Ch 5 and 7 Quiz

Question 1

Mercantilism

Answer 1

-When a country exports its products to other countries as much as possible (by encouraging exports through its policies) but tries to import much less from other countries by discouraging imports through various import restrictions

-Exports>Imports=Trade Surplus

Question 2

Absolute Advantage

Answer 2

-Adam Smith

-A country should not attempt to make all products by restricting imports (it should not try to be self sufficient in all products it needs)

-It should make the products which it can produce more efficiently than other countries and import other products which can be produced more efficiently by other companies

-Countries would become better off by: specializing according to their Absolute Advantage and trading with one another

Question 3

Comparative Advantage

Answer 3

-David Ricardo

-Even if a country has absolute advantage in all products, countries can still benefit from international trade if they specialize according to their comparative advantage

Example: The country with absolute advantage in both products should specialize in the product, which it can produce most efficiently compared to the other country, and the other country should produce the other product

Question 4

Theories of FDI

Answer 4

-Monopolisitic Advantages
-Internalization
-Market Imperfections
-Competitive Pressures

Question 5

Theories of FDI

Monopolisitic Advantages

Answer 5

-because you believe that your company had a better product/technology/management skills/etc. than your local competitors in other countires

Question 6

Theories of FDI

Internalization

Answer 6

(NOT Internationaliation!)
-because you believe that by making your FDI in another country, instead of using licensing, you will have better control over your know-how/technology

Question 7

Theories of FDI

Market Imperfections

Answer 7

-to take advantage of more favorable wage rates, tax rates, government incentives… in other countries

Question 8

Theories of FDI

Competitive Pressures

Answer 8

-because when your competitors expand internationally your company feels the pressure to go international

Question 9

International Product Life Cycle

Answer 9

-Covers both international trade and FDI

-About the relationship between the efficient location of production of a product and the stage in the life cycle of a product
1. New Product Stage
2. Growth
3. Mature Product
4. Standardized
5. Decline

-As a product moves along the life cycle curve, efficient location of production may shift from one place to another place

Question 10

PLC Examples

Answer 10

-In the new product stage, production takes place in the U.S and there will be some exports of this product from the U.S to other countries

-Later, other developed countries will start producing this product because they will develop their own similar technologies

-Less developed countries will be more efficient locations to produce this product during the standardized/decline stage due to
*availability of technology
*their cost advantage (low wage rates)
Developing countries will be exporting this product to developed countries where the product was invented in the first place

***TV Industry is a great example (the product was invented and produced in the U.S. Now the T.V production takes place in developing countries and the product is imported into the U.S)

Question 11

Creating Competitive Advantage

Answer 11

-Countries can create or boost their competitive advantage through their policies

-Ex: Dubai (had humble beginnings)

-Through Dubai’s business friendly industrial policies it has attracted many companies (FDI and setting up offices) Many operate in the Dubai Free Trade Zone

-Undertook unique projects like hotels, towers, artificial islands, malls, beaches, and activities

Question 12

Free Trade

Answer 12

-Means unrestricted international trade (being able to export and import products without facing trade restrictions)

Question 13

Protectionism

Answer 13

-The government protection of domestic industries from foreign competition by restricting/blocking/making more expensive imports of a product coming into the country

Question 14

Why do governments restrict imports, sometimes exports, and FDI activities (inward and outward)?

Answer 14

Helping domestic companies, saving jobs, infant industry argument, national defense argument

-A country should not be reliant on other countries and that product should be produced domestically as to ensure its availability during a military conflict and health and safety concerns

Question 15

When governments decide to control internationl trade activities (mostly imports) how do they achieve their objective?

