

A limit on the number of imported goods allowed into a country.

What is a subsidy in trade policy?

Government financial support to domestic firms to help them compete with foreign producers.

Protectionism vs Free Trade

• Protectionism = restrict imports to protect domestic industries

• Free trade = no barriers; allows goods/services to move freely between countries

What is one disadvantage of protectionism?

• Higher prices for consumers

• Less efficiency

• Less competition → weaker innovation

• Possible trade retaliation from other countries