view that claims phenomenon of globalization was initially driven by the desire of Western economies to exploit their power through MNE’s
new
view that claims globalization is a long-run historical evolution since the dawn of humanity. Says it is nothing new and that it will always exist
evolutionary
view that claims globalization is swinging from one extreme to another from time to time
pendulum
investment in, controlling, and managing value-added activities in other countries
foreign direct investment
political view hostile to FDI. believes it is an instrument of imperialism and vehicle for exploitation of domestic resources by foreign capitalists and firms
radical
suggests that FDI, unrestricted by government intervention, will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services
free market
views FDI as having pros and cons and only approving FDI when its benefits outweigh costs
pragmatic nationalis
what benefits exist to a country receiving FDI?
capital inflow, technology spillovers, advanced management know-how, creates jobs
what costs exist to a country receiving FDI?
loss of sovereignty, adverse effects on competition, net outflow in the capital account
The aggregation of importing and exporting that leads to the country-level trade surplus or deficit.
balance of trade
firms with a _ degree of resource similarity are likely to have similar competitive actions
high
a high degree of resource similarity but low market commonality = _ intensity of rivalry
highest
little resource similarity but high market commonality = _ intensity of rivalry
lowest
mercantilism, absolute advantage and comparative advantage belong to what theory of international trade
classical
theory of international trade that relies on more realistic product life cycles and first mover advantages
modern
under free trade, a nation gains by specializing in economic activities in which it has _____advantage
absolute
focuses on the idea that if a country does not have absolute advantage, they can still choose to specialize in the production of one good where it has __ advantage
comparative
comparative advantage and absolute advantage stem from
factor endowments
theory that the wealth of the world is fixed and that a nation that imports more and exports less will be richer
mercantilism
stage of the product life cycle where production of a new product that commands a price premium will concentrate in the US
new
stage of the product life cycle where demand and ability to produce grow in other developed nations
maturing
stage of the product life cycle where the previously new product is commoditized and production will now move to low-cost developing nations
standardized
comparative advantage may change over time because patterns of __ change over time
trade
theory that suggests that intervention by governments in certain industries can enhance their odds for international success
strategic trade
if a company seeks to limit foreign exchange rate exposure in the forward direction, what is the most effective way to do this?
currency hedging
exchange rate risk associating with the time delay between entering a contract and settling it
transaction risk
forward transaction that protects traders and investors from exposure to fluctuations of the spot rate
hedging
a means of spreading out activities in different currency zones in order to offset the currency losses in certain regions through gains in other regions
strategic heding
amount of resources committed to entering a foreign market
scale of entry
how do institutions reduce uncertainty?
by signaling which conduct is legit and which is not
pillar of formal institution, coercive power of government
regulatory
pillar of informal institution, the mechanism through which norms influence individual and firm behavior
normative
pillar of informal institution, taken for granted values and beliefs that guide behavior
cognitive
institutions represented by laws, regulations and rules
formal
institutions represented by norms, culture and ethics
informal
the necessity of making rational decisions in the absence of complete information
bounded rationality
bounded rationality is a position in which view of global business
institution
political system that affects global business with an individuals right to freedom of expression and organization
democracy
political system that affects global business with hostility towards business, higher political risk such as nationalism
totalitarianism
political system where citizens elect representatives to govern the country on their behalf
democracy
political system where one person or party exercises absolute political control over the population
totalitarianism
law that uses comprehensive statutes and codes as a primary means to form legal judgements
civil
law that is shaped by precedents and traditions from previous judicial decisions
common
law that is based on religious teachings
theocratic
less confrontational, shorter, less specific form of law
civil
common law is __ flexible than civil law
more
the legal right to use an economic resource and to derive income and benefits from it
property right
legal rights awarded by government authorities to investors of new products or processes who are given monopoly rights to derive income from inventions
patent
exclusive legal rights of authors and publishers to publish and disseminate their work
copyright
exclusive legal rights of firms to use specific names, brands and designs to differentiate their products
trademark
characterized by the invisible hand of market forces where the government takes a hands off approach
market
factors of production should be government owned or state owned and all supply, demand and pricing are planned by the government
command
the economic system of most countries
mixed economy
a curve that represents a consumers preferences
indifference curve
indifference curves are preferred to __ ones
higher, lower
indifference curves are bowed __
inward
the rate at which a consumer is willing to substitute one good for another
marginal rate of substitution
the limit on consumption bundles that a consumer can afford
budget constraint
a piece of analysis that shows the combination of goods the consumer can afford given their income and price of goods
budget constraint
an increase in income will shift the budget constraint __
outward
the slope of the indifference curve equals the slope of the
budget constraint
the consumer chooses consumption of the two goods so that the marginal rate of substitution equals the
relative price
the increase in total cost that results from adding an additional unit of production
marginal cost
formula to calculate marginal cost
change in total cost / change in quantity
a firm will produce the quantity where MR = MC as long as __
price > AVC
when price falls below the AVC, what will a firm do?
