International Business

Front 1

Mercantilism

Back 1

Increase trade surplus by
1. import barriers
2. export subsidies

Front 2

Export Subsidies

Back 2

lowering the price of goods we send overseas
b/c we subsidize it with the wealth of our own people

Front 3

Neomercantilism

Back 3

the more recent strategy
countries using trade policies to run favorable balances of trade
(and/or accomplish social or political objectives)

Front 4

Absolute Advantage

Back 4

It is better for countries to specialize production in something they are good at
Free trade is better

Front 5

Comparative Advantage

Back 5

You’re still better off trading even though one country is better at both goods

Front 6

Hecksher-Ohlin Theory of Factor Endowments

Back 6

Countries should specialize in what they have a lot of
(Labor, Minerals, etc.)

Front 7

The Leontief Paradox

Back 7

Replaced Hecksher-Ohlin Theory

“It’s not just your resources, but it’s the productivity of your resources.” - US is better at labor than India, b/c we have tractors

Labor absorbs capital – “if you’re richer, you’re richer still, as long as you keep spending your resources on productive resources.”

Front 8

Reasons for trade

Back 8

Diversification
Economies of Scale
Costs of Technology Tech
Product Lifecycle

Front 9

Product Lifecycle

Back 9

Every country you introduce a product to will have the same curve. By introducing it to not all countries at once, you stretch out your curve, and spread out your curve to make more money.

Front 10

Economies of Scale

Back 10

If you make it big enough, building one factory that can supply the rest of the world makes sense. Trade so everybody isn’t building a $4 billion factory.

a production process in which an increase in the scale of the firm causes a decrease in the long run average cost of each unit.

Front 11

Diversification

Back 11

if you spread your risks across countries, you lower your risk.

Front 12

Costs of Technology
Development

Back 12

We spent 14 billion to have a cure for aids. Why should they re-spend? We build in one, trade to others.

Front 13

The Porter Diamond

Back 13

there are 4 things you must have to win in international trade (national competitive advantage is embedded in four determinants):

1. Factor endowments
2. demand conditions
3. related and supporting industries
4. firm strategy, structure, and rivalry

All four determinants are interlinked and generally must be favourable for a given national industry to attain global competitiveness.

Front 14

Factor endowments

Back 14

necessary resources,
which you need to have to succeed

Front 15

demand conditions

Back 15

you have to have a strong market for your good in your own country

Front 16

Mercantilism

Back 16

"Increase trade surplus by

Front 17

Export Subsidies

Back 17

lowering the price of goods we send overseas b/c we subsidize it with the wealth of our own people

Front 18

Neomercantilism

Back 18

"the more recent strategy

Front 19

Absolute Advantage

Back 19

"It is better for countries to specialize production in something they are good at

Front 20

Comparative Advantage

Back 20

You’re still better off trading even though one country is better at both goods

Front 21

Hecksher-Ohlin Theory of Factor Endowments

Back 21

Countries should specialize in what they have a lot of (labor, minerals)

Front 22

The Leontief Paradox

Back 22

"Replaced Hecksher-Ohlin Theory

Front 23

Reasons for trade

Back 23

"Diversification

Front 24

Product Lifecycle

Back 24

"Every country you introduce a product to will have the same curve. By introducing it to not all

Front 25

Economies of Scale

Back 25

"If you make it big enough, building one factory that can supply the rest of the world makes sense. Trade so everybody isn’t building a $4 billion factory.

Front 26

Diversification

Back 26

if you spread your risks across countries, you lower your risk.

Front 27

Costs of Technology Development

Back 27

We spent 14 billion to have a cure for aids. Why should they re-spend? We build in one, trade to others.

