International Test 2

Front 1

horizontal FDI

Back 1

foreign direct investment in the same industry abroad as a firm operates in at home

Front 2

vertical FDI

Back 2

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.

Front 3

product life cycle theory

Back 3

The optimal location in the world to produce a product change as the market for the product matures

Front 4

What does the product life cycle theory predict about FDI?

Back 4

This predicts that when a foreign market is large enough to support local production, FDI will occur

Front 5

What is a free trade area?

Back 5

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.

Front 6

capital accounts

Back 6

The Capital Account shows a decrease from the initial capital outflow.

Front 7

current accounts

Back 7

The Current Account shows a decrease if the home market is served from a low-cost production company

Front 8

What is the EFTA

Back 8

European Free Trade Association – A free trade association including Norway, Iceland, and Switzerland

Front 9

Plaza Accord

Back 9

– 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 $)

Front 10

Louvre accords

Back 10

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 $)

Front 11

What can a Host Country do to encourage FDI

Back 11

Make Low interest rates on loans, provide a tax break, provide insurance

Front 12

What can a host country do to discourage FDI

Back 12

Arrest you, Tarrifs & Quotas, economic constraints CCR, Raise Taxes, Restrict currency convertibility.

Front 13

Describe the origin and development of the EEC

Back 13

The EEC was formed by the Treaty of Rome to produce a common market (1957)

Front 14

Describe how an exchange rate is derived from the law of one price

Back 14

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

Front 15

What is the Fisher effect?

Back 15

i = r + I

Front 16

What did the Jamaica agreement allow? (2)

Back 16

Floating & fixed rates are acceptable
Dirty floats are accepted (government intervention)

Front 17

Why do governments restrict the convertibility of their currencies? (2)

Back 17

1) to prevent capital flight
2) prevent speculation
3) to prevent negative impact on currency

Front 18

Make three arguments for fixed exchange rates

Back 18

1) Monetary Discipline
2) Speculation
3) Uncertainty
4) Trade Balance Adjustments

Front 19

Make three arguments for floating exchange rates

Back 19

1) Monetary Policy Autonomy
2) Trade Balance Adjustments

Front 20

Name three trade pacts and list the countries that a part of each pact. (5)

Back 20

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