Global 2


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Global 2

  1. 1. Global Test 2
  2. 2. Mercantilism• Advocates that countries should simultaneously encourage exports and discourage imports
  3. 3. Adam Smith• Theory of absolute advantage• Explained why unrestricted free trade is beneficial to a country• Wealth of Nations• 1776
  4. 4. Free Trade• Where government doesn’t attempt to influence through quotas or duties what its citizens can buy from another country, or sell to another country
  5. 5. David Ricardo• Theory of comparative advantage
  6. 6. New Trade Theory• In some cases countries specialize in the production and export of particular products because certain industries can only support a limited number of firms
  7. 7. 0-sum game• Situation in which an economic gain by one country results in an economic loss by another• Mercantilism assumed this was the case.• You sell more than you buy, your country gains and another country gets poorer. Doesn’t work like that in reality
  8. 8. Positive – sum game• Situation where all countries can benefit
  9. 9. Absolute Advantage• When one country is more efficient at producing something than any other country
  10. 10. Comparative Advantage• A can either produce 20 cocoa or 15 rice, while B can produce 5 cocoa or 7 rice.• B has the comparative advantage for rice• It is a measure of productivity
  11. 11. Samuelson Critique• 20% cheaper groceries doesn’t necessarily make up for wage losses in America
  12. 12. Heckscher-Ohlin theory• Comparative advantage arises from differences in national factor endowments, not productivity• Factor Endowments – extend to which a country is endowed with resources like land, labor, and capital
  13. 13. Leontief Paradox• Goes against the H-O theory• The U.S. is very high in capital, so according to the H-O theory their exports should be very capital intensive and imports more labor intensive• Yet in reality, U.S. imports are more capital intensive than its exports
  14. 14. Product Life Cycle Theory• United states starts as exporter of new product because initial demand is not based on price• Later more people produce it, demand based on price, production begins in countries that can do it cheaper• United states imports it from cheaper countries
  15. 15. Economies of Scale• Cost advantage associated with large-scale production• Spreading fixed costs by producing a ton of units
  16. 16. First-Mover Advantages• Economic and strategic advantages that accrue to early entrants into an industry
  17. 17. Porters Diamond• Said 4 factors determined comparative advantage• Factor endowments – resources• Demand Conditions – nature of home demand• Relating and Supporting industries – related industries. Stuff tends to be clustered• Firm strategy, structure, and rivalry – how companies are managed, organized, etc. Local competition makes for better advantage globally
  18. 18. Tariff• Tax on imports
  19. 19. Specific tariff• Tariff levied as a fixed charge for each unit of good imported
  20. 20. Ad Valorem Tariff• Levied as a proportion of the value of an imported good
  21. 21. Subsidies• Government payment to a domestic producer
  22. 22. Import Quota• Direct restriction on the number of a good that may be imported into a country
  23. 23. Tariff Rate Quota• Applying a lower tariff rate to imports within the quota
  24. 24. Voluntary Export Restraint• Quota imposed by the exporting country
  25. 25. Local Content Requirements• A requirement that some specific fraction of a good be produced domestically
  26. 26. Administrative Policies• Rules designed to make it difficult for imports to enter a country• Example: japan required searching of packages for pornography, making quick deliveries impossible
  27. 27. Antidumping Policies• Dumping – selling goods in a foreign market at below their costs of production, or below fair market value• Antidumping Policies – designed to punish foreign firms that engage in dumping and protect domestic producers from unfair foreign competition
  28. 28. Infant Industry Argument• New industries should be temporarily protected from foreign competition, until they can hold their own in the global marketplace
  29. 29. Strategic Trade Policy• Government should use subsidies to support promising firms that are active in newly emerging industries, to help them get first mover advantage• Second, when they are not the first, is to help them overcome the first-mover advantages of foreign countries
  30. 30. GATT• Established 1947• Objective – liberalize trade by eliminating tariffs, subsidies, import quotas, etc
  31. 31. Uruguay Round• Tariffs reduced• Agricultural subsidies reduced• Protection for intellectual property• WTO created
  32. 32. WTO• Polices the GATT agreement
  33. 33. Flow of FDI• Amount of FDI undertaken over a given time period
  34. 34. Stock of FDI• Total accumulated value of foreign-owned assets at a given time
