Exam 2 Review (Homework ?’s Ch 6-9)

The theory of absolute advantage suggests what?
A country should export those goods and services for which it is more productive than other countries are, and import those goods and services for which other countries are more productive than it is.
The theory of comparative advantage suggests what?
A country should produce and export those goods and services for which it is relatively more productive than other countries are, and import those goods and services for which other countries are relatively more productive than it is.
The value of a good equals the value of what is given up to have that good. The previous statement describes what?
Opportunity cost
Use the following table to answer the question below:
US | EU
Cars 5 | 5
Tractors 10 | 5

Who has the comparative advantage in producing tractors?

The US. To produce 1 tractor, the US gives up 1/2 a car, while the EU gives up 1 car to produce 1 tractor. Because the EU gives up more (i.e. has a higher opportunity cost) to produce tractors, it cannot have a comparative advantage in producing tractors.
What was the economic philosophy that maintained that a country’s wealth was measured by its holdings of gold and silver?
theory of mercantilism (Mercantilism was a 16th century economic philosophy that maintained that a country’s wealth is measured by its holdings of gold and silver. According to mercantilists, a country’s goal was to enlarge these holdings by promoting exports and discouraging imports.)
Which of the following is an example of an economy of scale?
The cost of computers decreases as the quantity that is produced increases. (economies of scale occur if a firm’s average costs of producing a good decrease as its production of the good increases)
Which of the following is particularly useful in explaining trade in differentiated goods such as automobiles, expensive electronics equipment, and personal care products, for which brand names and product reputations play an important role in consumer decision making?
country similarity theory
Which of the following terms describes when a firm’s average cost decreases as the number of different products it sells increases?
economies of scope (firms that are able to achieve economies of scope enjoy low average costs, which give the firms a competitive advantage over their global rivals)
Which theory traces the roles of innovation, market expansion, comparative advantage, and strategic responses of global rivals in international production, trade, and investment decisions?
product life cycle theory
Which theory states that success in international trade comes from the interaction of four country- and firm-specific elements?
theory of national competitive advantage
Which of the following is NOT a reason for the development of modern firm-based theories?
The recognition that countries, not firms, are the agents for international trade.
Reasons for the development of modern firm-based trade theories:
-the failure of Leontief and other researchers to empirically validate the country-based Heckscher-Ohlin theory
-the inability of the country based theories to explain and predict the existence and growth of intraindustry trade
-recognition of the growing importance of MNCs in the postwar international economy
-firm-based theories incorporate factors such as quality, technology, brand names, and customer loyalty into explanations of trade flows
Which of the following is FALSE regarding the product life cycle theory?
the personal computer industry has entered the maturing product stage
Which of the following would be an example of the experience curve?
an advantage that a company gets with factory workers who have experience with a certain product
Which of the following factors is considered by Porter to be an “advanced factor”?
education of workforce (land, labor and capital are classic / basic factors)
Which of the following would occur in stage 3 in the international product life cycle in an innovating firm’s country?
production facilities are moved to low labor cost markets
Most FDI is either made by or goes to the world’s richest nations.
true
Which of the following is NOT a demand factor that affects the foreign direct investment (FDI) decision?
logistics
All of the following EXCEPT ______ can be used to explain international investment between the US and the UK.
differing rates of return (Internationalization theory, dunning’s eclectic theory, ownership advantage theory, and supply factors can be used to explain)
Why do US firms use places like the Bahamas as offshore financial centers?
It is less heavily taxed, providing a greater profit.
Which of the following best accounts for the reason why Swiss pharmaceutical companies are choosing to invest in smaller US biogenetical companies?
to gain access to research in this area
Competitive advantage
is a firm’s ability, relative to its competitors, to transform inputs into goods and services at a maximum profit on a sustained basis.
Outsourcing to places like India and China takes advantage of comparative advantage in terms of low-cost labor. Competing as the lowest cost labor provider in a global marketplace is most likely which type of strategy?
short-term strategy
Infosys’s ability to leverage domestic relationships and deliver services in a quality, cost-efficient manner, using the best resources from all over the world and beating out the local and global competition is an example of
competitive advantage
What is one of the greatest comparative advantages of operating a company in India?
a large, educated workforce
One of the greatest advantages of having 63 offices located around the globe is that InfoSys has been able to
maintain its competitive edge
