MGMT 450 Exam 1

Globalization Definition =

The socioeconomic reform process aimed at reducing or eliminating barriers to international trade, investment, technology, and even cultural and political systems

Globalization Core Principle =

Based on free enterprise, open markets, and economic liberalization

Globalization Key Goal =

Promote integration and interdependence among nations

Why does globalization matters?

Countries engaging in globalization typically experience faster economic growth, increased trade, greater consumer choice, more investment and innovation

Specialization =

Countries export what they’re best at producing and import what they lack. Expands consumer choices and reduces costs

Foreign Direct Investment (FDI) =

Encourages capital flow across borders. Supports job creation and infrastructure development

Technology Transfer =

Sharing of knowledge and innovation

The National Income Identify Equation =

Y = C + I + G + (X - M)

Y =

GDP is the total value of all goods/services produced by country

C =

Consumption by households

I =

Investment (public and private, including FDI)

G =

Government spending

(X - M) =

Net Exports

Globalization (X - M) =

Global trade increases exports, reduces trade barriers

Globalization I =

Attracts foreign direct investment (FDI)

Globalization C & G =

Growth from trade and investment increases incomes, employment, and tax revenue, indirectly fueling consumption and government capacity

Economic Reforms =

Open markets, privatize industries, reduce trade/investment barriers

Globalization Benefits =

Increased exports, higher FDI from open capital markets, improved productivity and competitiveness

Remove trade barriers =

(X - M) up

Liberalize Capital Markets =

I up

Improve education/skills =

C & I up

Deregulate markets =

I up

Globalize Metrics that Matter =

Merchandize trade as a % of GDP, Net FDI inflows, GDP growth rates (annual %)

World trade as a % of GDP almost tripled during _______. ______ is the leader in trade.

1960-2023, ASEAN

Investment =

Job creation, tech transfer, tax revenue, and skill development

Developed Economies =

EU, G-7, slower growth, aging populations, low productivity gains

Emerging Economies =

BRICS+, ASEAN, ~50% faster growth, younger labor force, greater room for reforms and efficiency gains

Challenges faced by workers =

Job displacement in blue-collar sectors, wage stagnation and regional decline, income inequality rise

Strategic Responses for Firms and Policymakers =

Invest in work retraining and vocational education, improve national infrastructure, adopt inclusive corporate governance

Mercantilism =

Maximizing holding of gold and silver, promoting exports, discouraging imports

Goal of Mercantilism =

Export > import to hoard gold/silver

Result of Mercantilism =

Depressed wages, poorer exporters, citizen welfare ignored

Theory of Absolute Advantage =

Adam Smith, Wealth of Nations: Mercantilism squanders a country’s resources, reduces wealth, countries need to specialize, export what is more productive

Theory of Comparative Advantage =

David Ricardo, trade is mutually beneficial, even if one country is better at everything, opportunity cost matters, export what is relatively more productive, import what is relatively less productive

Heckscher-Ohlin (H - O) Theory =

Cause of trade: differences in factor endowments, countries export goods that intensively use their abundant factors of production

Factor - Price Equalization Theorem =

Free trade = tendency for wages, rents, and returns on capital, explains rising wages in emerging economies and narrowing global income gaps

What are the two reasons tariffs are imposed?

Raise revenue for the national government, act as trade barriers

Three types of tariffs =

Export, transit, import

Three types of Import Tariffs =

Ad Valorem, Specific, Compound

Quotas =

A numerical limit on the quantity of a good that may be imported into a country during a certain period, put in place to protect domestic industries or vulnerable producers

Rules of Origin (ROOs) were designed to prevent…

Trade deflection

Tariff Pros =

More transparent and predictable, revenue goes to the government, less prone to corruption or favoritism

Quota Cons =

Profits go to importers or foreign exporters, not the domestic government, can lead to smuggling, less flexible - fixed quantity doesn’t adjust to market changes

Why do economists prefer tariffs?

Market adjusts naturally to price-based controls, encourages competition, maintains consumer access, avoids arbitrary limit-setting and allocation problems

When Quotas might be used?

