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101 Cards in this Set

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Democracy

Form of government in which all citizens have the right to vote

Athenian Democracy

A pure form of democracy, in which all adult citizens vote directly on matters affecting the community

Representative Democracy

Form of government in which citizens vote to elect given individuals to serve as their representatives for a certain period of time

Totalitarian Government

System of government in which individuals govern without the support or consent of the citizenry; for example, a military dictatorship

Communism

The government or state owns and controls all major factors of production and philosophically an economically classless society

Socialism

The government plays a strong role in the economy and may own stakes in certain businesses

Capitalism

Businesses are privately owned, strong individual incentives exist, and the government plays very little role in the economy.

Do you think, overall, that countries in the world are becoming more democratic, or less democratic, in nature? Why?

With the fall of communism probably somewhat more democratic in nature.




Communist: China (declining)


Socialist: China, Denmark, Sweden, Finland


Capitalism: USA

Based on the type of government, which countries are doing much better and progressing more than others in comparison?

Democratic Countries

Are there any places in the world, today, where "pure", "free market" capitalism exists? If so, what is it about these locations that permits this ideological approach to thrive?

Hard to find, maybe a country like Singapore with a very stable political structure.

Civil Law Legal System

Based on a comprehensive listing of legal rules in sets of written codes of law

Common Law Legal System

Compromised of legislative bodies that enact less specific legal rules that give judges or courts considerable authority in interpreting these rules based on precedent and other factors.

Theocratic Law Legal System

Based on religious documents and teachings

Political Risks

The risks that political forces or problems in a given country will have a meaningful negative impact upon the conduct of business in that country

Micropolitical Risk

A political risk that only affects a certain industry or set of firms in a given country

Macropolitical Risk

A political risk that essentially affects all businesses in a given country

How can we avoid risk?

Through careful planning and research

Terrorism Risk Insurance Act of 2002

U.S. law that after a certain deductible provides U.S. businesses government insurance coverage for the risk of terrorism

Overseas Private Investment Corporation (OPIC)

U.S. government agency that sells political risk insurance to U.S. businesses operating in countries with which the U.S. has a bilateral investment treaty

Corruption

A situation where businesses are able to illegally alter relevant private and/or public decision making by way of bribes, kickbacks, blackmail, extortion, and related activities

Private Corruption

Business corruption involving other private businesses, individuals, or groups

Public Corruption

The practice of making illegal payments to government officials or engaging in blackmail, extortion or other related activities to obtain government contracts or governmental approval for business activities

What are the different types of laws?

>Criminal


>Contract


>Tax


>Antitrust


>Product Safety


>Dispute Settlement

Criminal Law

Establishes which violations of a nation's laws are crimes punishable by possible incarceration

Contract Law

Governs legally enforceable agreements between parties to engage in economic exchange

Tax Law

Deal with governmental levying of taxes on individuals and corporations

Antitrust Law

Promote "fair competition" among businesses

Collusion

The practice of companies acting in a manner which secretly thwarts competition amongst themselves




Examples: Dividing up markets; collaborating to fix prices on goods and services

Monopoly

The situation where there is only a single seller of a product in an industry and there are very high barriers to enter that industry

Product Safety Law

Establishes the standards of product safety to which the manufacturers and sellers of products are held

Caveat Emptor

"Buyer Beware"




Places the burden of determining product safety on consumers

Caveat Venditor

"Seller Beware"




Places on manufacturers or sellers the burden of making sure their products are safe or at least clearly and explicitly warning consumers about the potential safety risks of their products

How do we settle disputes?

>Dispute Settlement Law

>Litigation


>Arbitration

Dispute Settlement Law

Governs how disputes arising in the conduct of global business are settled

Litigation

Involves bringing a dispute to a publicly or governmentally run court of law for resolution

Arbitration

The disputing parties designate a neutral private person or group of persons to hear and decide their dispute

Mediation

Person who acts on behalf of both party


>Not right or wrong


>Focuses on win-win situation

Intellectual Property

Property that is the product of intellectual rather than physical activity

Intellectual Property Protections

The limited monopoly rights legally granted by a nation to the creator of intellectual property

What are the three main intellectual property protections?

>Patent


>Trademark


>Copyright

Patent

Protects inventor's product or process from others selling, making, or using the invention for a certain period of time

Trademark

Distinct phrase, name, word, picture, symbol, design, or combination of these, that identifies a given business' service or product and is owned by said business

Copyright

Protects creator's creative work (book, film, art, music, etc)

Genericized Trademark

Trademark that has become so well known or colloquial that it now describes a general class of product or service, as opposed to a specific product or service as intended by the trademark's owner

What are some arguments in favor of permitting at least some levelof “corruption” in the conduct of business throughout the world?

It's almost impossible to completely detect and prevent.

Criminal laws vary widely throughout the world. What may be a“crime” in one country, may represent permissible conduct in another locale.Why do you think there are such vast global differences in this regard?

Different cultural roles and ideologies in different places in the world

What are some steps countries can take to better enforceintellectual property rights in their jurisdictions?

Better police/customs agents and other enforcement mechanisms

Balance of Payment

A statement of account that shows all transactions between one country and the rest of the world for a given period of time.

The Current Account (of the BOP)

Largely driven by activities of consumers and business


>consists of 4 sub-accounts (added up equals current account balance)

Trade Balance

The net of merchandize exports and merchandize imports

When does a country have a trade deficit?

When a country imports more than it exports

Services Balance

The net of exports of services and imports of services

What does a surplus in the services balance indicate?

