International Business, Trade Theories, and Foreign Exchange Review

Comprehensive practice exam flashcards covering international trade theory, foreign direct investment, exchange rate dynamics, trade instruments, and balance of payments.

What theory did Raymond Vernon propose based on the observation that the wealth and size of the U.S. market in the 1960s provided an incentive to develop new consumer products?

Product-life cycle theory

As the first online auction site that continues to be widely used worldwide, what type of advantage did eBay benefit from?

First-mover advantages

A running shoe manufacturer faces high consumer pressure to create the best quality shoes and constantly innovate with new designs. Which aspect of Porter's diamond does this demonstrate?

Demand conditions

Which term indicates that the units of resources required to produce a good are assumed to remain fixed no matter where one is on a country's production possibility frontier?

Constant returns to specialize

Which trade theory justifies limited government intervention to support the development of certain export-oriented industries?

New trade theory

Which trade theory is reflected when a nation encourages the production of goods for exporting and domestic needs, thereby relying less on imports?

Mercantilism

According to Michael Porter, which type of factor endowment is classified as an advanced factor?

Technological know-how

What was the primary goal of government intervention under the mercantilist doctrine?

To achieve a surplus in the balance of trade

Why might a country become dominant in the export of a good according to new trade theorists?

Simply because it was lucky to have a firm that was the first to produce the good

Which approach suggests that nations may benefit from trade even when they do not differ in resource endowments or technology?

New trade theory

A tax of 25 cents levied on each imported ceramic plate is an example of what type of trade barrier?

A specific tariff

When the Trump administration imposed tariffs on foreign steel and aluminum, it was the first time since 1986 that what issue was used as a primary justification?

National security issues

What is it called when a country does not allow the export of certain products?

An export ban

What was the multilateral agreement established in 1947 to liberalize trade by eliminating tariffs, subsidies, and import quotas?

General Agreement on Tariffs and Trade (GATT)

How did the Smoot-Hawley Act divert consumer demand away from foreign products?

It implemented tariffs in almost every industry.

A direct restriction placed on the amount of bananas that may be imported into a country is an example of which trade policy instrument?

Import quota

What is one primary focus of strategic trade policy?

To help domestic companies gain a first-mover advantage

What is an important implication of trade barriers for business practice?

They limit a firm's ability to serve a country from locations outside of that country.

What benefit does a tariff rate quota provide to imports within the specified quota?

A lower tariff rate

A government contract requiring that at least 37 percent of the value of office chairs be produced in the U.S. is an example of what?

A local content requirement

What term describes the situation when two or more enterprises encounter each other in different regional markets, national markets, or industries?

Multipoint competition

Why would a company like Conventions to Kitchens purchase an existing foreign company rather than establishing a new operation when under a strict time constraint?

Mergers and acquisitions are quicker to execute than greenfield investments.

Under what condition would a country following the pragmatic nationalist view permit foreign direct investment (FDI)?

FDI should be allowed so long as the benefits outweigh the costs.

According to the eclectic paradigm, what factor is of considerable importance in explaining both the rationale for and direction of FDI?

Location-specific advantages

When is licensing a good option for entering a foreign market?

When tight control of the foreign operation is not required

What form of FDI involves establishing a completely new operation in a foreign country?

A greenfield investment

What type of effect occurs when an FDI project provides jobs that raise local income levels and allow domestic entrepreneurs to open stores and restaurants?

An indirect effect

What is created when a country imports more goods than it exports?

A trade deficit

What metric represents the amount of foreign direct investment undertaken over a one-year time period?

Flow of FDI

What is the stock of FDI?

The total accumulated value of foreign-owned assets at a given time

What is the highest level of economic integration a country can enter into?

A political union

Why did Mexico insist during NAFTA negotiations that its oil industry be controlled by MexiCompany?

It wanted to maintain national sovereignty.

How does the creation of a single market impact businesses in terms of price competition?

It increases price competition, creating a threat for businesses.

Which European Union body debates legislation proposed by the commission and serves primarily as a consultative body?

European Parliament

According to economists, what determines the benefits of regional integration?

The amount of trade creation

What business implication of adopting the euro is demonstrated when customers cross borders within the eurozone to buy cheaper construction equipment?