In emergency protection of domestic industries, to manage critical resource shortages

Tariff Rate Quotas =

Promoted by WTO, purpose: to transform a quota into a tariff

Subsidies represent…

Unfair trade practices as per rules of the WTO because they distort market efficiences

Multiple Exchange Rate Systems =

Trade distortions meant to give preference to certain types of exports or imports

Minimal Government Influence =

Free Trade

Active Government Intervention =

Protectionism

Protectionism =

Managed trade, maintains elements of free trade, adds targeted restrictions to address domestic priorities

Countertrade =

To avoid embargo

Export Cartels =

To stabilize national income

Diversifying Supply Chains =

Onshoring, nearshoring, friendshoring

Health and Safety =

To protect citizens

Industrial Policies =

To support/develop specific industries

Infant - Industry Argument =

To protect infant industries

Labor and Environmental Concerns =

To deal with unethical business practices

Geoeconomics =

Interplay of international economics, geopolitics, and strategy

Foreign Portfolio Investments (FPI) =

Passive holding of securities

Foreign Direct Investments (FDI) =

Acquisition of foreign assets for the purpose of control

Macroeconomic Factors that Attract FDI =

High GDP growth potential, market-oriented reforms and political stability, large, young populations, privatization and restructuring of state-owned firms

Top Sectors for FDI in 2022 =

Renewable energy, coal, gas, and oil, semiconductors and EV batteries

Greenfield FDI =

Drives job creation, innovation, and tax revenue

Friendshoring =

Firms diversify supply chains away from geopolitical rivals

Balance of Payments (BOP) =

A country’s financial statement with the world, records all flows of goods, services, income, and investments, shows how much a country earns vs. spends, and borrows vs. lends

Current Account =

Trade in goods/services, primary income, secondary income

Capital Account =

Transfers of non-produced assets

Financial Account =

FDI and portfolio investments, hot money flows and derivatives, finances current account deficits/surpluses

Errors and Omissions =

Adjusts for timing gaps, illegal/unrecorded trade

International Reserves =

Foreign Exchange (FX) holdings, gold reserves, special drawing rights

Why do International Reserves matter?

Support currency stability and foreign payments, used during BOP crises or external shocks, critical for emerging/developing economies without reserve currencies

What is the Rules-Based International Order?

Framework based on capitalism and free markets, private initiative, multilateral institutions that promote good governance, competitive markets, property rights, anti-corruption policies

Why does the Rules-Based International Order matter?

Replaced arbitrary international politics with structured global cooperation, anchored in sound economic theory and institutional collaboration, not just international law

When was the UN founded and what is its purpose?

1945, after WWII by 51 countries (now 193), maintain international peace and security, promote human rights, provide humanitarian aid and uphold international law

Main UN Organs =

General Assembly, Security Council, ECOSOC, Intl., Court of Justice and Secretariat, programs and funds, specialized agencies, related organizations

General Assembly =

The main discussion body where all 193 member states vote and debate global issues

Security Council =

Responsible for maintaining international peace and security

ECOSO =

Coordinates international economic and social efforts, including development and sustainability

International Court of Justice =

Settles legal disputes between countries and provides advisory legal opinions

Secretariat =

Carries out the day-to-day work of the UN

IMF’s Core Objectives =

Promote international monetary cooperation, facilitate global trade and economic growth, discourage harmful policies like protectionism and excessive debt

Bretton Woods System =

Fixed exchange rates tied to U.S. dollar

Why Multilateralism Stalled =

Frustrations with decision-making power and slow reforms

IMF’s Role in Regionalism =

Still supports regional blocs by offering policy advice and research, lending support during regional financial crises, promoting stability that underpins regional integration

Regional Trade Agreements (RTAs) =

Faster negotiation and implementation, regional customization of trade rules, more control over enforcement and dispute settlement

Postwar Trade Framework =

Focused on reducing tariffs and quotas but only for manufactured goods

WTO talks failed due to…

Political interference, influence of special interests, lack of flexibility for diverse economies

Five Progressive Levels of Integration =

Free trade area, custom union, common market, economic union, political union

Free Trade Area =

Remove tariffs/quotes on goods between members

Custom Union =

Common external tariffs on non-members

Common Market =

Free movement of goods, services, labor, and capital

Economic Union =

Shared fiscal and monetary policy

Political Union =

Unified political and economic system; supranational governance

Key Insight of Regional Economic Integration =

Countries choose the depth of integration based on shared goals, trust, and willingness to pool sovereignty

Why did regionalism emerge?

Slow and unequal progress in multilateral negotiations

What are these new blocs doing?

Making their own rules for trade, investment, and development

EU =

Most advanced union; single market, shared policies

ASEAN =

Diverse, fast-growing Southeast Asian economies

USMCA =

North American trade bloc