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20 Cards in this Set

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horizontal FDI
foreign direct investment in the same industry abroad as a firm operates in at home
vertical FDI
FDI in an industry abroad that provides input into a firm’s domestic operations, or FDI into an industry abroad that sells the outputs of a firm’s domestic operations.
product life cycle theory
The optimal location in the world to produce a product change as the market for the product matures
What does the product life cycle theory predict about FDI?
This predicts that when a foreign market is large enough to support local production, FDI will occur
What is a free trade area?
A group of countries committed to removing all barriers to the free flow of goods and services between each other, but pursuing independent external trade policies.
capital accounts
The Capital Account shows a decrease from the initial capital outflow.
current accounts
The Current Account shows a decrease if the home market is served from a low-cost production company
What is the EFTA
European Free Trade Association – A free trade association including Norway, Iceland, and Switzerland
Plaza Accord
– A group of 5 major industrial countries (GB, France, Japan, Germany, and the US) met in New York and reached the Plaza Accord. They announced that it would be desirable for most major currencies to appreciate vis-à-vis the US dollar and pledged to intervene in the foreign exchange markets, selling dollars, to encourage this objective. (boost the value of the $)
Louvre accords
When the dollar continued to decline the Group of 5 began to worry so they met in Paris, and reached a new agreement known as the Louvre Accord. They agreed that exchange rates had been realigned sufficiently and pledged to support the stability of exchange rates around their current levels by intervening in the foreign exchange markets when necessary to buy and sell currency. (lower the strength of the US $)
What can a Host Country do to encourage FDI
Make Low interest rates on loans, provide a tax break, provide insurance
What can a host country do to discourage FDI
Arrest you, Tarrifs & Quotas, economic constraints CCR, Raise Taxes, Restrict currency convertibility.
Describe the origin and development of the EEC
The EEC was formed by the Treaty of Rome to produce a common market (1957)
Describe how an exchange rate is derived from the law of one price
in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price, the exchange rate is derived from these two
What is the Fisher effect?
i = r + I
What did the Jamaica agreement allow? (2)
Floating & fixed rates are acceptable
Dirty floats are accepted (government intervention)
Why do governments restrict the convertibility of their currencies? (2)
1) to prevent capital flight
2) prevent speculation
3) to prevent negative impact on currency
Make three arguments for fixed exchange rates
1) Monetary Discipline
2) Speculation
3) Uncertainty
4) Trade Balance Adjustments
Make three arguments for floating exchange rates
1) Monetary Policy Autonomy
2) Trade Balance Adjustments
Name three trade pacts and list the countries that a part of each pact. (5)
1) Andean Pact of 1969 – Chile, Peru, Columbia, Ecuador, Bolivia. 2) Asean Pact of 1967 – Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand. 3) Central American Pact of the 1960 – El Salvador, Costa Rica, Honduras, Nicaragua, Guatemala, Panama