Tutorial 5

Question 1

Chapter 5

trade in goods (merchandise trade)

Answer 1

Sale of physical goods across national borders.

Question 2

Chapter 5

trade in services

Answer 2

Sale of intangibles across national borders.

Question 3

Chapter 5

trade deficit

Answer 3

An economic condition in which a nation imports more than it exports.

Question 4

Chapter 5

trade surplus

Answer 4

An economic condition in which a nation exports more than it imports.

Question 5

Chapter 5

balance of trade

Answer 5

The aggregation of importing and exporting that leads to the country-level trade surplus or deficit.

Question 6

Chapter 5

classic trade theories

Answer 6

The major theories of international trade advanced before the mid-20th century: mercantilism, absolute advantage, comparative advantage and factor endowments.

Question 7

Chapter 5

Classic theory: theory of mercantilism

Answer 7

A theory that holds that
the wealth of the world (measured in gold and silver) is fixed and that a nation that exports more and imports less would enjoy the net inflows of gold and silver and thus become richer

Question 8

Chapter 5

free trade

Answer 8

Trade uninhibited by trade barriers.

Question 9

Chapter 5

Classic theory: theory of absolute advantage

Answer 9

A theory that suggests
that under free trade, each nation gains by specializing in economic activities
in which it has absolute advantage.

Question 10

Chapter 5

absolute advantage

Answer 10

The economic advantage one nation enjoys due to higher productivity in an economic activity

Question 11

Chapter 5

modern trade theories

Answer 11

The major theories of international trade advanced in the second half of the 20th century: product life cycle, strategic trade and national competitive advantage.

Question 12

Chapter 5

classic theory: theory of comparative advantage

Answer 12

A theory that focuses on the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations.

Question 13

Chapter 5

comparative advantage

Answer 13

Relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations.

Question 14

Chapter 5

opportunity costs

Answer 14

Given the alternatives (opportunities), the cost of pursuing one activity at the expense of another activity.

Question 15

Chapter 5

classic theory: factor endowment theory (or Heckscher–Ohlin theory)

Answer 15

A theory that suggests nations will develop comparative advantage based on their locally abundant factors.

Question 16

Chapter 5

resource(factor) endowents

Answer 16

The extent to which different countries possess various resources (factors), such as labour, land and technology.

Question 17

Chapter 5

modern theory: product life cycle

Answer 17

A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles.

Question 18

Chapter 5

modern theory: strategic trade theory

Answer 18

A theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success.

Question 19

Chapter 5

first mover advantage

Answer 19

Advantages that first entrants enjoy and do not share with late entrants.

Question 20

Chapter 5

modern theory: theory of national competitive advantage industries (diamond model)

Answer 20

A theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a ‘diamond’.

Question 21

Chapter 5

resource mobility

Answer 21

The ability to move resources from one part of a business to another.

Question 22

Chapter 5

protectionism

Answer 22

Government policies designed to protect a domestic industry from foreign competition.

Question 23

Chapter 5

deadweight loss

Answer 23

Net losses that occur in an economy as the result of tariffs

Question 24

Chapter 5

non tariff barries

Answer 24

Government policies designed to protect a domestic industry from foreign competition

Question 25

# Chapter 5 subsidies

Answer 25

Government payments to (domestic) firms.

Question 26

# Chapter 5 import quotas

Answer 26

Restrictions on the quantity of imports.

Question 27

# Chapter 5 anti dumping duties

Answer 27

Costs levied on imports that have been ‘dumped’ (selling below costs to ‘unfairly’ drive domestic firms out of business).

Question 28

# Chapter 5 public procurement

Answer 28

Units of government buying products or services.

Question 29

# Chapter 5 local content requirements

Answer 29

A requirement that value added is created locally.

Question 30

# Chapter 5 infant industry argument

Answer 30

The argument that temporary protection of young industries may help them to attain international competitiveness in the long run.

Question 31

# Chapter 5 trade embargos

Answer 31

Politically motivated trade sanctions against foreign countries to signal displeasure

Question 32

# Chapter 6 foreign direct investements (FDI)

Answer 32

Investment in, controlling and managing value-added activities in other countries.

Question 33

# Chapter 6 emerging enconomy MNEs

Answer 33

MNEs that originate from an emerging economy and are headquartered there.

