global exam 3

Regional trade agreements

amount of trade created must exceed the amount diverted and all partners benefit

trade diversion

Lower cost external suppliers replaced by higher cost suppliers in free trade area

Customs Union

Eliminates barriers to trade among members, Establishes a common external trade policy

Common Market

Eliminates barriers to trade, Common external trade policy, Allows factors of production (capital and labor) to move freely

Economic Union

removal of barriers to trade, Common external trade policy, Free movement of factors of production, Common currency, Harmonization of tax policy, Common fiscal policy

political union

No barriers to trade, Common external policy, Free movement of the factors of production, Harmonized tax, currency, fiscal policy, Central form of government

Speculation currency

high risk Hope to profit from changes in exchange rates

Arbitrage

purchasing in one currency and reselling immediately (buying low and selling higher)

Carry trade

borrowing in one currency where interest rates are low; investing proceeds in a country where interest rates are high

Swap

simultaneously buying and selling a given amount of foreign currency for two different dates (most commonly used for trade)

gold standard

value of the country’s currency or paper money has a value directly linked to a quantity of gold

Bretton Woods system

pegged value of currencies to gold, but only USD was exchangeable, fixed

gold par value

amount of currency needed to purchase one ounce of gold

floating exchange rate

foreign exchange market (supply and demand) determines relative value of currency

free Currency convertibility

government allows both residents and nonresidents to purchase foreign currency

Currency nonconvertibility

nonresidents and residents aren’t allowed to purchase foreign currency

external Currency convertibility

only nonresidents may convert into foreign currency

Bandwagon effect

investors/traders respond as a herd, moving in the same direction at the same time

ap/depreciation

currency value in/decreases

spot rate

current value of trade currency

forward rate

future value of trade currency

profit growth

percentage increase in net profits over time

profitability

rate of growth of firm’s invested capital over time (ROI)

Learning effects

cost savings that come from learning by doing

Location economies

economies arisen from valuable creation activities in optimal locations

Experience curve

systemic reductions in production costs that have been observed to occur over life of a product

transnational

standardize core operations (tailor products for locals)

global standardization

massive economies of scale

localization

adapt product to fit culture

international

domestic brand strength to drive sales with extensions of home market (centralized care with minimum customization)

global standardization

high pressure to reduce cost, low pressure for local responsiveness

transnational

high pressure to reduce cost, high pressure for local responsiveness

international

low pressure to reduce cost, low pressure for local responsiveness

localization

low pressure to reduce cost, high pressure for local responsiveness

pegged exchange rate

value of currency is fixed relative to reference currency (exchange rate between currencies determined by reference currency exchange rate)

fixed exchange rate

values of a set of currencies are fixed against each other at mutually agreed on exchange rate

premium

sold on market when expected to appreciate

discount

sold on market when foreign exchange dealers expect depreciation

Nixxon speech

Temporarily suspend convertibility to gold to stabalize dollar