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Global 2


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  • 1. Global Test 2
  • 2. Mercantilism• Advocates that countries should simultaneously encourage exports and discourage imports
  • 3. Adam Smith• Theory of absolute advantage• Explained why unrestricted free trade is beneficial to a country• Wealth of Nations• 1776
  • 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. David Ricardo• Theory of comparative advantage
  • 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. 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. Positive – sum game• Situation where all countries can benefit
  • 9. Absolute Advantage• When one country is more efficient at producing something than any other country
  • 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. Samuelson Critique• 20% cheaper groceries doesn’t necessarily make up for wage losses in America
  • 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. 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. 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. Economies of Scale• Cost advantage associated with large-scale production• Spreading fixed costs by producing a ton of units
  • 16. First-Mover Advantages• Economic and strategic advantages that accrue to early entrants into an industry
  • 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. Tariff• Tax on imports
  • 19. Specific tariff• Tariff levied as a fixed charge for each unit of good imported
  • 20. Ad Valorem Tariff• Levied as a proportion of the value of an imported good
  • 21. Subsidies• Government payment to a domestic producer
  • 22. Import Quota• Direct restriction on the number of a good that may be imported into a country
  • 23. Tariff Rate Quota• Applying a lower tariff rate to imports within the quota
  • 24. Voluntary Export Restraint• Quota imposed by the exporting country
  • 25. Local Content Requirements• A requirement that some specific fraction of a good be produced domestically
  • 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. 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. Infant Industry Argument• New industries should be temporarily protected from foreign competition, until they can hold their own in the global marketplace
  • 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. GATT• Established 1947• Objective – liberalize trade by eliminating tariffs, subsidies, import quotas, etc
  • 31. Uruguay Round• Tariffs reduced• Agricultural subsidies reduced• Protection for intellectual property• WTO created
  • 32. WTO• Polices the GATT agreement
  • 33. Flow of FDI• Amount of FDI undertaken over a given time period
  • 34. Stock of FDI• Total accumulated value of foreign-owned assets at a given time
  • 35. Outflows of FDI• Flow of FDI out of a country
  • 36. Inflows of FDI• Flows of FDI into a country
  • 37. United states big part of FDI• It had a large economy during the post-war period and many large enterprises
  • 38. Oligopolies• Firms tend to imitate each other’s FDIs
  • 39. Product Life Cycle• At some point, businesses will use FDI for their products when there is demand in other countries
  • 40. Free Market View of FDI• FDI benefits both source country and host country
  • 41. Radical View of FDI• Source country exploits host country for profits
  • 42. Pragmatic Nationalism• FDI benefits host countries, but it comes at a cost
  • 43. Location-specific advantages• Advantages that arise from utilizing resources that are tied to a particular foreign location
  • 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. 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. 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. Home country costs• Reduced home country employment
  • 48. FDI types• Greenfield Investment – new facility• Acquisition or merger with existing local firm
  • 49. Gross Fixed Capital Formation• Summarizes the total amount of capital invested in factories, stores, office buildings, and the like
  • 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. Licensing• Firm licenses right to produce a product to a foreign firm, and collects a royalty for it
  • 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. European Union EU• The countries dropped their trade borders to eachother and adopted a single currency for doing business
  • 54. NAFTA• North American Free Trade Agreement• Free trade between Canda, USA, and Mexico
  • 55. Levels of Economic Integration
  • 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. Customs Union• Group of countries committed to removing all barriers to flow of goods and services• Pursuit of a common external trade policy
  • 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. 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. Political Union• Where all of the above are true, and government coordinates• United States is an example
  • 61. Trade Creation• Trade created due to regional economic integration, occurs when high-cost domestic producers are replaced by foreign producers
  • 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. EU• Global Superpower due to high GDP• 27 member states
  • 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. Euro Benefits• Simpler between-country transactions• Easier to compare prices across europe• Long term efficiency of countries
  • 66. Euro costs• Nations lose control over monetary policy
  • 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. Optimal Currency Area• Similarities in the underlying structure of economic activity make it feasible to adopt a single currency
  • 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. European Commission• Body responsible for proposing EU legislation, implementing it, and monitoring compliance
  • 71. European Parliament• Elected EU body that consults on issues proposed by the european commission
  • 72. Court of Justice• Supreme appeals court for EU law