If two country each devalue their currency by 20 percent, which of the following would happen?
Neither would gain an advantage because each currency’s value relative to the other would remain the same.
Assuming we are operating under the gold standard. If the fixed exchange rate between the US dollar and the British pound is 0.50, and the dollar’s par value is 5, what is the pound’s par value?
2.5
Why did the sterling-based gold standard originally unravel?
The outbreak of war ceased normal commercial transactions.
How did the Marshall Plan assist the World Bank?
It established the IBRD.
Which of the following organizations’ objectives include promoting international monetary cooperating, facilitating the expansion and balanced growth of international trade, promoting exchange stability, and shortening the duration and lessen the degree of disequilibrium in the international balance of payment of members?
International Monetary Fund
The World Bank System is controlled by ______.
a weighted voting system
Which of the following is NOT one of the objectives included in the IMF’s Articles of Agreement?
To lengthen the duration and increase the degree of disequilibrium in the international balance of payments to its members
Suppose we are operating under the Bretton Woods System. If a currency’s value rises above the range required by the system, that country’s central bank will ___________ in the international foreign exchange market.
Buy gold/foreign currency
Why did the US sell one-third of its gold reserves in 1971?
to maintain the dollar’s value
Which of the following signified the growing fear that the US could not live up to its Bretton Woods obligations?
Triffin paradox (this paradox arose because foreigners needed to increase their holdings of dollars to finance expansion of international trade, but the more dollars they owned, the less faith they had in the ability of the US to redeem those dollars for gold.
Which of the following was created in 1979 by the EU in order to manage their currency relationships?
European Monetary System
Which of the following records international business transactions and supplies vital information about the health of a national economy?
Balance of Payments (BOP) an accounting system that records international transactions and supplies vital information about the health of a national economy and likely changes in its fiscal and monetary policies.
Which of the following countries was forced to unpeg its currency after investors began to distrust the abilities of its borrowers to repay foreign loans?
Thailand. (((Asian currency crisis erupted in July 1997, when Thailand, which had pegged its currency to a dollar-dominated basket of currencies, was forced to unpeg its currency, the baht, after investors began to distrust the abilities of thai borrowers to repay their foreign loans and of the thai government to maintain the baht’s value)))
The current account records all of the following types of transactions EXCEPT ________.
short-term foreign portfolio investments
Which of the following is NOT an asset that is included in the official reserves account?
non-convertible currencies
Which of the following accounts is used to make the Balance of Trade (BOP) account balance?
errors and omissions
International business people need to pay close attention to Countries’ Balance of Payments (BOP) statistics for all of the following reasons EXCEPT BOP statistics ___________.
usually do not impact businesses that sell inventory
Which of the following is the best example of a capital outflow from the United States?
The Tommy Hilfiger Company buys a controlling stake in the UK fashion label Temperley London
All of the following are examples of capital inflows into the US EXCEPT
Sears, Roebuck, and Co. buys 15% of British retailer Selfridges
The balance on services reflects which of the following?
the service sector’s global competitiveness
Why did markets rally on the prediction that Congress was going to vote to raise the debt ceiling?
Raising the debt limit affects international capital markets, allowing the government to honor domestic and foreign debt obligations
What was a potentially negative outcome if the debt ceiling wasn’t raised?
foreign direct investments from countries like China and Japan may stop
The US dollar is currently the world’s largest reserve currency. What is a “reserve currency”?
foreign currency that is widely accepted to pay for debts
At the time of the video, the unemployment rate in Spain was 21% and 4% in Austria. What may be a reason for this disparity?
Spain’s core jobs were focused in areas such as construction.
Ellen Braitman mentions that the dollar was gaining strength in trading. What is the significance of this?
an increase in the value of the dollar makes foreign goods and services more affordable for US companies and consumers
Assume we are comparing the pound and the dollar. Suppose the annualized forward discount on the pound is 40%. The forward price of the pound is $1, and the spot price of the pound is $1.25. Then we know this AFD was calculated based on the
6 month forward price

.4=(1-1.25/1.25)n
.4=(.25/1.25)
.4=.2n
n=2, but that’s not months, thats periods in a year, so two 6 month periods.

What makes up the foreign exchange market?
buyers and sellers of currency (currencies issued by the world’s countries)
Foreigners’ demand for yen chart
including price of yen, quantity of yen
and a downward slope like
there is a higher quantity demanded when the price is lower
The direct exchange rate is $.020 / ¥1. Then the indirect exchange rate is
¥50/$1
(¥1/$.020=50)
Which of the following has been a result of the higher loonie value?
More Canadian consumers are shopping in the United States.

