International Business Exam 1

Front 1

What is absolute advantage?

Back 1

Shows how one country has an "absolute advantage" when it can produce a good at less cost than another country.

Front 2

What is comparative advantage?

Back 2

States that two countries (or other kinds of parties, such as individuals or firms) can both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods.

Front 3

Who was the pioneer of the comparative advantage theory?

Back 3

David Ricardo, "Principles of Political Economy and Taxation".

Stated both countries would gain from trade even if one were more efficient in all goods.

Front 4

What is the "race to the bottom"?

Back 4

A socio-economic concept that is argued to occur between countries as an outcome of regulatory competition. When competition becomes fierce between nations over a particular area of trade and production, countries are given increased incentive to dismantle currently existing regulatory standards.

Front 5

Who introduced the concept of free trade or otherwise known as laissez-faire?

Back 5

Adam Smith, "Wealth of Nations" who argued all nations would benefit from unregulated free trade since it permits countries to specialize in goods they were best suited to produce because of natural and acquired advantages.

Front 6

What is the product life-cycle theory?

Back 6

The product life-cycle theory is an economic theory which suggests that early in a product's life-cycle all the parts and labor associated with that product come from the area in which it was invented. After the product becomes adopted and used in the world markets, production gradually moves away from the point of origin. In some situations, the product becomes an item that is imported by its original country of invention.

Front 7

What are the four steps of the product life-cycle theory?

Back 7

Step 1: U.S. has an export monopoly on this new product

Step 2: Foreign production of product begins

Step 3: Foreign production becomes competitive in export markets - U.S. Exports declines

Step 4: U.S. becomes importer of this no-longer new product.

Front 8

What is the 90/10 rule in Pankaj Ghemawat's article of "Why the World Isn't Flat"?

Back 8

Says most of our fixed investments which is about 90% is domestic and 10% is from foreign direct investment.

Front 9

What does Thomas L. Friedman's book, "The World is Flat" say?

Back 9

Thomas L. Friedman asserts 10 forces - most of which enable connectivity & collaboration at a distance which are flattening the Earth & leveling a playing field of global competitiveness.

Front 10

What are some of the examples of why the world isn't flat in the article by Pankaj Ghemawat?

Back 10

- More than 90% of phone calls, web traffic, and investment are local.
- Google is in third place behind two local firms in Russia.
- Political differences still exist despite economic convergence.
- There are still many barriers to web platforms and communication

Front 11

What are the several facts associated with product cycles?

Back 11

1. Export performance of principal innovating country is better for new products than products reaching maturity
2. Technology is simplified as maturing process continues, products initially produced with skilled labor can be later produced by automation with use of unskilled labor.
3. Relationship between innovating and imitating countries changes over time, countries once principal innovators may fall into decline.
4. International trade may increase in later stages of product cycle.

Front 12

What does the Linder's Income-Preference Similarity Theory argue?

Back 12

Argues range of a country's manufactured exports is determined by internal demand.

- He also states the phenomenon known as preference similarity which is basically: countries with high per capita income will demand high-quality goods and countries with low per capita will demand low-quality goods.

Front 13

On average, a 1% point increase in the ratio of a country's trade to its GDP increases income/person by at _______ %.

Back 13

0.5%

So for every 10% point increase in the importance of international trade in an economy, average income levels will rise by at least 5%.

Front 14

How do we calculate comparative advantage?

Back 14

Example: England and Portugal can both produce wine and cloth.
England (labor hrs): Wine - 120 Cloth - 100
Portugal (hrs): Wine - 80 Cloth - 90
1. We need to find opportunity cost of producing each item in each country.
2. Lowest opportunity cost of each country is the comparative advantage.

So England specializes in cloth (.83) and Portugal specializes in wine (.89).

Front 15

In recent years, what two countries experienced outstanding economic growth and trade expansion?

Back 15

China and India.

For many commodities, China has become the largest importer and the largest supplier in the world.

Front 16

In the U.S., we have a surplus in _______ industry and a deficit in the _______________ industry.

Back 16

U.S. Surplus - services

U.S. Deficit - Manufacturing

Front 17

What is the main point of Linder's Income-Preference Similarity Theory?