shut down temporarily
someone who has to take the market price of a product and accept it as their own price
price taker
the demand curve for a perfectly competitive firm is
horizontal
the demand curve for a monopolistic market is
downward sloping
where do firms with market power determine the quantity of product/service they will produce?
quantity where MR = MC, quantity where P = MC
where will firms with price setting capacity maximize profits?
intersection between the marginal cost curve and the marginal revenue curve
a market with only a few sellers offering similar or identical products
oligopoly
a firm is a sole seller of a product with no close substitutes
monopoly
many firms sell similar products but not identical. many firms compete for the same customers, free entry and exit
monopolistic competition
many buyers and sellers, identical products, free entry and exit, perfect information, price taker
perfectly competitive
what may rare, precious, and hard-to-duplicate resources and capabilities lead to for a firm?
sustained comparative advantage
company strategies must consider actions by rival firms is a lesson learned from what
prisoners dilemma about oligopoly
what prevents oligopolistic firms from behaving like monopolies?
antitrust laws
oligopolies are best off when producing a _ quantity of output and charging a price _ marginal cost
small, above
decrease in income _ demand for normal goods
decreases
decrease in income __ demand for inferior goods
increases
increase in income _ demand for inferior goods
decreases
increase in income __ demand for normal goods
increases
good in which people will purchase more of as their income increases
normal good
good in which people will purchase less of as their income increases
inferior good
coke and pepsi are examples of
substitutes
hot dogs and hot dog buns are examples of
complements
normal and inferior goods, complements and substitutes, expectations about the future and tastes and number of buyers influence the position of the
demand curve
demand that is greater than one
elastic
demand that is less than one
inelastic
how is income elasticity measured?
percentage change in quantity demanded / percentage change in income
a change in price will cause a large change in the quantity demanded
elastic
a change in price will not cause a large change in the quantity demanded
inelastic
the percentage change in price is equal to the percentage change in quantity demanded
unit-elastic
necessities have a _ income elasticity
small
luxuries have a __ income elasticity
large
how the quantity demanded of one good changes in response to a change in the price of another good
cross-price elasticity
substitute goods have a __ cross elasticity
positive
complementary goods have a _ cross elasticity
negative
price elasticity of demand equation
% change in quantity demanded / % change in price
income elasticity of demand equation
% change in quantity demanded / % change in income
cross elasticity of demand equation
% change in quantity demanded of Y / % change in price of X
tools the federal reserve has in regards to monetary control
open market operations, discount rates, reserve ratios
purchase or sale of US treasury or US government bonds in the open market
open market operations
when the fed buys bonds, what happens to the money supply and AD?
increases money supply and shifts AD to the right
when the fed sells bonds, what happens to the money supply and AD?
decreases money supply and shifts AD to the left
the interest rate on loans that the Fed makes to the bank
discount rate
reducing the discount rate does what?
increases money supply, increases AD
increasing the discount rate does what?
decreases money supply, decreases AD
ratio of money that banks are required to hold whenever an entity deposits money with them
reserve ratio
when the reserve ratio is increased, what happens to the money supply and AD
decreases, shifts to the left
when the reserve ratio is decreased, what happens to the money supply and AD
increases, shifts to the right
if the government uses fiscal policy and cuts taxes, what effect will this have on interest rates and AD?
cutting taxes will increase demand for money, increase interest rates and cause AD to shift to the right
the difference between what a buyer is willing to pay for a good or service and what they actually pay
consumer surplus
consumer surplus is measured in the area _ the demand curve, ___ the price, _ the quantity consumed
under DC, above price, up to quantity consumed
the benefit sellers receive from participating in a market
producer surplus
producer surplus is measured in the area _ the supply curve, the price, __ the quantity supplied
above, below price, up to
total surplus equation
value to buyers – cost to sellers
the study of economy wide phenomena such as inflation, unemployment and economic growth
macroeconomics
the study of how households and firms make decisions and how they interact in markets
microeconomics
income must _ expenditure in an economy
equal
the market value of all final goods and services produced within the border of a given country during a specified period of time
gross domestic product
gross domestic product measures what two things?
total amount of expenditures and total income of everyone in the economy
4 components of GDP
- consumption
- investment
- government purchases
- net exports (exports minus imports)
which payments are not counted in government expenditures?
transfer payments, social security
a tax on goods produced abroad and sold domestically
tariff
a method used to restrict international trade by taxing imported goods
tariff
the fall in total surplus that results from a tax
deadweight loss
financial environment in which exchange rates and payments for goods and services are conducted
international monetary system
what happens to a country’s real exchange rate and nominal interest rate as the price level increases
exchange rates depreciate, interest rates increase
easiest method non financial companies use to handle currency fluctuations
currency diversification
strategy that minimizes the risk of unanticipated changes in future exchange rates
currency swap
a non equity arrangement for a company contemplating entry into a foreign market
licensing
What size commitment is required for a non-equity mode of entry into a foreign market?
