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60 Cards in this Set
- Front
- Back
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Globalization
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the shift toward a more integrated, interdependent world economy
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Components of Globalization
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Globalization of Markets and Globalization of Production
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Globalization of Markets
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the merging of separate national markets into a global marketplace; firms that offer similar commodities worldwide will help create the global market; operate in numerous different countries and sell the same basic products, with some changes to accommodate the different cultures Examples: Coca Cola, McDonalds, Starbucks, and IKEA; IKEA flower vase sales skyrocketed because americans thought they were glasses
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Globalization of Production
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sourcing goods/services from locations around the world to exploit national differences in cost and quality of factors of production, including energy, land, capital, and labor; Example: Boeing
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Drivers of Globalization
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(1) Declining Trade & Investment Barriers (2) Technological Change
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Declining Trade & Investment Barriers (Drivers of Globalization)
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during 20s and 30s, many countries implemented daunting trade bariers to international markets to help boost local markets. this backfired and led to 'beggar thy neighbor' trade policies (hefty tariffs); resulted in decreased international flow of goods, services, and capital; GATT Treaty was created during Bretton Woods Conference during WWII to lower all trade barriers and promote international trade
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Technological Change (Drivers of Globalization)
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plays a huge role in promoting globalization; technology helps promote international communication and transportation
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Limits to Globalization of Markets
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differences among national markets (especially food markets) cause issues in international franchises because differences in tastes and preferences; most global markets are for industrial goods and materials that have universal applicability; food companies have a hard time making it in international markets; Example: Campbell soup in Russia
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Limits to Globalization of Production
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Managing a global web of suppliers and production facilities is complex; crisis's test supply chains weak links; Example: Japans earthquake crated product shortages, especially in electronics and automotive industries; costs of using a nation's factors of production can change due to: gov policies and barriers to trade, transport costs, exchange rate fluctuations, and resource availability
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Global Institutions that influence trade today
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World Trade Organization (WTO) and International Monetary Fund (IMF) and World Bank
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Bretton Woods Conference
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1944 GATT Treaty signed (WTO); focused on reducing barriers to trade by lowering tariffs and remove restrictions to the flow of goods/services; this is also where the IMF was created which focused on stability in exchange rates
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GATT
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General Agreement on Tariffs and Trade -- emerged from the Bretton Woods Conference; main objective was to reduce barriers to international trade; WTO replaced GATT agreement in 93; GATT treaty is still in effect but the WTO is now the org that controls the rules
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IMF
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International Monetary Fund -- created to stabilize exchange rates and to supervise the reconstruction of the world's international payment system; provides financial assistance to countries in hard financial/economic times IF they agree to IMF's policy conditions; they are lender of last resort; member countries pay dues yearly
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Positives of Globalization
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lowers prices for goods/services; stimulates economic growth; promotes efficient resource utilization; creates jobs
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Concerns with Globalization
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eliminates manufacturing jobs in wealthy, developed countries; decreases wage rates of unskilled workers in advanced countries; may encourage companies to more countries with fewer labor/environmental regulations; results in loss of national sovereignty
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Smoot-Hawley Act
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1930 -- 'Beggar Thy Neighbor' trade policy; US raised tariffs to get out of depression but caused other countries to do the same
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The New Deal
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1933 -- Keynesian economics is when the government spends money to create jobs; in The New Deal they spent money on random stuff like bridges, railroads, etc to create jobs for unemployed; it worked and got people back into the workforce and boosted economy
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Glass-Steagall Act
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1933 -- established the rule that a financial institution can be one of three types of bank: commercial, investment, or an insurance seller
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contagion
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economic crisis in one country spills over into another; Example: Asian Financial Crisis 1997 - investors in Thailand got spooked and pulled out of Thailand which spilled into other asian countries then into russia and south america
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Asset Bubbles
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when it bursts it usually is very dramatic; Example: when price of real estate and homes are way higher than what they're actually worth
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TARP
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Trouble Asset Relief Program -- $700 billion bailout program for financial institutions and automakers
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issues with TARP
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Where is the help for individual homeowners? Why are the banks bailing out super-rich individuals and wealthy bank when there’s no bailout for the average homeowner?