Question 34

# Chapter 6 foreign portfolio investements (FPI)

Answer 34

Investment in a portfolio of foreign securities such as stocks and bonds.

Question 35

# Chapter 6 joint venture

Answer 35

Operations with shared ownership by several domestic or foreign companies

Question 36

# Chapter 6 horizontal FDI

Answer 36

FDI that creates operations abroad at the same position in the value chain as the operation in the home country.

Question 37

# Chapter 6 vertical FDI

Answer 37

FDI in operations in different stages of the value chain, upstream or downstream.

Question 38

# Chapter 6 upstream vertical FDI

Answer 38

FDI in an upstream stage of the value.

Question 39

# Chapter 6 downstream vertical FDI

Answer 39

FDI in a downstream stage of the value chain in two different countries.

Question 40

# Chapter 6 FDI flow

Answer 40

The amount of FDI moving in a given period (usually a year) in a certain direction.

Question 41

# Chapter 6 FDI stock

Answer 41

The total value of inbound FDI in a country or outbound FDI from a country operating at a given point in time.

Question 42

# Chapter 6 OLI paradigm

Answer 42

A theoretical framework positing that ownership (O), location (L) and internalization (I) advantages combine to induce firms to engage in FDI. 1. **Ownership advantages:** What does the firm own that allows it to overcome its liability of foreignness when competing with local firms in their country? 2. **Locational advantages:** What does the host location have to offer that allows the firm to create more value than it would by purely operating in its home country? 3. **Internalization advantages:** What advantages does the firm get from directly owning the operation abroad rather than relying on contracts and markets as means of exchange?

Question 43

# Chapter 6 liability of foreignness

Answer 43

The inherent disadvantage a firm faces when competing with local firms in a foreign country.

Question 44

# Chapter 6 ownership advantage

Answer 44

Resources of the firm that are transferable across borders and enable the firm to attain competitive advantages abroad.

Question 45

# Chapter 6 location advantage

Answer 45

An advantage enjoyed by firms operating in certain locations.

Question 46

# Chapter 6 agglomeration

Answer 46

The location advantages that arise from the clustering of economic activities in certain locations

Question 47

# Chapter 6 knowledge spillovers

Answer 47

Knowledge diffused from one firm to others among closely located firms

Question 48

# Chapter 6 internalization advantage

Answer 48

Advantages of organizing activities within a multinational firm rather than using a market transaction.

Question 49

# Chapter 6 market failure

Answer 49

Imperfections of the market mechanism that make some transactions prohibitively costly

Question 50

# Chapter 6 intra firm trade

Answer 50

International trade between two subsidiaries in two countries controlled by the same MNE

Question 51

# Chapter 6 licensing

Answer 51

A contract by which a firm allows another firm to use its intellectual property rights in return for a fee.

Question 52

# Chapter 6 franchising

Answer 52

A contract by which a firm allows another firm to use its branded service or products in return for a fee.

Question 53

# Chapter 6 dissemination risk

Answer 53

The risk associated with unauthorized diffusion of firm-specific know-how.

Question 54

# Chapter 6 local content requirements

Answer 54

Requirement that a certain proportion of the value of the goods made in a country originates from that country.

Question 55

# Chapter 6 tax avoidance

Answer 55

Reducing tax liability by legally moving profits to jurisdictions where tax rates are lower

Question 56

# Chapter 6 bargaining power

Answer 56

The ability to extract a favourable outcome from negotiations due to one party’s strengths

Question 57

# Chapter 6 obsolescing bargain

Answer 57

Refers to the deal struck by MNEs and host governments which change their requirements after the initial FDI entry.

Question 58

# Chapter 6 sunk costs

Answer 58

Up-front investments that are non-recoverable if the project is abandoned.

Question 59

# Chapter 6 expropriation

Answer 59

Government confiscation of private (foreign-owned) assets.

Question 60

# Chapter 6 state owned enterprise(SOEs)

Answer 60

Companies with direct ownership by the state.

Question 61

# Chapter 6 soft budget constraint

Answer 61

Phenomenon that SOEs tend to receive extra resources from the state when facing financial difficulties.

Question 62

# Chapter 6 sovereign wealth fund(SWF)

Answer 62

A state-owned investment fund composed of financial assets such as stocks, bonds, real estate or other financial instruments.