small
two supportive pillars of an informal institution
normative and cognitive
reducing uncertainty is the key role of an institution according to which view
institution based view
the rules, enforcement mechanisms, and organizations that support market transactions are referred to as _.
institutions
two polar types of economies
centrally planned and market
in addition to improving efficiency, why might a government intervene in a market?
to promote equality
what is the relationship between marginal cost and total cost?
marginal cost is the change in total cost divided by the change in quantity
a seller maximize profits in a perfectly competitive market by producing
the quantity where P = MC
the economic profit of a competitive firm is the difference between and
total revenue and total cost
when average variable costs are above the price, what should a firm do?
temporarily shut down
what is the producers demand curve when the producer sells a differentiated product?
downward sloping
a competitive firms demand curve is __ elastic than a monopoly’s demand curve
more
at which point does a monopoly maximize profit?
where MC = MR
many firms and differentiated products
monopolistic competition
if the consumers budget constraint has shifted inwards, the consumer will buy _ normal goods and _ inferior goods
fewer normal goods and more inferior goods
if there is an increase in market demand in a perfectly competitive market, equilibrium price will _ and equilibrium quantity will _
they will both increase
if both demand and supply decrease, what will happen to equilibrium price and quantity?
quantity will decrease, but price can either increase or decrease
the positive or negative numbers of cross price elasticity of demand represent what?
complements and substitutes
enacting a permanent income tax cut is what kind of policy?
fiscal
an increase in the money supply will _ interest rates and _ AD
decrease, increase
A nation ends a tariff on bananas, which is an imported product. What will be the effect on banana prices within that nation?
the market price will match the global market price
implementing a new tariff does what for the government?
increases tax revenues
the idea that governments should actively protect domestic industries from imports and vigorously promote exports
modern day protectionism
The classic single-shot exchange of one currency for another.
spot transactions
allows participants to buy and sell currencies now for future delivery
forward transactions
a foreign exchange transaction where one currency is converted into another
currency swap
currency diversification is also known as
strategic hedging
focuses on forward contracts and swaps to contain currency risks
currency hedging
geographically dispersing operations through sourcing or FDI in multiple currency zones
strategic hedging
possession of natural resources and related transport and communication infrastructure
natural resource seeking
abundance of strong market demand and customers willing to pay
market seeking
economies of scale and abundance of low cost factors
efficiency seeking
abundance of innovative individuals, firms, and universities
innovation seeking
exports, licensing, and franchising are __ entry modes
non-equity
partially owned subsidiaries, joint ventures, acquisitions, and greenfield operations are _ entry modes
equity
indicate a relatively larger, harder to reverse commitments
equity modes of entry
tend to reflect relatively smaller commitments to overseas markets
non equity
an MNE enters foreign markets via _ modes through FDI
equity
ownership, location and internalization are 3 advantages of
MNE’s
the rate at which a person can trade the currency of one country for the currency of another
nominal exchange rate
the rate at which a person can trade the goods and services of one country for the goods and services of another
real exchange rate
the relative price of the currency of two countries
nominal exchange rate
the relative price of the goods and services of two countries
real exchange rate
the production of goods and services valued at current prices
nominal GDP
the amount produced that is not affected by changes in prices
real GDP
Globalization
The close integration of countries and peoples of the world.
Purchasing Power Parity (PPP)
A conversion that determines the equivalent amount of goods and services that different currencies can purchase.
Scenario Planning
A technique to prepare and plan for multiple scenarios (either high or low risk).
Risk management
The identification and assessment of risks and the preparation to minimize the impact of high-risk , unfortunate events.
Gross National Income (GNI)
GDP + income from non-resident sources abroad. GNI is the term used by the World Bank and other international organizations to supersede the term GNP.
Gross National Product (GNP)
GDP + income from non-resident sources abroad.
reverse innovation
An innovation that is adopted first in emerging economies and is then diffused around the world.
International Business (IB)
(1) A business or firm that engages in international crossborder economic activities and/or (2) the action of doing business abroad.
semiglobalization
A perspective that suggests that barriers to market integration at borders are high, but not high enough to insulate countries from each other completely.
BRIC
Brazil, Russia, India, and China
base of the pyramid (BOP)
Economies where people make less than $2,000 per capita per year.
emerging economies
A term that has gradually replaced the term “developing countries” since the 1990’s.
emerging markets
A term that is often used interchangeably with “emerging economies”
nongovernmental organizations (NGO’s)
An organization that is not affiliated with governments.
Expatriate Manager
A manager who works “abroad”, or “expat” for short.