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Dodd-Frank Wall Street Reform and Consumer Protection Act
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most sweeping overhaul of financial regulations since the 30's was recently signed into law summer of 2010; it places further restrictions on the financial industry and protects consumers in financial markets (makes sure if someone gets a sub-prime mortgage, they actually understand what they're doing); expands the power of key government agencies and creates a new consumer-protection agency to oversee financial products
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American Recovery and Reinvestment Plan
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$787 billion stimulus package to 'jump-start the economy to create and save jobs'; package includes funding for infrastructure projects, education, and tax cuts for individuals and businesses; also lowered tax rates for some consumers, so they would spend more money rather than save; provisions included 'Cash for Clunkers' (ultimately helped Japan car companies) and 'Housing Tax Credit'' (people stopped buying houses again when program was over); MOST CONTROVERSIAL: included a Buy American clause (all new projects had to use american products)
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Fiscal Policy
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attempts to influence the direction of an economy through changes in gov taxes or gov spending; jobs are created when consumers, businesses, and gov spend money; fiscal policy takes longer than monetary policy to impact an economy
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Monetary Policy
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attempts to influence an economy by controlling interest rates and the supply of money; when cost of borrowing is low, consumers/businesses are going to borrow more money to spend; often have a quick and substantial impact on an economy; must be careful using this policy to keep inflation in narrow range
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Monetary Policy Tools
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Banking reserve requirements and Buying and Selling of gov securities
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Banking reserve requirements (Monetary Policy Tools)
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designed to provide a financial cushion to the banks in case everyone comes at the same time to withdraw their money; US doesn't control reserve requirements very often but other countries tend to; Decrease reserve requirements -- banks have more money to lend out, and consumers have more money to spend promoting growth of the economy; Increase reserve requirements -- banks have less money to lend out, constraining the economy
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Discount Rates
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the interest rate that the Federal Reserve charges banks for short term loans;
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Federal Funds Rate
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the interest rate banks charge each other for overnight loans (this is linked to the Discount Rate. The higher the discount rate, the higher the federal funds rate will be); affects ALL other interest rates;
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Specific Tariffs
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levied as a fixed charge for each unit
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Ad volarem tariffs
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levied as a proportion of the value of the good
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Tariffs
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duties imposed by governments on imported/exported goods; revenues go directly to gov; promote consumption of domestic products and protect domestic industries; Who is the biggest loser? DOMESTIC CONSUMERS because they must now pay artificially higher prices for the inefficient domestic product of the tariff-ridden foreign product; "Outfoxing the Chicken Tax" -- once through customs, the rear windows and seats are removed and all the material scrap sent to be recycled. Removing the parts costs Ford hundreds of dollars but it saves thousands of dollars in tariffs
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Mercantilism
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dates back pre paper currency; more gold is better than less gold; countries could maximize exports through gov subsidies and minimize imports through tariffs and quotas
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Neo-mercantilism
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the notion that imports are inherently bad for an economy, and this still is a way of thinking today. "Protectionist movement" -- those who protect domestic industries from foreign ones are neo-mercantilists. they believe countries should be self sufficient
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Absolute Advantage
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countries must engage in trade where they have the absolute advantage compared to their rivals in that industry and they should ONLY produce those goods and trade for everything else; Example: Cocoa and Rice (Ghana vs South Korea)
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Theory of Comparative Advantage
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Ricardo -- countries can still benefit from trade even if a country has an absolute advantage of production in all products; a country should specialize in the production of goods that it produces most efficiently and buy the goods it produces comparatively less efficiently from other countries; Example: - Ghana & South Korea -- Ghana is comparatively more efficient in producing cocoa than rice. For every acre used to grow cocoa, they have to forego certain acres of rice, but they still are more efficient with growing cocoa than rice.
