International Trade Theories, FDI, and Exchange Rate Concepts

What is mercantilism?

A theory that a country should export more than it imports to build national wealth.

What is absolute advantage?

When a country can produce a good more efficiently than another country.

What is comparative advantage?

When a country specializes in goods it can produce at lower opportunity cost.

What are gains from trade?

Benefits countries get by specializing and trading with others.

What is Heckscher-Ohlin theory?

Countries export goods that use their abundant factors.

What is the Leontief Paradox?

The U.S. exported labour-intensive goods despite being capital-rich.

What is product life-cycle theory?

Products move from developed to developing countries over time.

What is new trade theory?

Trade happens due to economies of scale and first-mover advantages.

What are economies of scale?

Cost advantages from producing large volumes.

What are first-mover advantages?

Benefits gained by entering a market early.

What is Porter's Diamond?

Model explaining national competitive advantage using 4 factors.

What is FDI?

Investment in business operations in another country.

What are the two forms of FDI?

Greenfield investment and acquisition.

What is a greenfield investment?

Building new operations from scratch.

What is an acquisition?

Buying an existing company in another country.

What is the radical view of FDI?

FDI is harmful and exploits host countries.

What is the free market view of FDI?

FDI benefits both home and host countries.

What is pragmatic nationalism?

FDI is allowed only if benefits outweigh costs.

What are host country benefits of FDI?

Economic growth, technology transfer, job creation.

What are host country costs of FDI?

Loss of control and profit repatriation.

What are home country benefits of FDI?

Income from foreign markets.

What are home country costs of FDI?

Possible job loss.

What is the foreign exchange market?

Market where currencies are bought and sold.

What is a spot exchange rate?

Current exchange rate.

What is a forward exchange rate?

Agreed future exchange rate.

What is a currency swap?

Simultaneous purchase and sale of currency for future use.

What is transaction exposure?

Risk from currency changes on transactions.

What is translation exposure?

Risk from converting financial statements.

What is economic exposure?

Long-term impact of exchange rate changes on firm value.

What does the efficient market school believe?

Prices reflect all available information.

What does the inefficient market school believe?

Prices do not reflect all information.

In the short run, what predicts exchange rates?

Forward rates.

In the long run, what should be observed?

Interest rates.