It indicates that a country is competitive in its services industry

Income Balance

The net of investment income from abroad and investment income paid to foreigners

Balance of Transfers

The net transfer payments between countries based on outflows and inflows

What is more important: current account balance or trade balance?

Current Account Balance

Financial Account

Shows how the country's current account balance is financed

What are the three sub-accounts of the Financial Account of the BOP?

1. U.S.-owned assets abroad, foreign-owned assets in the U.S., and financial derivatives

Foreign Direct Investment (FDI)

Encompasses the purchases of fixed assets abroad used in the manufacture and sales of goods and services for local consumption or exports.

How is the flow of Foreign Direct Investment (FDI) dictated?

It is dictated by opportunities to earn profit overseas.

Security Investment

>Has a significant impact on the BOP's financial account

Statistical Discrepancy

Reconciles any imbalance to ensure that all debit and credit entries in the BOP statement sum to zero




>captures statistical inconsistencies in the recording of the credit and debit entries as well as illegal trade

What does capital flows represent and why does capital flow between countries?

Represents investments for the long term


>Financial Capital flows between countries in search of higher rates of return on foreign stocks and bonds

What holds foreign exchange of major countries? Why?

Central Banks hold foreign exchange of major countries


>Part of their reserves in addition to their local currency.

TRUE OR FALSE: In flow of funds analysis, money moving into a country is a debit (negative sign), while money leaving the same country is a credit (plus sign).

False.

TRUE OR FALSE: One factor affecting change in currency values is different price levels in different countries for the same goods and services.

True.

What are some reasons why currency values can change?

1. Different price levels in different countries for the same goods and services


2. Price imbalances due to mispricing


3. Varying interest rates across countries


4. Price imbalances due to differential inflation

Balance of Payment

Statement of account that shows all transactions between one country and the rest of the world for a given period of time

Current Account

Activities of consumers and businesses in the economy

What are the four types of Current Account?

1. Trade Balance


2. Services Balance


3. Income Balance


4. Net Transfers

Financial Account

How the account balance is financed

What are the three types of Financial Account?

1. U.S. Assets Abroad


2. Foreign Assets in the U.S.


3. Net Financial Derivatives

What are the three types of Exchange Rate Systems?

1. Floating Exchange Rate System


2. Managed Floating Exchange Rate System


3. Fixed Exchange Rate System

Floating Exchange Rate System

Determined by the demand and supply of currencies

Managed Floating Exchange Rate System

Government intervention (e.g. Russia, India)

Fixed Exchange Rate System

Pegged to another currency (e.g. Malaysia)

Exchange Rate

Price at which one currency can be converted to another currency

What are the two types of FOREX Markets?

1. Spot Market


2. Forward Market

What's the difference between Spot Market and Forward Market?

Spot is real time rate where Forward Market is previously established rate




Spot is Immediate delivery where Forward is in the future

What are the Spot Rates?

>Direct Quotes: Prices of a foreign currency in dollars

>Indirect Quotes: The reciprocal of the direct quote


>Bid-Ask Spread: Transaction fee earned by bank; difference b/t bid (buy) and ask (sell) prices of a currency

When does discount selling occur?

When...


Spot Rate < Forward Rate

When does premium selling occur?

When...


Spot Rate > Forward Rate

Smithsonian Agreement 1971

>U.S. devalued the dollar against other's currencies


>Temporary regime of central rates by IMF

Jamaica Agreement (1976)

>Floating currencies, gold no longer a standard


>Countries adopted exchange rate systems


>Members adopted SDR (Special Drawing Right)

Money and Inflation

>Printing more money can increase economic activity
>Excess supplies of money could cause inflation


>When supply of money exceeds demand for goods and services, prices of goods and services can rise

Bretton Woods Agreement

Slide 26 of Week 10

Special Drawing Right (SDR)

>Primary reserve asset of international monetary system


> Basket of currencies (dollars, euros, pounds, and yen) used a benchmark to value different currencies

Dollar, Euro, and Yen account for how much percentage of the world economy?

60%

Clean Float

Currency monetary system with minimal government intervention; largely market determined

Dirty Float

Currency monetary system with varying degrees of government intervention to maintain a range of acceptable values against other currencies

What are the potential problems with valuing or devaluing currencies?

Liabilities denominated in foreign currency, while assets denominated in local currency

Hard Currencies

Leading world currencies of developed industrialized countries, including dollar, euro, yen, and pound

Soft Currencies

Emerging market countries' currencies that are less stable in value than

Dollarization

Practice of using the dollar or some other foreign currency together with, or instead of, a domestic currency in a country

Purchasing Power Parity (PPP)

Theory stating that a basket of goods should have approximately the same prices across different countries

Law of One Price

Principle stating that identical goods should sell for the same price in different countries according to local currencies

The Big Mac Index

Calculation using the cost of a Big Mac sandwich to assess the relative values of currencies

The difference between forward and spot exchange rates reflects expectations by investors about future exchange rate movements.

True

According to the Big Mac Index, the dollar interest rate on U.S. and European bonds should be the same. Otherwise, there would be no arbitrage opportunities for investors.

False. It regards to the ingredients and is FAR from being related to bonds.

__________________ encompasses purchases of fixed assets (such as factories and equipment) abroad used in the manufacture and sales of goods and services.

Foreign Direct Investment

A system that sets the values of major currencies based on their demand and supply in world currency markets are referred to as a(n) ______.

Independent Floating Exchange Rate System