Gross Domestic Product (GDP)
The sum of value added by resident firms, households, and governments
Foreign Direct Investment (FDI)
Investment in, controlling, and managing value-added activities in other countries.
Group of 20 (G-20)
The group of 19 major countries plus the European Union (EU) whose leaders meet on a biannual basis to solve global economic problems.
liability of foreignness
The inherent disadvantage that foreign firms experience in host countries because of their non-native status.
global business
Business around the globe.
international premium
A significant pay raise when working overseas.
multinational enterprise (MNE)
A firm that engages in foreign direct investment (FDI)
Triad
North America, Western Europe, and Japan
Expatriate Manager (expat)
A manager who works abroad, or “expat” for short.
Nontariff Barriers (NTB)
Trade barrier that relies on nontariff means to discourage imports.
tariff barrier
Trade barrier that relies on tariffs to discourage imports.
deadweight costs
Net losses that occur in an economy as a result of tariffs.
free trade
The idea that free market forces should determine how much trade with little or no government intervention.
infant industry argument
The argument that if domestic firms are as young as “infants”, in the absence of government intervention, they stand no chances of surviving and will be crushed by mature foreign rivals.
product life cycle theory
A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles.
theory of mercantilism
A theory that suggests that the wealth of the world is fixed and that a nation that exports more than imports less will be richer.
theory of comparative advantage
A theory that focusses on the relative not the absolute advantage in one economic activity that one nation enjoys in comparison with other nations.
strategic trade theory
A theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success.
merchandise (goods)
Tangible products being traded.
services
Intangible services being traded.
trade deficit
An economic condition in which a nation imports more than it exports.
factor endowments
The extent to which different countries possess various factors of production such as labor, land and technology.
classical trade theories
The major theories of international trade that were advanced before the 20th century, which consist of (1) mercantilism, (2) absolute advantage, and (3) comparative advantage.
Comparative advantage
Relative not absolute advantage in one economic activity that one nation enjoys in comparison with other nations.
export
selling abroad
theory of national competitive advantage of industries
A theory that suggests that the competitive advantage of certain industries in different nations depend on four aspects that form a “diamond”.
import tariff
A tax imposed on imports.
resource mobility
Assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry.
theory of absolute advantage
A theory that suggests that under free trade, a nation gains by specializing in economic activities in which it has an absolute advantage.
balance of trade
The aggregation of importing and exporting that leads to country-level trade surplus or deficit.
trade embargos
Politically motivated trade sanctions against foreign countries to signal displeasure.
factor endowment theory or Heckscher-Ohlin Theory
A theory that suggests that nations will develop comparative advantages based on their locally abundant factors.
opportunity cost
Cost of pursuing one activity at the expense of another activity, given the alternatives (other opportunities).
import
Buying from abroad
antidumping duties
Tariffs levied on imports that have been “dumped”
first-mover advantages
Advantage that the first movers enjoy and do not share with late entrants.
absolute advantage
The economic advantage one nation enjoys that is absolutely superior to other nations.
modern trade theories
The major theories of international trade that were advanced in the 20th Century, which consists of (1) product life cycle, (2) strategic trade, and (3) national competitive advantage of industries.
subsidies
Government payment to domestic firms.
Administrative policies
Bureaucratic rules that make it harder to import foreign goods.
voluntary export restraints (VER’s)
An international agreement that shows that exporting countries voluntarily agree to restrict their exports.
Strategic Trade Policy
Government policy that provides companies a strategic advantage in international trade through subsidies and other supports.
local content requirements
A requirement stipulating that a certain proportion of the value of the goods made in one country must originate from that country.
trade surplus
An economic condition in which a nation exports more than it imports.
import quotas
Restriction on the quantity of imports
protectionism
The idea that governments should actively protect domestic industries
Administrative policy
Bureaucratic rules that make it harder to import foreign goods.
Antidumping duty
Tariffs levied on imports that have been “dumped” (selling below costs to unfairly drive domestic firms out of business)
Deadweight cost
Net losses that occur in an economy as a result of tariffs.
dissemination risks
The risk associated with unauthorized diffusion of firm specific know-how.
management control rights
The rights to appoint key managers and establish control mechanisms.
Internalization
The replacement of cross-border markets (such as exporting and importing) with one firm (MNE) locating and operating in two or more countries.
technology spillovers
Technology diffused from foreign firms to domestic firms.
sunk costs
cost that a firm has to endure even when its investment turns out to be unsatisfactory.
oligopoly
Industry dominated by a small number of players
free market view
A political view that suggests that FDI unrestricted by government intervention is the best.
upstream vertical FDI
A type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country.
OLI advantages
A firms quest for (O) ownership advantages, (L) location advantages, and internalization (I) advantages via FDI.
pragmatic nationalism
A political view that only approves FDI when its benefit outweighs its costs.
horizontal FDI
A type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host country.