Back 17

- The more similar the demand structure of countries, the more they will trade with one another.

- Developed countries trade more with other developed countries.

Almost exact opposite of Heckscher-Olin Theory which predicted that "opposites attract"!

Front 18

Inter-industry trade refers to trade between ___________ countries which can be explained by what theory?

Back 18

Inter-industry trade is trade between different countries which is explained by the Heckscher-Ohlin Theory.

Front 19

Intra-industry trade is trade between ___________ countries which can be explained by what theory?

Back 19

Intra-industry trade is trade between similar countries which can be explained by economies of scale which can be explained by the Linder's Income-Preference Similarity Theory.

Front 20

What are examples of externalities that influence international trade?

Back 20

-Gov't policies
- Political relations between two countries
- History of importing/exporting country
- Culture
-Accident
-Luck

Front 21

Who has the largest trade deficit of any country?

Back 21

U.S.

Front 22

Highly developed countries tend to have __________ as major export.

Back 22

Services

Front 23

Unskilled workers are much less likely to support free trade because of what?

Back 23

They are threatened by a shift of their jobs to lower-cost locales.

Front 24

Skilled and highly educated people are more likely to _________ from free trade in the short term.

Back 24

Benefit

Front 25

What does the Sovereignty Argument say about the opposition of trade?

Back 25

States that trade is a threat that represents national sovereignty.

- The shift in production to the most efficient location deprives a country of the base it needs.
- In turn, this will make a country too dependent on nations that may challenge its national interests.

Front 26

The Lowest Common Denominator Argument says what?

Back 26

Says production will shift to nations with the least protection since they will offer the lowest cost base.
- Eventually will pay for adverse impact: environmental degradation, global warming, etc.

Front 27

What is passive reciprocity?

Back 27

Position taken by a country in which it refuses to lower or eliminate barriers to trade until one or more parties do the same.

Front 28

What is active or aggressive reciprocity?

Back 28

Conducted through threat of retaliation such as withdrawal of previous commitments until other party fulfills its obligations.

Front 29

What are all the tariff barriers?

Back 29

- Tariffs
- Quotas
- Export controls
- Dumping and anti-dumping

Front 30

What are all the nontariff barriers?

Back 30

- Administrative barriers
- Subsidies
- Embargoes, boycotts, buy local campaigns
- Technical standards
- Corruption

Front 31

What does the optimal tariff theory assume?

Back 31

Assumes that by imposing a tariff, governments can capture a significant portion of the manufacturer's profit margin.

- Gov't obtains part of proceeds that would have been obtained by the exporter.

Front 32

When are export controls typically used?

Back 32

They are typically activated against products with a national security potential.

Also can be used to prevent export of goods vital to domestic industry & armed forces.

Front 33

What are the good and the bad of globalization?

Back 33

Good:
- Lower prices for goods and services
- Economic growth
- Increase in average consumer income
- Creates jobs
- Countries specialize in goods and services produced most efficiently
- Greater competition
Bad:
- Reduce blue-collar jobs and wages in developed countries
- "Race to the bottom"
- Greater income disparity both within and across countries
- Loss of traditional culture
- Environmental damage
- Businesses more powerful than governments

Front 34

What is international business?

Back 34

International Business - the business activities that involve the transfer of resources, goods, services, knowledge, skills or information across national boundaries.

Front 35

What is a multinational enterprise?

Back 35

A firm that has directly invested abroad and has control over at least one working affiliate in a foreign country.

Front 36

What are some of the flatteners of globalization?

Back 36

- Internet 1995-2000
- Transportation improvements
- VOIP (Voice-over IP)/ long distance - $300 to 40 cents
- Greed – need for constant growth
- Berlin Wall collapse – fall of communism causing freer flow of information
- Decrease in corruption

Front 37

Increase respect for ideas regardless of nationality and increased humility in other countries are examples of which cross-cultural competency?

Back 37

Reduced Ethnocentrism

Front 38

Having greater comfort in international and multicultural situations when cues cannot be easily read and being slower to form judgment are examples of which cross cultural competency?