Front 28

The Porter Diamond

Back 28

"there are 4 things you must have to win in international trade (national competitive advantage is embedded in four determinants):

Front 29

Factor endowments

Back 29

necessary resources, which you need to succeed

Front 30

demand conditions

Back 30

you have to have a strong market for your good in your own country

Front 31

related and supporting industries

Back 31

Industries are not alone. You need supporting industries

Front 32

firm strategy

Back 32

companies need a good strategy in the industry

Front 33

structure

Back 33

it has to be built right

Front 34

rivalry

Back 34

When countries compete, technology improves

Front 35

Global Strategic Rivalry Theory

Back 35

"gain competitive advantage/create a monopoly by:

Front 36

Experience Curve

Back 36

It takes a lot of people with very specialized knowledge to create an industry

Front 37

Foreign Direct Investment

Back 37

building a factory in somebody else’s country

Front 38

Why Foreign Direct Investment

Back 38

Supply Factors
Demand Factors
Political Factors

Front 39

Why Governments Intervene – Economic Arguments

Back 39

" Unemployment

Front 40

Unemployment

Back 40

"We’ve got unemployment problems and we need to protect our people’s jobs.

Front 41

Infant industry argument

Back 41

Countries wanting to grow in an industry they’re not good at
Putting up barriers to protectt countries form coming in and wiping out

Front 42

l                               Industrialization argument

Back 42

"Countries saying they don’t have any industrialization the rest of the world has.

Front 43

l                               Economic relations argument

Back 43

"Country vs. country, trying to gain advantage over each other

Front 44

Balance of payment adjustment. - argument

Back 44

Getting a country to lower tariff barriers on us arguing that our balance of payments is unequal

Front 45

Comparable access- argument

Back 45

We’ll say to the rest of the world, “we’re this big open country. We have all these open markets. We think that’s great but you’re not doing that for us, and that’s just not fair.

Front 46

Restrictions as a bargaining tool- argument

Back 46

We threaten to block you out of our market if you don’t lower your barriers.

Front 47

Price control objectives- argument

Back 47

Using tariffs on goods to keep prices high – putting subsidies on this good to keep the price real low.

Front 48

Why Governments Intervene – Noneconomic Arguments

Back 48

"not about money we’re trying to make our country, but other things we’re trying to do)

Front 49

Maintenance of essential industries- argument

Back 49

"Every country says, there’s something special about our country that we want to protect. So we set up all kinds of barriers to make it hard to get into or our industry.

Front 50

Prevention of shipments to “unfriendly” countries - argument

Back 50

Every country has friends. Every country has enemies, who they try to mess with

Front 51

Maintenance of sphere of influence argument

Back 51

We want to be friends with surrounding countries. If you want to win the sphere of influence, set up trade policies with neighbors that work well

Front 52

protecting national identity

Back 52

"They say “there is something special about us. There are some industries we really like, that make us important, we’re going to try to protect these industries.

Front 53

Tools of Trade Control (how governments mess with trade

Back 53

"Tarriffs

Front 54

Tariffs

Back 54

Tax on a product when it comes across the border. We do this when we don’t want the imports.

Front 55

Subsidies

Back 55

You give your industries free money.

Front 56

Aid and loans

Back 56

Loaning industries money, without charging them interest

Front 57

Customs valuation

Back 57

When you send a TV from Japan to the US, how do you know what it’s worth? So at customs, you ask the company. What’s the price? When they say, 100 you say, no 130. You increased tariffs by 30% - hard to argue

Front 58

Quotas

Back 58

Instead of Japan sending 1 mil cars a year, we tell them they can only send 800,000

Front 59

Buy Local” legislation

Back 59

1) Government saying they’re only going to buy from local services
- US Government will say if you’re operating on grant
money, you have to buy from within the US.
2) Putting made in USA labels on products, trying to convince people to buy that product, even with a higher price

Front 60

Standards

Back 60

Banana standard. EU requires a certain curve in a banana so apples will sell better.
They subsidize their industry by driving up costs overseas.

Front 61

Labels

Back 61

Chek Republic requiring a work Visa, then they give you the run around, 2 offices need to be open on the same day, but they aren’t. They set up permissions requirements which make it hard for people to get through.
Good way to block out goods, and increase price.

Front 62

Specific permissions requirements

Back 62

They say, yes, we’ll get to it. Give us your paperwork; we’ll eventually get back to you.

Front 63

Administrative delays

Back 63

“we’re going to let your products in, but we’re a poor country so instead of letting you take our money out, we’re going to make you take a comparable amount of our product out.”