FDI Outflow
Outbound FDI moving out of a country in a year.
radical view
A political view that is hostile to FDI
market imperfections (market failure)
The imperfection of the market mechanisms that make transactions prohibitively costly and sometimes make transactions unable to take place.
Location
Advantages enjoyed by firms operating in a certain location.
FDI Stock
Total accumulation of inbound FDI in a country or outbound FDI from a country across a given period (usually several years)
downstream vertical FDI
A type of vertical FDI in which a firm engages in a downstream stage of the value chain in a host country.
ownership
An MNE’s possession of leveraging of certain valuable, rare, hard to imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI.
Knowledge spillovers
Knowledge diffused from one firm to others among closely located firms.
FDI inflow
Inbound FDI moving into a country in a year.
intrafirm trade
International transactions between two subsidiaries in two countries controlled by the same MNE.
bargaining power
Ability to extract a favorable outcome from negotiations due to one party’s strength.
FDI flow
The amount of FDI moving in a given period (usually a year) in a certain direction.
agglomeration
Clustering of economic activities in certain locations.
Foreign Portfolio Investment (FPI)
Investment in a portfolio of foreign securities such as stocks and bonds.
demonstration effect
The reaction of local firms to rise to the challenge demonstrated by MNEs through learning and imitation.
expropriation
Governments confiscation of foreign assets
obsolescing bargain
The deal struck by MNE’s and host governments, which change their requirements after the initial FDI industry.
blue ocean strategy
Strategy that focusses on developing new markets (“blue ocean”) and avoids attacking core markets defended by rivals, which is likely the result in a bloody price war or a “red ocean”.
predatory pricing
An attempt to monopolize a market by setting prices below cost and intending to raise prices to cover losses in the long run after eliminating rivals.
antitrust law
Law that outlaws cartels (trusts).
cartel
An output and price fixing entity involving multiple competitors.
competitor analysis
The process of anticipating rivals’ actions in order to both revise a firms plan and prepare to deal with rivals response.
capacity to punish
sufficient resources possessed by a price leader to deter and combat defection.
market commonality
The overlap between two rivals’ markets
resource similarity
The extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those local firm.
competition policy
Government policy governing the rules of the game in competition.
explicit collusion
firms directly negotiate output pricing and divide markets.
antitrust policy
government policy designed to combat monopolies and cartels
concentration ratio
the percentage of total industry sales accounted for by the top four, eight, or twenty firms.
mutual forbearance
multimarket firms respect their rivals’ spheres of influence in certain markets, and their rivals reciprocate, leading to tactic collusion.
antidumping laws
law that makes it illegal for an exporter to sell goods below cost abroad with the intent to raise prices after eliminating local rivals.
competitive dynamics
actions and responses undertaken by competing firms.
dodger
strategy that centers on cooperating through joint ventures with MNE’s and sell offs to MNE’s.
defender
strategy that centers on local assets in areas in which MNE’s are weak.
multimarket competition
firms engage the same rivals in multiple markets
price leader
a firm that has a dominant market share and sets “acceptable” prices and margins in the industry.
prisoners dilemma
in game theory, a type of game in which the outcome depends on two parties deciding whether to cooperate or to defect.
cross-market retaliation
retaliatory attacks on a competitors other markets if this competitor attacks a firms original market.
collusive price setting
price setting by monopolists or collusion parties at a level higher than the competitive level
counterattack
a set of actions in response to attack
extender
strategy that centers on leveraging homegrown competencies abroad
tacit collusion
firms indirectly coordinate actions by signaling their intention to reduce output and maintain pricing above competitive levels
collusion
collective attempts between competing firms to reduce competition.
game theory
a theory that studies the interactions between parties that compete and/or cooperate with each other.
contender
strategy that centers on a firm engaging in rapid learning and then expanding overseas.
attack
an initial set of actions to gain competitive advantage
dumping
an exporter selling goods below cost
antidumping law
law that makes it illegal for an exporter to sell goods below cost abroad with the internet to raise price after eliminating local rivals.
currency risks
the potential for loss associated with fluctuations in the foreign exchange market
clean
a pure market solution to determine exchange rates.
spread
the difference between the offer price and the bid price
appreciation
an increase in the value of currency
peg
a stabilizing policy of linking a developing country’s currency to a key currency.