Answer 15

-Tariffs

-Nontariff restrictions
*Quotas
*Product Standards
*Import License
*Currency Controls

Question 16

Tariffs

Answer 16

-Tax on imports paid by the importer

-In some countries there may be export tariffs which is paid by exporters

-Import tariffs are more common than exports tariffs

-You would find tariff information in a publication called Harmonized Tariff Schedule

Question 17

Specific Tariff

Answer 17

-on a per unit basis

Question 18

Ad Valorem Tariff

Answer 18

value of imported product as a percentage of the value

Question 19

Compound Tariff

Answer 19

combination of specific and ad valorem tariffs

Question 20

Countervailing Duties

Answer 20

Imposed when foreign exporters recieve subsidies (various types of assistance [financial and nonfinancial]) from their governments

-Receiving subsidies from their governments allows companies to lower their export price, thereby gaining competitive advantage

Question 21

Antidumping Duties

Answer 21

Imposed when foreign exporters export their products at artificially low prices or below cost

Question 22

Nontariff Restrictions

Quotas

Answer 22

quantitative restrictions by unit, weight, or $ amount

Question 23

Nontariff Restrictions

Product Standards

Question 24

Nontariff Restrictions

Import License

Answer 24

obtaining license from government to import products

Question 25

Nontariff Restrictions

Currency Controls

Answer 25

government not making foreign exchange available to importers for imports

Question 26

World Trade Organization (WTO)

Answer 26

-Mission is to liberalize international business activities (lower tariff rates, reduce nontariff restrictions and barriers to FDI, increase the protection of intellectual property rights, etc.)

-Formerly known as GATT (general agreements on tariffs and trade)

-More than 160 countries are part of the WTO

-Serves as a venue for settlement of trade disputes betwee countries

Question 27

What is the effect of protectionist policies?

Answer 27

-Protected industries and workers in those industries benefit

-Because tariffs and quotas increase prices of imported products, protectionist policies always mean higher prices for consumers and higher costs for manufacturing companies, which have to use the protected industry’s output

-Protected policies cost a society billions of dollars in the form of higher prices and and possibly job losses in other industries

Question 28

Regional Economic Integration

Answer 28

-Integration of national economies of a group of countries by eliminating tariff and non-tariff restrictions on international trade among themselves

Objective: benefit from international trade by increasing the volume of international trade among member countries

Ex: NAFTA, European Union, Mercosur

Question 29

Types of REIS

Answer 29

-Free Trade Area
-Customs Union
-Common Market
-Economic and Political Union

Question 30

Types of REIS

Free Trade Area

Answer 30

-Loosest form of integration
-Limited to free trade among member countries

Question 31

Types of REIS

Customs Union

Answer 31

-member countries harmonize their trade policies with non-member countries, such as applying the same tariff rates

Question 32

Types of REIS

Common Market

Answer 32

-Increase the level of integration of national economies by allowing a free movement of citizens of the member countries within the REIS (so that they can travel and work in other member countries)

-Free flow of financial resources so that people and business can invest in other member countries

Question 33

Types of REIS

Economic and Political Union

Answer 33

-Ultimate stage
-Member countries harmonize more of their policies (competition policy, labor practices, same currency)

Question 34

NAFTA

Answer 34

Free Trade Area
-Only 3 countries

Question 35

Mesocur

Answer 35

Customs Union

Question 36

European Union

Answer 36

Common Market (+ more than a common market but less than a total economic and political union)

-Started with Treaty of Rome
-27 members

-Have their own common agricultural policy, designed to protect and support farmers

-Euro currency

-United Kingdom left recently

Question 37

What is the effect of REI?

Answer 37

-governments drop their protectionist policies and competition intensifies

-market sizes become larger (because companies produce for the enlarged market they become more efficient producers)

-the volume of international trade among member countries increases

-the area attracts more FDI because foreign companies would like to produce and sell in the REI, in addition to exporting it

Ex: U.S FDI in the European Union increased a lot because if a U.S company produces its products in any member country of the E.U, it can export it to all other member countries of the EU without facing trade restrictions/tariffs

Question 38

Why Pay Attention to REI’s?

Answer 38

REI’s create international business opportunities for companies from member and nonmember countries

-Increase the level of competition, especially for companies from member countries because they are no longer protected by protectionist policies of their governments