Exam 2 Study Flashcards
(16 cards)
Protectionism
The collective, governmental actions to influence international trade
Problems with infant-industry argument
First, governments must identify those industries that have a high probability of success, and this is hard.
Second, the security of government import protection may deter managers from adopting the cost and quality measures needed to compete.
Third, if a protected industry fails to become globally competitive, its affected stakeholders may successfully prevent the imports that benefit consumers.
Tariff
o Tariff: A tariff is a tax imposed on imported goods, making them more expensive relative to domestic products.
Advantages:
* Revenue Generation: Tariffs can provide revenue for the government.
* Protection of Domestic Industries: By making imports more expensive, tariffs can encourage consumers to buy domestically produced goods.
* Job Protection: They can help protect local jobs in industries that may be threatened by foreign competition.
Disadvantages:
* Higher Prices for Consumers: Tariffs can lead to higher prices for imported goods and potentially for domestic alternatives.
* Retaliation: Other countries may impose their own tariffs, leading to trade wars.
* Inefficiency: They can encourage domestic industries to become less competitive and efficient.
Quotas
o Quotas: A quota is a limit on the quantity of a particular good that can be imported into a country.
Advantages:
* Protection of Local Industries: Quotas can help maintain market share for domestic producers.
* Market Stability: By limiting supply, quotas can help stabilize prices in the domestic market.
Disadvantages:
* Supply Shortages: Quotas can lead to shortages of goods, resulting in higher prices.
* Inefficient Resource Allocation: They can prevent resources from being used in the most efficient way, as domestic producers may not need to compete.
* Potential for Corruption: The allocation of import licenses can be subject to corrupt practices.
Subsidies
o Subsidies: A subsidy is a financial support given by the government to local businesses to lower their costs and make them more competitive.
Advantages:
* Encouragement of Domestic Production: Subsidies can promote local production and innovation.
* Lower Prices for Consumers: By lowering production costs, subsidies can help keep prices down for consumers.
* Job Creation: They can help sustain or create jobs in key industries.
Disadvantages:
* Cost to Taxpayers: Subsidies require funding, which can strain public finances.
* Market Distortion: They can lead to overproduction and inefficiency in resource allocation.
* Retaliation in Trade: Other countries may view subsidies as unfair and respond with their own trade barriers.
Levels of regional economic integration
Global integration: the unification of distinct national economic systems into one global market.
Bilateral integration: a form of integration between two countries in which they agree to cooperate more closely, usually in the form of tariff reductions but often in other areas as well.
Regional integration: a form of integration in which a group of countries located in the same geographic proximity decides to cooperate.
MFN (most favored nation)
“ trade without discrimination.”
Trade creation
Production shifts to more efficient producers for reasons of comparative advantage, allowing consumers access to more goods at lower prices than would have been possible without integration.
Trade Diversion
Trade shifts to countries in the group at the expense of trade with countries not in the group.
Exchange rate
o Definition:
The price of one currency in terms of another currency
o Appreciation:
This occurs when a currency increases in value relative to another currency. For instance, if the USD appreciates against the EUR, it means that more euros can be bought with each dollar (e.g., 1 USD = 0.90 EUR). Appreciation can make exports more expensive and imports cheaper.
o Depreciation:
This is the opposite of appreciation, where a currency decreases in value relative to another currency. If the USD depreciates against the EUR, it means fewer euros can be purchased with each dollar (e.g., 1 USD = 0.80 EUR). Depreciation can make exports cheaper and imports more expensive.
o Exports:
When a country’s currency depreciates, its goods become cheaper for foreign buyers, potentially boosting exports. Conversely, if the currency appreciates, exports may decline as they become more expensive for buyers in other countries.
o Imports:
A depreciating currency makes imports more expensive, as it takes more of the local currency to buy foreign goods. This can lead to reduced imports. On the other hand, an appreciating currency makes imports cheaper, which can increase the volume of imported goods.
Describe the International Monetary Fund and its role in exchange rate markets
o Definition:
A multi-governmental association organized in 1945 to promote exchange-rate stability and to facilitate the international flow of currencies.
o Roles:
Foster global monetary cooperation,
Secure financial stability,
Facilitate international trade,
Promote high employment and sustainable economic growth, and
Reduce poverty around the world.4
How a central bank/government keeps the exchange rate fixed
Central banks control policies that affect the value of currencies; the Federal Reserve Bank of New York is responsible for foreign exchange market operations in the United States.
International Fisher Effect
o The theory that the relationship between interest rates and exchange rates implies that the currency of the country with the lower interest rate will strengthen in the future.
o The IFE implies that the currency of the country with the lower interest rate will strengthen in the future.
Exchange rate arrangements
o The IMF surveillance and consultation programs are designed to monitor exchange-rate policies of countries and to see if they are acting openly and responsibly in exchange-rate policies.
o The IMF requires countries to identify how they base their exchange-rate policy—hard peg, soft peg, or flexible.
Define leverage and how it affects the choice of capital structure
First, excessive reliance on long-term debt raises financial risk and thus requires a higher return for investors. This was evident in Europe during the global financial crisis as companies and governments tried to raise capital through bond issues, and they either had to offer high interest rates to attract investors or they had difficulty getting any investors at all.
Second, foreign subsidiaries of an MNE may have limited access to local capital markets, making it difficult for the MNE to rely on debt to fund asset acquisition.
Eurodollar
U.S dollar banked outside the United States