Bretton Woods System
a system in which all currencies were pegged at a fixed rate to the US dollar.
post-Bretton Woods System
a system of flexible exchange rates with no official common denominator.
gold standard
a system in which the value of most major currencies was maintained by fixing their prices in terms of gold.
foreign exchange market
the market where individuals, firms, governments, and banks buy and sell foreign currencies.
bid rate
the price to buy a currency
quota
the weight a member country carries within the IMF, which determines the amount of its financial contribution (technically known as its “subscription”), its capacity to borrow from the IMF, and its voting power.
spot transactions
the classic single shot exchange of one currency for another
depreciation
the loss in the value of the currency
dirty
using selective government intervention to determine exchange rates
fixed policy rate
a government policy to set the exchange rate of a currency relative to other currencies.
forward discount
a condition under which the forward rate of one currency relative to another currency is higher than the spot rate.
common denominator
a currency of commodity to which the value of all currencies are pegged.
balance of payments
a country’s international transaction statement, which includes merchandise trade, service trade, and capital movement.
forward premium
a condition under which the forward rate of one currency relative to another currency is lower than the spot rate.
target exchange rates
specified upper or lower bounds within which an exchange rate is allowed to fluctuate.
offer rate
the price to sell a currency
capital flight
a phenomenon in which a large number of individuals and companies exchange domestic currency for a foreign currency.
currency swap
a foreign exchange transaction between two firms in which one currency is converted into another at Time 1, with an agreement to revert it back to the original currency at a specified Time 2 in the future.
currency board
a monetary authority that issues notes and coins convertible into a key foreign exchange rate.
International Monetary Fund (IMF)
an international organization that was established to promote international monetary cooperation, exchange, stability and orderly exchange arrangements.
strategic hedging
spreading out activities in a number of countries in different currency zones to offset any currency losses in one region through gains in other regions.
foreign exchange rate
The price of one currency in terms of another
bandwagon effect
the effect of investors moving in the same direction at the same time, like a herd
forward transactions
a foreign exchange transaction in which participants buy and sell currencies now for future delivery.
floating
a government policy to let supply and demand conditions determine exchange rates.
clean (free) float
a pure market solution to determine exchange rates
dirty (managed) float
using selective government intervention to determine exchange rates
fixed exchange rate policy
a government policy to set the exchange rate of a currency relative to other currencies
floating (flexible) exchange rate policy
a government policy to let supply and demand conditions determine exchange rates
target exchange rates (crawling bands)
specified upper or lower bounds within an exchange rate is allowed to fluctuate
build-operate-transfer (BOT) agreement
a non-equity mode of entry used to build a longer-term presence by building and then operating a facility for a period of time between transferring operations to a domestic agency or firm.
scale of entry
the amount of resources committed to entering a foreign market.
co-marketing
efforts amoung a number of firms to jointly market their products and services.
LLL Advantages
A firms quest for linkage advantages, Leverage advantages, and learning advantages. These advantages are typically associated with multinationals from Emerging economies.
Research and Development Contracts
Outsourcing agreement in R&D between firms
Wholly owned subsidiary (WOS)
A subsidiary located in a foreign country that is entirely owned by the parent multinational
joint venture (JV)
a new coporate entitiy created and jointly owned by two or more parent companies
non-equity modes
a mode of entry (exports and contractual agreements) that tends to reflect relatively smaller commitments to overseas markets.
location specific advantages
the benefits a firm reaps from the features specific to place
modes of entry
method used to enter a foreign market
turnkey projects
a project in which clients pay contractors to design and construct new facilities and train personnel
institutional distance
the extent of similarity or dissimilarity between regulatory, normative, and cognitive institutions of two countries.
country of origin effect
the positive or negative perception of firms and products from a certain country
equity modes
a mode of entry (JV and WOS) that indicates relativity larger, harder-to-reverse commitments to overseas markets.
greenfield operations
building factories and offices from scratch (on a proverbial piece of “green field” formerly used for agricultural purposes).
cultural distance
the difference between two cultures along identifiable dimensions such as individualism.
scale of entry
the amount of resources committed to entering a foreign market.
law of demand
the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises.
demand curve
a graph of the relationship between the price of a good and the quantity demanded; typically slopes downward.
market demand
the sum of all individual demands for a particular good or service.
normal good
a good for which, other things being equal, an increase in income leads to an increase in demand.
inferior good
a good for which, other things being equal, an increase in income leads to a decrease in demand.
substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the other.
complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other.
law of supply
the claim that, other things being equal, the quantity supplied of a good rises when the prices of the good rises.
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied.
supply curve
a graph of the relationship between the price of a good and the quantity supplied.
equilibrium
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded.
equilibrium price
the price that balances quantity supplied and quantity demanded.
equilibrium quantity
the quantity supplied and the quantity demanded at the equilibrium price.
surplus
a situation in which quantity supplied is greater than quantity demanded
shortage
a situation in which quantity demanded is greater than quantity supplied.
law of supply and demand
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.
elasticity
a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants.
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.
income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumers income, computed as the percentage change in quantity demanded divided by the percentage change in income.
cross-price elasticity of demand
a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good.
price elasticity of supply
a measure of how much the quantity supplied of a good responds to change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price.