  35. 35. Outflows of FDI• Flow of FDI out of a country
  36. 36. Inflows of FDI• Flows of FDI into a country
  37. 37. United states big part of FDI• It had a large economy during the post-war period and many large enterprises
  38. 38. Oligopolies• Firms tend to imitate each other’s FDIs
  39. 39. Product Life Cycle• At some point, businesses will use FDI for their products when there is demand in other countries
  40. 40. Free Market View of FDI• FDI benefits both source country and host country
  41. 41. Radical View of FDI• Source country exploits host country for profits
  42. 42. Pragmatic Nationalism• FDI benefits host countries, but it comes at a cost
  43. 43. Location-specific advantages• Advantages that arise from utilizing resources that are tied to a particular foreign location
  44. 44. Benefits of FDI to host country• Resource transfer – they get stuff they may not normally get (like technology)• Employment – gives jobs to host country• Balance of payments – gives country more exports and less imports• Increases global competition, reducing prices
  45. 45. Costs to host country• Competitors to domestic companies• Balance of accounts – hurts it if they import most of their parts, rather than buy them in the nation• Fear of losing economic independence
  46. 46. Home Country Benefits• Creates demand for home country exports• Profits for companies• Multinationals learn skills from their foreign companies that can be used at home
  47. 47. Home country costs• Reduced home country employment
  48. 48. FDI types• Greenfield Investment – new facility• Acquisition or merger with existing local firm
  49. 49. Gross Fixed Capital Formation• Summarizes the total amount of capital invested in factories, stores, office buildings, and the like
  50. 50. Internalization Theory• Argument that firms prefer FDI over licensing to retain control over know-how, manufacturing, marketing and strategy• They wanna do it themselves
  51. 51. Licensing• Firm licenses right to produce a product to a foreign firm, and collects a royalty for it
  52. 52. Economic Integration• Agreements among countries in a geographic region to reduce, and ultimately remove, tariffs and barriers to the free flow of goods and services between eachother
  53. 53. European Union EU• The countries dropped their trade borders to eachother and adopted a single currency for doing business
  54. 54. NAFTA• North American Free Trade Agreement• Free trade between Canda, USA, and Mexico
  55. 55. Levels of Economic Integration
  56. 56. Free Trade area• No barriers to trade between countries in agreement• Individual countries still free to decide how to deal with non-members• NAFTA• EFTA (european free trade association)
  57. 57. Customs Union• Group of countries committed to removing all barriers to flow of goods and services• Pursuit of a common external trade policy
  58. 58. Common Market• Everything customs union has, but also factors of production can move freely between members• Labor and capital are free to move
  59. 59. Economic Union• Same as those before, but requires common currency, harmonization of tax rates, and common monetary and fiscal policy• EU is an economic union, though imperfect since not all of its countries have adopted the Euro
  60. 60. Political Union• Where all of the above are true, and government coordinates• United States is an example
  61. 61. Trade Creation• Trade created due to regional economic integration, occurs when high-cost domestic producers are replaced by foreign producers
  62. 62. Trade Diversion• When low-cost foreign suppliers outside a free trade area are replaced by higher-cost foreign suppliers in a free trade area
  63. 63. EU• Global Superpower due to high GDP• 27 member states
  64. 64. Single European Act• Committed members to establishing an economic union• Remove trade barriers• Mutual product standards between countries• Reduce restrictions on transporting between countries
  65. 65. Euro Benefits• Simpler between-country transactions• Easier to compare prices across europe• Long term efficiency of countries
  66. 66. Euro costs• Nations lose control over monetary policy
  67. 67. Joining the EU• Have to privatize state assets, deregulate markets, restructure industries, and tame inflation• Enshrine EU laws into their own systems, establish democratic governments, and respect human rights
  68. 68. Optimal Currency Area• Similarities in the underlying structure of economic activity make it feasible to adopt a single currency
  69. 69. European Council• Most important EU authority• Represents interests of member states• Draft legislation from Commission can only become law if the council agrees
  70. 70. European Commission• Body responsible for proposing EU legislation, implementing it, and monitoring compliance
  71. 71. European Parliament• Elected EU body that consults on issues proposed by the european commission
  72. 72. Court of Justice• Supreme appeals court for EU law