Front 64

Reciprocal requirements

Back 64

“we’re going to let your products in, but we’re a poor country so instead of letting you take our money out, we’re going to make you take a comparable amount of our product out.”

Front 65

Restrictions on services businesses

Back 65

You try to keep service businesses form being able to succeed in your country. A service business primary resource is people. You mess with them by blocking Visas, or making them hard to get.

Front 66

Level of Regional Integration

Back 66

 Customs Union
 Common Market
 Complete economic integration

Front 67

Free trade area

Back 67

tariff system so countries can’t play us against each other anymore

Front 68

customs union

Back 68

No internal tariffs - Same external tariffs
You have agreed upon tariffs within the countries, and to outside countries as well.
Ex) If you’re inside the EU, this is your tariff, this is your rate. If you’re outside, this is your rate.
Problem: Distortions inside free trade union. Some counties have low labor costs, some have high, which create benefits to shifting labor to lower rate countries.

Front 69

common market

Back 69

Custom union plus factors of production free to move
The countries which are being avoided b/c of their higher labor rate free factors of production: labor, natural resources, money. You make it so all these things flow across the borders. Makes sure the wealth is flowing freely.

Front 70

Complete economic integration

Back 70

USA - Common market plus policy, money

Front 71

Good Effects of Integration

Back 71

 Increases regional trade
 Better environmental policies
 Better legal systems?

Front 72

Bad Effects of Integration

Back 72

 Where decreases global Trade
 Increases conflicts

Front 73

Goals of WTO

Back 73

 Promote trade - by encouraging non-discriminatory, predictable trade policies
 Reduce trade barriers - through multilateral negotiations
 Establish impartial procedures – (World trade court) for resolving trade disputes. Problem with the court: The court doesn’t do anything when you lose.

Front 74

Types of Currencies

Back 74

Fully convertible
Externally convertible
Non-convertible

Front 75

Fully convertible

Back 75

You can take that money anywhere in the world, go to that market, and exchange. You can be sure of the currency rates.

Front 76

Externally convertible

Back 76

Some countries prefer for their currencies to not be fully convertible – They don’t want them exchanged substantially. They put rules on exchange rates inside their country.

Front 77

Non-convertible

Back 77

Companies that strictly don’t want their money outside the country. Country want to be isolated, don’t want to exchange. You can’t get their currency. Have to barter.

Front 78

Currency markets

Back 78

Over the Counter
Exchange Traded

Front 79

Over the Counter (OTC)Currency Market

Back 79

Go to the booth/bank, switch your money

Front 80

Exchange Traded

Back 80

(commodities markets)
Usually have prices established
Open pit trading. You go into a room, and people bid on what to exchange for. They scream and yell at each other to trade their money. It’s people from banks trying to get the best deal on their exchange. They try to get the perfect price.

Front 81

Trade Time Frames

Back 81

 Spot (within 2 days)
 forward 3 or more days 30/60/90
 Outright forward contract
 FX Swap
 Currency swap
 Options

Front 82

Outright forward contract

Back 82

currency at a specified rate on a specified date

Front 83

FX Swap

Back 83

 Foreign exchange swap
 “simultaneous spot and forward transaction”
 You’d want to do this when conducting business overseas.
 You set it up at once. You buy rubber from Germany Day 1 (convert dollars to Euros - (spot transaction)) - sell the tires day 90, and transact money back into US dollars. Agreement to exchange in on day 1 and exchange out at day 90. Fixes prices to know how to transaction will occur and how the profits will be

Front 84

Currency swap

Back 84

you agree to exchange currencies at a time in the future but agree to exchange interest also.

Front 85

Options

Back 85

 “right to buy or sell”
Construction example
You pay an insurance premium form somebody who thinks the rates will change. You pay them to cover the contract, in case currency changes for more than agreed upon if it changes in that period. Locks you into a currency rate!