Money
the set of assets in an economy that people regularly use to buy goods and services from other people.
medium of exchange
an item that buyers give to sellers when they want to purchase goods and services.
unit of account
the yardstick people use to post prices and record debts.
store of value
an item that people can use to transfer purchasing power from the present to the future
liquidity
the ease with which an asset can be converted into the economy’s medium of exchange.
commodity money
money that takes the form of a commodity with intrinsic value
gold standard
when an economy uses gold as money or uses paper money that is converted into gold for money.
fiat money
money without intrinsic value that is used as money because of government decree.
currency
the paper bills and coins in the hands of the public
demand deposits
balances in bank accounts that depositors can access on demand by writing a check.
Federal Reserve
the central bank of the United States
central bank
an institution designed to oversee the banking system and regulate the quantity of money in the economy
monetary policy
the setting of the money supply by policymakers in the central bank.
reserves
deposits that banks have received but have not loaned out
fractional reserve banking
a banking system in which banks hold only a fraction of deposits as reserves.
leverage
the use of borrowed money to supplement existing funds for purposes of investment.
leverage ratio
the ratio of assets to bank capital
capital requirement
a government regulation specifying a minimum amount of bank capital
open-market operations
the purchase and sale of U.S. government bonds by the Fed
discount rate
the interest rate on the loans that the Fed makes to banks.
fed funds rate
the rate at which banks lend other commercial banks money that they have on deposit at the Federal Reserve
welfare economics
the study of how the allocation of resources affects economic well-being
consumer surplus
The consumers (WTP) willingness to pay minus what the consumer actually paid for the goods, or services.
Views on Globalization
New, Evolutionary, and Pendulum
“New” view on globalization
A force sweeping through the world in recent times.
“Evolutionary” view on globalization
A long-run historical evolution since the dawn of human history
“Pendulum” view on globalization
One that swings from one extreme to another from time to time
Foreign Direct Investment
Direct investment in, control, and management of value-added activities in other countries
Political views on FDI
Radical View, Free Market View, Pragmatic Nationalism
Benefits to a country receiving FDI
Capital Inflow, Technology Spillover, Advanced Management Know-How, Job creation
Costs to a country receiving FDI
Loss of Sovereignty, Adverse effects on competition,
Capital outflow.
How do resources and capabilities influence the competitive dynamics of a business?
Resource similarity and market commonality can yield a powerful framework for competitor analysis.
Resource similarity
The extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those of the focal firm.
How does resource similarity impact competitive dynamics?
Firms with a high degree are likely to have similar competitive actions. (Starbuck’s instant coffee & McDonald’s iced coffee)
Classical theories of international trade
Mercantilism, Absolute advantage, and Comparative advantage
Modern theory view
Dynamic
Classical theory view
Static
Absolute advantage
The economic advantage one nation enjoys that is superior to other nations
Comparative advantage
The advantage one economic activity nation enjoys in comparison with other nations (relative, not absolute)
Mercantilism
A theory that suggests that the wealth of the world is fixed and that a nation that exports more and imports less will be richer.
Features of the product life cycle?
New, Maturing, and Standardized
Strategic trade
Intervention by governments in certain industries can enhance their odds for international success.
How are supply and demand related to the exchange rate of a country?
The price of a commodity, a country’s currency, is fundamentally determined by this. Strong demand leads to price hikes; oversupply results in price drops.
Which theory came first?
Mercantilism (although both are of the idea that governments should actively protect domestic industries from imports and vigorously promote exports)
If a company seeks to limit foreign exchange rate exposure in the forward direction, what is the most effective way to do this?
Forward transactions, an act know as currency hedging.
Transaction risk
The exchange rate risk associated with the time delay between entering into a contract and settling it.
Hedging
A transaction, such as forward transactions, that protects traders and investors from exposure to the fluctuations of the spot rate.
Currency hedging
A way to protect traders and investors from being exposed to the fluctuations of the spot rate
Strategic hedging
A means of spreading out activities in different currency zones in order to offset the currency losses in certain regions through gains in other regions (currency diversification)
First mover advantages
Proprietary, technological leadership, pre-emption of scarce resources, establishment of entry barriers to late entrants, avoidance of clash with dominant firms at home, relationships with key stakeholders, (such as governments.)
Late mover advantages
Opportunity to free ride on first-mover investments, Resolution of technological and market uncertainty, First mover’s difficulty to adapt to market changes.)
Foreign market entries types
Non-equity and equity
Non-equity
Reflects relatively smaller commitments to overseas markets. Determines firms MNE status.
Equity
indicative of relatively larger, harder-to-reverse commitments. Determines firms MNE status.
How do institutions reduce uncertainty?
Establish “rules of the game” that economic players play by. A standard to follow in order to survive and prosper. By signaling which conduct is legitimate and which is not, institutions constrain the range of acceptable actions.