(the Retail Council of Canada believes that the rise in the # of Canadians heading south to take advantage of now-cheaper American goods has trimmed retail sales in Canada by 5%)

You work at a bank that performs services for a British bank in the US. What is this called?
correspondent relationship
Which of the following is known as the primary transaction currency for the foreign-exchange market?
US dollar
Shondra works for an entity of a US bank that is legally distinct from the bank’s domestic operations and offers international banking services only. They do not need to observe the numerous US domestic banking regulations. What is this type of entity?
international banking facility
Which of the following is a characteristic of the international Fisher effect?
The national differences in expected inflation rates yield differences in the nominal interest rates among countries.
Which market is used to make foreign-exchange transactions that are to occur sometime in the future?
forward market
Which of the following involves the buying and selling of 3 different currencies to make a riskless profit?
three-point arbitrage
Suppose:
£1 buys $3 in NY, Tokyo, and London
$1 buys ¥150 in NY, Tokyo, and London
£1 buys ¥175 in NY, Tokyo, and London

then

An opportunity for three-point arbitrage exists, but not for two-point arbitrage.

There are no opportunities for two-point arbitrage because the £1 buys the same amount in all three markets and $1 buys the same amount in all three markets. There is an opportunity for three-point arbitrage. We know this because the direct quote and the cross rate differ. In this case, the direct quote between £/¥=£1/¥175. The cross rate is calculated using the third currency ($). Multiply the other two $-based direct quotes together to calculate the cross rate: (£1/$3)($1/¥150)=£1/¥450. £1/¥175 differs from £1/¥450; therefore, the direct quote and cross rate differ, and there is an opportunity for the three-point arbitrage.

Daniel is involved in a transaction that involves buying and selling US dollars simultaneously, but delivery is made at two different points in time. What is this called?
swap transaction

(a transaction in which the same currency is bought and sold simultaneously, but delivery is made at two different points in time)

Which of the following allows, but does not require, a firm to buy or sell a specified amount of a foreign currency at a specified price at any time up to a specified date?
currency option
Suppose your company has significant assets in £. You notice that the £ is selling at a forward premium. You advise your CFO to increase your firm’s holdings of assets in £. Is this sound advice?
Yes. A premium means that assets will increase in value.
In the US, a Big Mac costs on average $5. In Mexico, the Big Mac costs $1. The indirect exchange rate between the $ and the peso is 50 pesos. Then we know that the peso is ______ by approximately _______ percent compared with the dollar.
undervalued; 80

1st we need to calculate the cost of the Big Mac in pesos, which we do using the indirect exchange rate: $1(50) = 50 pesos. Next we calculate the PPP (big mac) exchange rate: 50 pesos/$5 (cost of Big Mac in US) = 10. Now, we can calculate the % difference between the PPP exchange rate and the actual indirect exchange rate to determine how much the currency is over or undervalued: (10-50/50)100 = (-40/50)100=-.8(100)=-.80 this means that the peso is undervalued by approx 80%

Which of the following is the name for US dollars deposited in any bank account outside of the US?
Eurodollar
Which of the following cities is NOT considered to be a major financial center?
Banglore

(Singapore, London, Tokyo, NYC, and Hong Kong are)

Currencies that are freely tradable are called ______.
convertible currencies
Which market represents a major source of debt financing for the world’s governments, international organizations, and larger firms?
international bond market
Which of the following statements is FALSE with regard to the current trends in the business world?
More companies are focusing solely on the domestic market.
Which of the following identifies a key factor that helps explain China’s recent explosive economic growth?
The government policies have focused on international exports.
Which of the following possible conclusions of the World Trade Organization’s Doha Round would likely have a negative effect on China’s economy?
Developing countries will have to end industrial subsidies.
Which currency change would be likely to reduce China’s exports?
An increase in the value of China’s currency.
Which of the following factors does NOT help account for the fact that China is beginning to lose its competitive edge in the global labor market?
Vietnam’s standard of living is increasing.
Firms sometimes believe that foreign competitors gain an unfair advantage due to which of the following?
government policies
Which of the following terms describes a policy for national governments that exert minimal influence over trade?
free trade
A major international corporation has steadily bought up all of a certain resource so they control it. Because they have done this, they are the only corporation manufacturing and marketing the finished product. Which of the following is occurring?
monopoly profit
What is the term used to describe when a national government identifies key domestic industries critical to the country’s economic future and then formulates programs that promote their competitiveness?
industrial policy
Use the following payoff matrix to answer this question. Numbers are in billions of dollars.
-boeing enters market/boeing does not enter market
Airbus enters market | airbus: -5, boeing: -5 // airbus: 15, boeing: 0
Airbus does not enter the market | airbus: 0, boeing: 15 // airbus: 0, boeing: 0

