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GBE UNIT 3 Flashcards

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1
Q

What are the key characteristics of capitalism?

A

Private ownership of production and property, free-market competition, emphasis on profit maximization and innovation, consumer demand drives production decisions.

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2
Q

How does capitalism impact business?

A

Ease of starting and running a business, encourages competition and innovation, access to capital markets, freedom of pricing, high responsiveness to consumer trends.

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3
Q

What are some challenges associated with capitalism?

A

Intense competition leading to monopolies, limited social safety nets, neglect of environmental and labor standards.

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4
Q

Provide an example of capitalism in action.

A

In the United States, businesses like Apple and Amazon thrive due to open markets and minimal restrictions.

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5
Q

What are the key characteristics of socialism?

A

Government ownership or control of major industries, central planning for production and pricing, focus on social welfare, limited role for private enterprises.

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6
Q

How does socialism impact business?

A

Private businesses operate in limited sectors, major sectors are state-run, emphasis on job security, price controls can restrict profitability.

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7
Q

What challenges are faced in socialist economies?

A

Inefficient decision-making due to bureaucracy, lack of competition stifling innovation, over-reliance on the state.

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8
Q

Provide an example of socialism in practice.

A

In Cuba, most enterprises are controlled by the government with minimal private business.

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9
Q

What are the key characteristics of a mixed economy?

A

Combination of private and public sector ownership, government regulation of key sectors, aims to balance growth with social justice.

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10
Q

How does a mixed economy impact business?

A

Encourages private entrepreneurship with state support, coexistence of state-owned enterprises and private firms, regulated competition ensures ethical practices.

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11
Q

What challenges exist in a mixed economy?

A

Overregulation causing bureaucratic delays, policy instability due to political shifts, public sector inefficiencies.

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12
Q

Provide an example of a mixed economy.

A

In India, private companies like Tata coexist with public enterprises like Indian Railways.

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13
Q

What are the characteristics of emerging markets?

A

Rapid GDP growth, young and growing populations, urbanization, economic reforms, increasing FDI inflows, rising technology adoption.

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14
Q

What drives economic growth in emerging markets?

A

Demographic dividend, natural resources, export-led growth, infrastructure investment, integration into global trade.

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15
Q

What are some economic development trends in emerging markets?

A

Improved living standards, investments in skill development, structural changes from agriculture to industry.

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16
Q

What challenges do emerging markets face?

A

Income inequality, corruption, vulnerability to external shocks, debt burden, environmental degradation.

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17
Q

What role do emerging markets play in the global economy?

A

Global growth engines, significant consumer markets, geopolitical influence, supply chain realignment.

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18
Q

What are the four phases of economic cycles?

A

Expansion, Peak, Contraction, Trough.

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19
Q

What characterizes the expansion phase of the economic cycle?

A

Rising GDP, low unemployment, high consumer spending.

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20
Q

What occurs during the peak phase of the economic cycle?

A

Inflation rises, interest rates increase, business growth plateaus.

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21
Q

What defines the contraction phase of the economic cycle?

A

Falling GDP, rising unemployment, reduced consumer spending.

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22
Q

What characterizes the trough phase of the economic cycle?

A

Economic activity bottoms out, stimulus policies take effect.

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23
Q

How do economic cycles affect international trade?

A

Demand fluctuations increase during expansion and decrease during recessions, impacting trade volumes.

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24
Q

What are the effects of economic cycles on foreign investment?

A

Higher FDI during expansion, reduced investments during recessions.