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Extensions of the Ricardian Model
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immobile resources, diminishing returns to specialization, dynamic effects and economic growth
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Immobile Resources (Extensions of the Ricardian Model)
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there are limits to the mobility of resources; if a country all of a sudden switches from growing rice to cocoa, they are going to be a lot less efficient still compared to a country that has been growing cocoa for a while
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Diminishing Returns to Specialization (Extensions of the Ricardian Model)
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The Production Possibilities curve will curve into the center because as you get closer to growing all cocoa, the last acre of cocoa will be less efficient that the very best acre
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Dynamic Effects and Economic Growth (Extensions of the Ricardian Model)
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"Success begets Success" -- if a country is doing well in a certain study or production and becomes very successful, there will be an inflow of knowledge, labor, and capital; Example: Stem Cell Research in Singapore - if doing well in this area, more stem cell scientists are going to want to be in Singapore
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Herkscher-Ohlin Theory
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states that differences in factor endowments and factor costs determine the comparative advantage of certain products; countries should export goods that intensively use factor endowments which are locally abundant and import goods made from locally scarce factors; Example: Iceland has lots of thermal energy and should therefore concentrate on geothermal energy and trade for things like citrus
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Product Life-Cycle Theory
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a product goes through evolutionary stages from the day it is introduced to the market to the day it is withdrawn from it; 1 introduction 2 growth 3 maturity 4 decline; each stage has different competitive conditions and this competitive rivalry and competitive advantage change during each stage
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Introduction (Product Life-Cycle Theory)
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manufactured and sold in advanced economies -- early adopters of a new technology are generally less concerned about price; Example: HDTVs were thens of thousands of dollars when first relseased; Sales and production are both concentrated in advanced economies during this stage because whoever is buying these extremely expensive TVs wants to be close to the company who created it in case something goes wrong; ALL products in the intro stage are created, produced, and sold in advanced economies
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Growth (Product Life-Cycle Theory)
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manufactured and sold in advanced economies -- new entrants enter the industry but sales are still increasing; firms may supplement production capacity by building additional production facilities
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Maturity (Product Life-Cycle Theory)
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moving to manufacturing in low labor-cost economies -- sales plateau and are limited to replacement sales and population growth; product becomes standardized and sales are more and more based on price; Cost-competitiveness becomes the key to survival at this point; production is moved from advanced economies to low labor-cost countries
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Decline (Product Life-Cycle Theory)
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completely manufactured in low labor-cost economies -- a new technology replace the product and sales decrease; weaker firms are forced out of the industry; all production is moved to low-labor cost countries
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New Trade Theory
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all about "getting there first" -- to enjoy economies of scale (lower production costs due to more production); Example: Spain's wind energy industry
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Factor Endowments (National Competitive Advantage or Porter's Determinants of National Advantage)
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the quantity and quality of resources including land, labor, and capital a nation possesses; 1 human resources 2 physical resources 3 knowledge resources 4 capital resources 5 infrastructure
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National Competitive Advantage or Porter's Determinants of National Advantage
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Michael Porter -- attempts to explain reasons for a nation's success in a certain industry; theory proposes 4 broad attributes that shape environment in which local firms compete; these attributes promote or impede the creation of comparative advantage; 1 factor endowments 2 Firm Strategy, Structure, and Rivalry 3 Demand Conditions 4 Related and Supporting Industries
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Firm Strategy, Structure, and Rivalry (National Competitive Advantage or Porter's Determinants of National Advantage)
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level of competition in domestic market -- cutthroat competition in domestic markets can only prepare you for cutthroat competition in international markets
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Demand Conditions (National Competitive Advantage or Porter's Determinants of National Advantage)
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a large home market can lead to emphasis in economies of scale; high consumer expectations in the domestic industry will prepare the firm to operate in the global market; specialized demand can create global demand
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Related and Supporting Industries (National Competitive Advantage or Porter's Determinants of National Advantage)
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firms in related industries can achieve competitive advantage through spillover effects; this competitive advantage leads to cost-effective inputs or higher quality inputs
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Instruments of Trade Policy
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1 Tariffs 2 subsidies 3 import quotas 4 voluntary export restraints 5 local content requirements 6 administrative trade policies 7 antidumping policies
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Import Quotas (Instruments of Trade Policy)
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restriction on the quantity of a foreign good imported into a country; enacted by issuing import licenses to a limited number of firms; TARIFF RATE QUOTA - a lower tariff rate is applied to imports within the quota than those above the quota
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Voluntary Export Restraints (Instruments of Trade Policy)
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quota on trade imposed by the exporting company; countries agree to voluntary export restraints in order to avoid other trade actions such as tariffs
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Local Content Requirements (Instruments of Trade Policy)
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declare that foreign producers must use a certain amount of local materials in their domestic production; may be a percentage of component parts or of the total value of the good; developing countries use this to promote economic development; developed economies use this to protect domestic producers
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Administrative Trade Policies (Instruments of Trade Policy)
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bureaucratic rules that make it difficult for imports to enter a country; seem neutral on surface but have either the intent or consequence of make it more difficult for foreign firms to do business to protect domestic firms
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Antidumping Policies (Instruments of Trade Policy)
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used to prevent foreign firms from selling goods too cheap in another country's market;
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Strategic Trade Policy
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Argues to use subsidies in strategic ways in infant, emerging industries (ex: solar energy); problem is that the subsidies tend to be used in industries where there is no hope left which is detrimental to the economy
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