Which company/companies has/have a dominant strategy?

neither
Use the following payoff matrix to answer this question. Numbers are in billions of dollars.
-boeing enters market/boeing does not enter market
Airbus enters market | airbus: -5, boeing: -5 // airbus: 15, boeing: 0
Airbus does not enter the market | airbus: 0, boeing: 15 // airbus: 0, boeing: 0

If the EU wants to ensure that Airbus will enter the market, what is the best policy for it to adopt?

A subsidy for Airbus of $6 billion
You would like to market rare earth technologies, yet you are not able to obtain them for a reasonable price. Why is this?
China has created a situation where it controls the export of this product.

China currently accounts for over 90% of the world’s rare earth production, although it possesses only 1/3 of global reserves.

Which of the following terms describes a policy for national governments that actively intervene to ensure that domestic firms’ exports receive an equitable share of foreign markets?
fair trade
Canada has imposed a specific tariff on imports of motorcycle parts from the US. Why did it do this?
to create a larger demand for Canadian motorcycle parts
The US and Canada are friendly trade nations that do not want to damage their relations. They both import and export each other’s products in large volume and recognize that the potential for problems exists. What could they put in place to help with this?
voluntary export restraint
Suppose you import products into the United States that weigh very little but that are extremely valuable (i.e. high-tech microchips). If you must pay a tariff, you would prefer the tariff to be
specific
Suppose the US government eliminates all tariffs on foreign cars. As a result, the demand for American-made cars will
decrease
China requires that imported sugar and petroleum be distributed only by state-owned trading enterprises, while Indonesia granted exclusive rights to import rice to a state agency. This is an example of what type of non-quantitative NTB?
restricted access to distribution networks
Singapore uses a tiered tax system based on engine displacement, which hurts the sales of large motorcycles. Taiwan’s transportation ministry has been slow to issue regulations that would allow motorcycles with engines larger than 500cc to travel on its highways throughout the day, while Thailand has an outright ban on motorcycles on its highways. This is an example of what type or non-quantitative NTB?
regulatory controls
Egypt gives state-owned enterprises a 15% bidding preference on public contracts, while Argentina grants domestically owned firms a 5-7% preference; turkey, a 15% preference; Thailand, 7%; and Paraguay, 20%. Russia grants local firms a 15% preference in pharmaceutical contracts, while Kenya’s Public Procurement and Disposal Act requires that certain govt contracts be given only to Kenyan citizens. These are examples of what type of non-quantitative NTB?
Public-sector procurement policies
The Philippines restricts foreign ownership in advertising to 30% and in telecommunications to 40%, while foreigners can own no more than 49% of local accounting firms in Thailand and 50% of Korean power generators. These are examples of what type of non-quantitative NTB?
Investment controls
The national bank of Ethiopia often makes it difficult for importers to obtain scarce foreign exchange, although state-owned enterprises or firms controlled by the ruling party normally have no such problems. This is an example of what type of non-quantitative NTB?
Currency controls
Which of the following statements is FALSE regarding subsidies?
Subsidies can never be so large as to affect the normal pattern of international trade.
Which of the following countries uses the ITA to investigate complaints of unfair trade practices?
United States
One country is selling computers for $650 US dollars locally, but $300 in foreign markets. What is this an example of?
Dumping
Which of the following is a method a government can use to restrict trade?
Quota
Governments intervene in trade for all of the following reasons except
Egological
Airbus has benefited from subsidies from the European Union. Subsidies would be considered a method of ____
Promoting trade
Both Airbus and Boeing have operations outside of their home countries. The video mentions that much of their expansion was done via ____
Foreign direct investment
What is a situation in which China requires Airbus or Boeing to use a certain percentage of parts produced in China an example of?
Local content requirement