Global Environment of Business Exam 3

What is trade?

The exchange of one thing for something else.

What is international trade?

Exchange that takes places across borders

What are Exports?

Goods/services produced domestically and sold abroad

What are Imports?

Goods/services produced abroad and sold domestically

Pre 1800 - volume of international trade was very _______?

low

Pre - 1800 most international trade was driven by ___________?

colonialism

What was the first wave of globalization?

Mid - 19th century

What caused the first wave of globalization?

Technological advances

Most of the trade during the first wave of globalization was done between _________________?

European countries

When was the second wave of globalization?

Post - WWII

What is a primary good?

Good that is available from cultivating raw materials without a manufacturing process.

What are some examples of primary goods?

Agriculture, fishing, mining, and forestry

What is an intermediate good?

Components and parts which cross national borders before being made into final products?

What are some examples of intermediate goods?

Auto parts, semiconductors

What are final goods?

Consumer goods

What are some examples of final goods?

Food, beverages, phones, etc.

Why do countries trade?

Trade helps countries obtain items they cannot produce.

What is Mercantilism?

An economic philosophy advocating that countries should simultaneously encourage exports and discourage imports.

What is the purpose of mercantilism?

Building a wealthy and powerful state.

When and where was mercantilism prominent?

Western Europe from the 16th century until the end of the 18th century.

Why did mercantilism peak during the 16th century through the 18th century?

1. Military conflict between nation-states

2. Governments sought enough currency to support a full time military to:

   1. deter attacks from other countries

      1. Help in territorial expansion.

In mercantilisms governments wanted __________ to support militaries?

currency

Mercantilists argued that the benefit of foreign trade was the importation of ___________ and ___________?

gold and silver

Does mercantilism seek a favorable balance of trade?

Yes

What is a favorable balance of trade?

Balance of trade = exports - imports

What is a trade surplus?

Exports > Imports = Trade Surplus

What is a Trade Deficit?

Exports < Imports =

How does government intervention achieve surpluses and deficits?

1. Subsidies to encourage exports

2. Tariffs to restrict imports

Mercantilism views trade as a _____________?

zero-sum game

Mercantilism’s zero—sum view of trade was challenged by ________________ and later by David Ricardo?

Adam Smith

When did Adam Smith publish The Wealth of Nations?

1776

What is free trade?

The absence of barriers to the free flow of goods and services between countries.

Smith argued that __________ and _________ improves efficiency?

specialization and trade

What is mean when a country has an absolute advantage?

When a country can produce a good using fewer inputs than another country.

When does a country have a comparative advantage?

When it can produce a good at a lower opportunity cost than another producer.

_____________ forms the basis of international trade economics?

Comparative advantage

What is the job argument for free trade?

This argues that free trade destroys domestic goods.

What is the unfair competition argument?

Argues that free trade is only desirable if all countries play by the same rules.

What is money?

The stock of assets that can be readily used to make transactions.

What is the foreign exchange market?

A market for converting the currency of one country into that of another country.

What is the exchange rate?

The rate at which one currency is converted into another.

What are the two primary functions of the foreign exchange (FX) market?

1. Currency conversion

2. Insuring against foreign exchange risk

What is foreign exchange risk?

Risk that changes in exchange rates will hurt the profitability of a business’ international operations.

What is the spot exchange rate?

The exchange rate at which a foreign exchange dealer will convert one currency into another that day.

Do spot rates ever stay the same?

No, they change continually

What is the law of one price?

This states that identical products sold in different countries must sell for the same price when their price is expressed in the same currency.

What is arbitrage?

The act of buying an item in one market and selling it at a higher price in another market to profit from the price differential between two markets.

What is purchasing power?

The ability to buy goods and services.

What is PPP exchange rate?

The exchange rate that equalizes the purchasing power of different currencies, by eliminating the differences in price levels between countries.

What is inflation?

An increase in the overall level of prices

What is the gold standard?

A system where a country fixes the price of their domestic currency to a specific quantity of gold and guarantees convertibility.

What two points did proponents of the gold standard argue for?

1. Balance-of-trade equilibrium

2. Monetary Policy Constraint

What is the Balance-of-Trade Equilibrium?

When the income of a country’s residents earn from exports equals the money residents pay for imports.

Why did the gold standard go away?

In 1914, the start of WWI, due to governments having to print more money to finance military expenditures.