Front 86

Currency Arbitrage

Back 86

 The ability to make risk free profits from international trade in currencies
 Developing opportunities in countries who’s currencies change against one another

Front 87

ypes of Currency Arbitrage

Back 87

Geographic arbitrage
Cross rate arbitrage

Front 88

Geographic arbitrage

Back 88

They make different decisions based upon what information they know. Different places may make different decisions, and effect currency. Buy in London, sell in Chicago

Front 89

Cross rate arbitrage

Back 89

 You turned £1 into ¥200 b/c you jumped countries.
 Happens b/c several currencies are trading in different markets at different rates against each other

Front 90

Eurocurrencies

Back 90

 Eurodollars
 Eurocurrencies
 Foreign Bonds
 Eurobonds

Front 91

Eurodollars

Back 91

 dollars held outside the US – money outside the country
came from WW2 when we sent money to rebuild. People traded dollars for currencies.

Front 92

 Eurocurrencies

Back 92

 other currencies held outside their home country – currency outside its home market
 If you take a euro to Japan, it’s a Eurocurrency.

Front 93

Foreign Bonds

Back 93

 bonds sold outside of your home country
 bond that is sold outside the country of the currency in which they are denominated
 US government sells a US treasury bond. When they sell to another government, it’s not called a foreign bond. US dollar based bond in China.

Front 94

Eurobonds

Back 94

 bonds sold by a country or entity using a different currency then their home currency
 government denominating its bonds in something other than its own currency
 When countries can’t get anybody to buy their bonds they sell bonds, denominated in dollars. We’ll sell you this bond for a promise to pay you back in dollars.

Front 95

What's Different about International Money?

Back 95

 Most nations have unique currencies
 Trades between nations must be valued in someone's money
 Value of different nations money change in relation to one another

Front 96

Bretton Woods System

Back 96

 U.S. dollar fixed to Gold
 Other Nations currency fixed to U.S. Dollar
 Set up IMF and IBRD

Front 97

Set up IMF and IBRD

Back 97

to hold currencies, maintain ratios and make loans Built to create stability in the currencies.

Front 98

IMF

Back 98

- International monetary fund
- Central bank for the world
- Tried to organize the currencies for the world
- Fixed currencies to the dollar
- made sure we have enough dollars to make the world
work

Front 99

IMF
Purpose, How, Why?

Back 99

To promote (exchange rate stability)/to enforce power rights
Increase the flow of currencies across borders
To gain trust

Front 100

Purpose of IMF

Back 100

 1 - To facilitate the international flow of currencies and hence the balanced growth of international trade
 2 - To promote international monetary cooperation
 3 - To establish a multilateral system of payments
 4 - To make resources available to member nations experiencing balance-of-payments difficulties

Front 101

IBRD

Back 101

Now the world bank

Front 102

Special Drawing Rights

Back 102

 an artificial international reserve asset, to supplement IMF members’ existing reserves of gold and foreign exchange
 What the IMF gives, not cash

Front 103

Exchange Rate Types

Back 103

types of currencies, in their way they trade with the rest of the

 Pegged
 Banded Peg
 Free Floating

Front 104

pegged

Back 104

They try to keep it pegged to this value

Front 105

banned pegged

Back 105

“our currency is between 3.5 to 4.5 to the dollar”

Front 106

free floating

Back 106

Currency that goes into any market, and trades like crazy

Front 107

Central Banks – How do they work to try to maintain their currencies

Back 107

 Set policies for currency manipulation
 Buy and Sell currencies to try and affect value
 Hold reserves in Gold, SDR or other currencies

Front 108

Purchasing Power Parity (PPP)

Back 108

 PPP predicts the exchange rate
 This is what drives currency values against each other
 Explains the future of a currency

Front 109

Fisher Effect

Back 109

[links interest rates and inflation]

Nominal interest rate (rate charged at a bank) =
real interest rate + inflation

Front 110

Nominal interest rate is built of

Back 110

1) Inflation Rate: varies from countries
2) Real interest rate: what you want to get paid for letting them have your money (same around the world)

Front 111

International Fisher Effect Theory (IFE

Back 111

links interest rates and exchange rates]
The currency of the country with the lower interest rate will strengthen in the future

Front 112

Three major responsibilities of the European Parliament

Back 112

Legislative power
Control over the budget
Supervision of executive decisions

Front 113

Exchange rate

Back 113

is the price of a currency

Front 114

Reasons for Trade

Back 114

Diversification
Economies of Scale
Cost of Technology
Product Life Cycle