It makes it easier to compare prices across Europe.

Which level of economic integration has no trade barriers among members, a common external trade policy, and free mobility of production factors, but lacks a common currency?

Common market

What was the primary purpose of the Single European Act?

To remove all impediments to the formation of a single market

Why are labor and capital allowed to move freely within a common market?

Because there are no restrictions on cross-border flows of capital.

What is Mercosur?

A pact among Argentina, Brazil, Paraguay, and Uruguay to establish a free trade area.

What is the bandwagon effect in financial and currency markets?

When traders all move in the same direction and at the same time, in response to each other's perceived actions.

What is an efficient market?

A market in which prices reflect all available public information.

What type of transaction occurs when two parties agree to exchange currency and execute the deal at a specific future date?

A forward exchange

What is the spot exchange rate?

The rate at which a foreign exchange dealer converts one currency into another currency on a particular day.

What activity is a company engaging in when it buys securities on the London Stock Exchange and immediately resells them on the New York Stock Exchange at a higher price?

Arbitrage

What does the Fisher effect state?

There is a strong relationship between inflation rates and interest rates.

If a trader borrows Chilean pesos at $4\%$ interest, converts them to British pounds, and deposits them in a British bank at $8\%$ interest, what transaction is being conducted?

A carry trade

Paying a foreign supplier in advance because their currency is expected to appreciate is an example of which foreign exchange strategy?

A lead strategy

Delaying the collection of foreign currency payments from customers because that foreign currency is expected to appreciate is an example of which strategy?

A lag strategy

What is economic exposure risk?

The extent to which a firm's future international earning power is affected by changes in exchange rates.

Under what condition could the Bretton Woods system no longer work?

If the U.S. ran a balance-of-payments deficit.

Under the gold standard, what does the fixed amount of currency needed to purchase one ounce of gold represent?

Gold par value

What type of exchange rate system continuously adjusts exchange rates based on the laws of supply and demand?

A floating exchange rate system

What does a country suffer from when it is in a state of fundamental disequilibrium?

Permanent adverse shifts in the demand for their products.

What term describes reckless behavior by companies that act recklessly because they know they will be saved if things go wrong?

Moral hazard

What type of crisis occurred during the Great Depression when lines of people stood at institutions to withdraw money because they lacked trust?

A banking crisis

What two mechanisms in the IMF Articles of Agreement provided the flexibility needed to help avoid high unemployment?

Lending facilities and adjustable parities

How can a multinational manufacturing company hedge against unpredictable currency fluctuations through operations?

By dispersing production to different locations around the globe.

What happened to the U.S. dollar after the Group of Five determined in 1985 that major currencies should appreciate against it?

The dollar continued to decline.

When is a country said to be in balance of trade equilibrium?

When the income its residents earn from exports is equal to the money its residents pay to other countries for imports.

What are the core tenets of the Theory of Mercantilism?

Countries should prioritize exports over imports; success is defined as having exports exceed imports, and exports serve as an extension of the economy.

What does Adam Smith's Theory of Absolute Advantage state?

A country has an absolute advantage when it is more efficient in producing a product compared to another country.

What is the Theory of Comparative Advantage?

A measure of productivity where a country specializes in the production of goods that it makes most efficiently.

What is the premise of the Heckscher-Ohlin theory?

Countries will export goods that utilize their abundant factor endowments and proper resources.

What was the finding of the Leontief paradox?

U.S. exports were less capital intensive than U.S. imports, contradicting the expectation that the U.S. would export capital-intensive goods and import labor-intensive goods.

According to new trade theory, what is the most important criterion for trade advantage?

Economies of scale, which give big firms a unique advantage.

What is the core idea of the International Product Life Cycle Theory?

Trade can be explained through stages a company goes through, showing how manufacturing migrates from one region to another.

Describe the first phase of the product life cycle.

A firm comes up with an innovative product that does well, typically in a highly developed economy.

Describe the second phase of the product life cycle.

The firm expands into other markets and is introduced to new competitors, where new local competitors hold a transportation advantage.

Describe the third phase of the product life cycle.

The firm builds manufacturing plants in other countries to negate the advantage held by local competitors.