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25
What impact do economic cycles have on currency and exchange rates?
Economic slowdowns can lead to currency depreciation and increased exchange rate risks.
26
What are the effects of economic cycles on multinational corporations (MNCs)?
Revenue and profitability fluctuations, operational adjustments, supply chain impacts.
27
What is fiscal policy?
Government decisions on taxation and public spending.
28
How does fiscal policy impact business?
Taxation levels affect profitability, government spending can stimulate growth.
29
What is monetary policy?
Central bank actions controlling money supply and interest rates.
30
How does monetary policy influence business?
Interest rate changes affect borrowing costs, influencing investment and expansion.
31
What is trade policy?
Regulations and agreements governing imports and exports.
32
How does trade policy impact business?
Tariffs and free trade agreements affect costs and market entry strategies.
33
What is the Balance of Payments (BOP)?
A comprehensive record of a country’s economic transactions with the rest of the world.
34
What are the two main accounts of the Balance of Payments?
Current Account and Capital and Financial Account.
35
What does the current account record?
Exports and imports of goods and services, income from abroad, and current transfers.
36
What does BOP stand for?
Balance of Payments ## Footnote The BOP should always balance: inflows = outflows, but temporary deficits or surpluses may occur.
37
What is a trade deficit?
A situation where a country's imports exceed its exports ## Footnote This impacts the current account balance.
38
What are the components of the Balance of Payments?
1. Current Account 2. Capital and Financial Account ## Footnote These components track various economic transactions.
39
What does the Current Account include?
1. Trade Balance 2. Income Account 3. Current Transfers
40
What is the Trade Balance?
Records exports and imports of goods and services ## Footnote Exports bring in foreign currency, while imports require payments abroad.
41
What occurs if imports exceed exports?
A trade deficit occurs ## Footnote This results in a net outflow of currency.
42
What does the Income Account consist of?
Earnings on investments abroad and payments made to foreign investors.
43
What are Current Transfers?
Includes remittances, foreign aid, and gifts without quid pro quo.
44
What does the Capital and Financial Account record?
Capital transfers, acquisition/disposal of non-produced assets, and financial flows.
45
What is the Capital Account?
Records transfers of ownership of fixed assets, debt forgiveness, and migrants' funds.
46
What is included in the Financial Account?
1. Foreign Direct Investment (FDI) 2. Portfolio investment (stocks, bonds) 3. Other investments (loans, banking capital)
47
How can a trade deficit be financed?
1. Borrowing from abroad 2. Selling domestic assets to foreigners
48
What are potential consequences of persistent trade deficits?
1. Exchange rate depreciation 2. Increased foreign debt 3. Potential loss of investor confidence
49
True or False: Trade deficits are always negative.
False ## Footnote They can indicate strong domestic demand and investment-driven growth.
50
Why is the Balance of Payments important for international business?
It helps understand currency stability, trade policies, and foreign exchange risks.
51
What can trade imbalances lead to?
1. Political pressure for trade policy changes 2. Shifts in global trade flows
52
What is the impact of exchange rate volatility on countries with trade deficits?
Currency depreciation makes imports costlier and exports cheaper.
53
What might governments impose to reduce trade deficits?
Tariffs, quotas, or subsidies.
54
What is the effect of trade imbalances on supply chains?
Drives offshoring and outsourcing to low-cost export-surplus nations.
55
How do trade deficits affect consumers and producers?
Lower prices for consumers but intense competition for domestic producers.
56
What macroeconomic measures might countries with large deficits implement?
Austerity measures or adjustments in fiscal and monetary policies.
57
What are the two primary types of exchange rate systems?
1. Fixed exchange rate system 2. Floating exchange rate system
58
What characterizes a fixed exchange rate system?
A country's currency value is pegged to another major currency.
59
What is required to maintain a fixed exchange rate?
Large foreign currency reserves.
60
What does the IMF stand for?
International Monetary Fund
61
What are the key roles of the IMF?
1. Balance of Payments Assistance 2. Surveillance and Monitoring 3. Technical Assistance and Training
62
What is the primary focus of the World Bank?
Long-term development and poverty reduction in developing countries.
63
How does the Bank for International Settlements (BIS) support central banks?
By providing banking services and promoting international monetary cooperation.
64
What is a hybrid exchange rate system?
A managed float that combines elements of fixed and floating exchange rates.
65
What is currency pegging?
Currency value is set at a fixed rate against another currency ## Footnote Examples include the Hong Kong dollar pegged to the US Dollar and the Saudi Riyal pegged to the US Dollar.
66
What is the role of central bank intervention in a pegged exchange rate system?
Central bank buys or sells foreign currency to maintain the peg
67
What are foreign reserves in the context of currency pegging?
Large foreign currency reserves required to defend the peg
68
What is one advantage of a pegged exchange rate system?
Stability encourages international trade and investment by reducing exchange rate risk
69
What is a disadvantage of a pegged exchange rate system?
Loss of monetary policy autonomy
70
Fill in the blank: A fixed exchange rate can be targeted by speculators if perceived as _______.
unsustainable
71
What defines a floating exchange rate system?
Currency value is determined by supply and demand forces in the foreign exchange market
72
What is a characteristic of a floating exchange rate system?
Currency prices fluctuate according to market forces
73
What is one advantage of a floating exchange rate system?
Monetary policy flexibility
74
What is a disadvantage of the floating exchange rate system?
High volatility creates risks for traders, investors, and multinational corporations
75
What is exchange rate volatility?
Changes in the value of one currency relative to another over time
76
How does currency depreciation affect export competitiveness?
Makes exports cheaper and more competitive in foreign markets
77
What happens to import costs when the currency depreciates?
Raises the cost of imports, increasing production costs
78
What type of exposure arises from actual transactions payable or receivable in foreign currency?
Transaction exposure
79
What is economic exposure?
Long-term impact on a company’s market value due to exchange rate changes affecting competitive position
80
How does exchange rate volatility impact Foreign Direct Investment (FDI)?
Increases investment risk, affecting willingness to invest abroad
81
What is one impact of exchange rate fluctuations on pricing strategies?
Firms may need to frequently adjust prices in foreign markets
82
What is the effect of currency depreciation on consumers?
Can lead to inflationary pressures as import prices rise
83
What is the automatic adjustment mechanism in a floating exchange rate system?
Exchange rates adjust naturally to balance trade and capital flows
84
What is the risk of currency crises in a pegged exchange rate system?
If reserves run low or economic fundamentals weaken, the peg may collapse
85
What is one reason for adjustment rigidity in a pegged exchange rate system?
Cannot easily adjust exchange rates to correct external shocks or economic changes
86
What do companies often use to manage currency risk?
Derivatives (forwards, options)
87
What is the impact of exchange rate fluctuations on capital flows?
Can lead to volatile capital inflows and outflows
88
What is one strategic implication of exchange rate fluctuations for companies?
Requires companies to develop sophisticated risk management and hedging strategies

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