Back 38

Increased Tolerance of Ambiguity

Front 39

Being able to work more effectively in situation where reinforcement substitutions are needed and being ableto change behaviors in international settings are examples of which cross cultural competency?

Back 39

Increased Cultural Flexibility

Front 40

What was the act that caused the GATT?

Back 40

The Smoot-Hawley Tariff Act helped reduce world trade by 2/3 between 1929-1933.

This act raised U.S. tariffs on imported goods to record levels.

Front 41

What is an example of a global infrastructure?

Back 41

Ex: IMF (International Monetary Fund), The World Bank, WTO (World Trade Organization).

Front 42

What does the Hecksher-Ohlin Theory say?

Back 42

Countries are not equal in their factor endowments ( factors of production; land, labor, capital).
- Countries will export commodities that make heavy use of their abundant factors
- Countries will import commodities that make heavy use of their scarce factors

Front 43

Intra-industry, trade between similar countries can be explained by what theory?

Back 43

Linder's Income-Preference Similarity Theory

Front 44

The Leontief Paradox contradicted what theory and what were the reasons behind it?

Back 44

Contracted the Heckscher-Ohlin theory.

Reasons for contradiction:
- Demand bias for capital-intensive goods
- Existence of trade barriers
- Additional factors that vary by country such as human skills and technology

Front 45

What are the factors of the Round world view?

Back 45

1.Nationalism (security, identity) self-sufficient
Ex: Ban of Facebook in China
2. Language - communication barriers
3. 90-10 rule - 90% of business transactions are domestic
4. Culture
5. Political
6. Financial
7. Religion
8. Time & Geography

Front 46

What are the pros of GATT?

Back 46

1.Required consensus - no country left out, all countries gain wealth
2. Reduce Tariffs & increase collaboration
3. Most favored Nations Status - tariff between two countries is available for all countries.
4. National Treatment - domestic, local treat foreign companies same as domestic companies

Front 47

What are the pros and cons of WTO?

Back 47

Pros of WTO:
- Sped up dispute resolution
- Consensus not required
- Intellectual property protection
Cons of WTO:
- Threaten you with your membership
- Impose sanctions

Front 48

The new trade theory argues what?

Back 48

Argues that countries don't just trade to take advantages of specializations but because of increasing returns.

Front 49

What are some of the issues with the WTO?

Back 49

WTO:
-

Front 50

What did the U.S. think about the WTO?

Back 50

U.S. negotiators thought stronger enforcement procedures within GATT can serve as a substitute for unilateral action by the U.S.

Front 51

What is the terms of trade?

Back 51

The relative prices of exports - the unit price of exports divided by the unit price of imports.

Terms of trade improve if the country exports more goods that are associated with advanced human skills and technologies.

Front 52

In the argument between Bhagwati and Alan Binder, what were the supporting arguments of offshoring by Bhagwati?

Back 52

Supporting arguments of offshoring:

- Lowers labor costs, increases firm's ability to adapt to changes in an integrated economy
- allocating work across borders brings about the greatest efficiencies to production and costs
of goods.

Front 53

What is offshoring?

Back 53

Moving work previously completely in one country to another country.

Bad for low-skilled workers since they are the ones getting replaced.

Front 54

What are the key supporting arguments of Alan Blinder who is against off-shoring?

Back 54

- Means we need to retool and reskill the American workforce so the low-class worker jobs are not taken
Recommends:
- Building a better safety net through trade adjustment assitance (TAA), greater pension, and universal health care.
- Preparing workforce with more education so occupations won't be offshored
- Policies supporting innovation and entrepreneurial ventures increasing our comparative advantage

Front 55

What is the key concept of our flattened world?

Back 55

It is where we are on a equal, leveled playing field.

Front 56

What is Globalization 1.0, 2.0, and 3.0?

Back 56

Globalization 1.0 (1490-1800):
- Shrank world from large to medium
- Countries globalizing
Globalization 2.0 (1800-2000)
-Companies globalizing
- Medium to small
- Driven by U.S. and European countries
Globalization 3.0 (Started 2000)
-Small to tiny size
-Individuals and small groups globalizing
- Driven by all countries