Describe the fourth phase of the product life cycle.

Competition is driven by price, prompting firms to look for cost havens to produce at the lowest cost and serve markets previously supplied from the home country.

What are the four components of Porter's diamond of national competitive advantage?

1. Factor endowments (basic and advanced)
2. Firm strategy, structure, and rivalry
3. Related and supporting industries
4. Demand conditions

What is the central thesis of Hymer's theory of international production?

Multinational companies expanded abroad because they were able to create highly efficient internal markets operating in less efficient or less developed foreign markets.

What are the three core components transferred by multinational enterprises?

Capital, Technology, and Advanced managerial skills/capabilities

What are internalization/intra-company transfers?

A giant internal market that the firm owns and operates through having operations in other less developed countries.

What are Balance of Payments Accounts?

Records of all transactions between a country and the rest of the world.

What transactions are recorded in the Current Account?

A list of all transactions surrounding the export and import of goods and services.

In the current account, how do exports and imports affect the flow of funds?

Exports generate an inflow of funds, while imports generate an outflow of funds.

What transactions are recorded in the Financial Account?

Transactions that involve the purchase or sale of assets.

In financial accounting terms, what is an inflow of funds considered, and what is an outflow considered?

An inflow of funds is a source; an outflow of funds is a use.

If Japan builds a facility in Canada for $1\,\text{billion}$, is it recorded in the current account or the financial account?

Financial account, as it represents a sale/purchase of assets.

If Japan builds in Canada for $1\,\text{billion}$, who is exporting capital and who is importing capital?

Exporting capital = Japan ($-1\,\text{billion}$); Importing capital = Canada ($+1\,\text{billion}$).

Between tariff barriers and non-tariff barriers, which are easier to identify and which are more difficult?

Tariff barriers are easier to identify; non-tariff barriers are difficult to identify.

What are the political arguments for government intervention in trade?

Protecting jobs and industries, national security, and retaliation.

What are the economic arguments for government intervention in trade?

The infant industry argument and strategic trade policy.

What is the infant industry argument, and what is its major drawback?

It offers temporary protection so that an industry can develop and become efficient; its drawback is that protection is hard to withdraw due to potential job losses.

If the U.S. acquires a manufacturing plant from Portugal for $1\,\text{billion}$, who has outward FDI and who has inward FDI?

The U.S. has outward FDI (and is the creditor); Portugal has inward FDI (and is the debtor).

What are the three ideological views on foreign direct investment (FDI)?

1. Free market view: FDI will create wealth.
2. Radical view: FDI is destructive.
3. Pragmatic nationalism: There are both benefits and costs to FDI.

What are the major host country benefits of FDI?

Resource transfers, employment effects, balance-of-payments effects, and increased competition and growth.

What are the host country costs associated with FDI?

Adverse effects on competition, adverse effects on the balance of payments, and perceived loss of national sovereignty and autonomy.

What is the primary benefit of FDI for the home country's balance of payments?

The balance of payments benefits from the inward flow of foreign earnings.

What is Economic Integration (EI)?

A series of arrangements between two or more countries to dismantle barriers to trade and investment, ranging from least restrictive to highly restrictive.

Why do countries pursue Economic Integration (EI)?

To achieve economies of scale, where cost per unit decreases as production volume increases.

What is the relationship between the size of a domestic market and its reliance on international trade and investment?

An inverse relationship.

True or False: Just because a country is homogeneous means that its markets are going to be standardized.

False (the note confirms: just because a country is homogeneous does not mean that markets are going to be standardized).

What is Trade Creation versus Trade Diversion?

Trade Creation occurs when low-cost member producers replace high-cost domestic producers. Trade Diversion occurs when higher-cost member suppliers replace lower-cost non-member external suppliers.

What is Transaction Risk Exposure?

The extent to which income from individual day-to-day transactions is affected by fluctuations in foreign exchange values.

What is Translation Risk Exposure?

An accounting/bookkeeping requirement measuring the impact of exchange rate changes on the reported consolidated financial statements of a company.

What monetary action should be taken when there is a domestic loss in purchasing power?

Increase the interest rate.

What type of relationship exists between domestic inflation and the valuation of an exchange rate?

An inverse relationship.