Regulatory pillar
The coercive power of governments (laws, regs, rules)
Normative pillar
Values, beliefs, and actions of other relevant players (norms, cultures, ethics)
Cognitive pillar
The internalized, taken-for-granted values and beliefs that guide behavior. (beliefs between right/wrong)
Formal institution
One that include laws, regulations and rules
Informal institution
One that includes norms, cultures and ethics
What core propositions lie at the root of the institution based view on global business?
(1) managers and firms rationally pursue their interests and make choices within institutional constraints (bounded rationality)
(2) in situations where formal constraints are unclear or fail, informal constraints play a larger role in reducing uncertainty and providing constancy to managers and firms (personal relationships and connections)
The institution based view global business is grounded upon
The dynamic interaction between institutions and firms, and considers firm behaviors as the outcome of such an interaction.
How is global business affected by democracy?
An individual’s right to freedom of expression and organization. For example, starting up a firm is an act of economic expression
How is global business affected by totalitarianism?
These countries often experience wars, riots, protests, chaos, and breakdowns, which result in higher political risk.
Democracy
Citizens elect representatives to govern the country on their behalf.
Totalitarianism
One person or party exercises absolute political control over the population.
Civil law
Law that uses comprehensive statutes and codes as a primary means to form legal judgments.
Common law
Law shaped by precedents and traditions from previous judicial decisions.
Theocratic law
A legal system based on religious teachings.
How do civil, common and theocratic laws compare?
Relative to civil law, common law has more flexibility because judges have to resolve specific disputes based on their interpretation of the law. Civil law has less flexibility because judges only have the power to apply the law.
Property right
The legal rights to use an economic resource and to derive income and benefits from it. Can be used as collateral for starting a firm; not as common in developing countries, therefore hindering economic growth.
Intellectual property right
Rights associated with the ownership. They primarily include rights associated with patents, copyrights, and trademarks.
Market economy
One that is characterized by the “invisible hand” of market forces-all factors of production should be privately owned.
Command economy
One that is defined by a government taking all factors of production to be government-owned or state-owned, and all supply, demand, and pricing are planned by the government.
Mixed economy
One has elements of both a market economy and a command economy. It boils down to the relative distribution of market forces versus command forces.
Indifference curve
A curve that shows consumption bundles that give the consumer the same level of satisfaction (i.e. combinations of pizza and Pepsi with which the consumer is equally satisfied.)
Four properties of an indifference curve
(1) Higher indifference curves are preferred to lower ones. People usually prefer to consume more goods rather than less.
(2) Indifference curves are downward sloping. The slope of an indifference curve reflects the rate at which the consumer is willing to substitute one good for the other.
(3) Indifference curves do not cross.
(4) Indifference curves are bowed inward. The slope of an indifference curve is the marginal rate of substitution—the rate at which the consumer is willing to trade off one good for the other.
Marginal rate of substitution.
The rate at which the consumer is willing to trade off one good for the other (i.e. how much Pepsi the consumer requires to be compensated for a one-unit reduction in pizza consumption)
Budget constraint
The consumption bundles that the consumer can afford.
How might a budget constraint be impacted by an increase in income?
Additional bundles could be consumed with an increase in income.
Graphical elements needed to determine a consumer’s optimal point of consumption
Indifference curve and budget constraint.
How is a consumer’s optimal point of consumption determined precisely? What is the condition that must be met?
The point at which this indifference curve and the budget constraint touch (the best combination of pizza and Pepsi available to the consumer.) The marginal rate of substitution equals the relative price of the two goods.
Marginal cost
The increase in total cost that arises from an extra unit of production
How is marginal cost related to total cost?
The portion of total cost resulting from an extra unit of production.
Formula to calculate marginal cost
Change in total cost divided by change in quantity
If Dave’s company has a total cost of $100 when quantity output is 5, and a total cost of $115 when quantity output is 6, what is the marginal cost of producing the 6th unit?
$15
Total cost is made of two types of costs, what are they?
Fixed and Variable.
How does a firm determine to shut down in the short-run? What rule characterizes this?
If the revenue that it would earn from producing is less than its variable costs of production. P<AVC (Price is less than Avg Variable Cost)
Market structure characterized as being “price takers”
Competitive markets
Price taker
One who must accept the price as the market determines
When a market is characterized as being a price taker, what fundamental shape does the demand curve for this market take?
Horizontal line.
Demand curve for a perfectly competitive firm
Horizontal line
Demand curve for a monopolistic market
Downward-sloping
What does “downward” sloping with regards to a demand curve mean?
The monopoly has to accept a lower price if it wants to sell more output.
Where do firms with market power determine the quantity of product/service they will produce?
A firm chooses a quantity of output such that marginal revenue equals marginal cost. The firm chooses quantity so that price equals marginal cost. Thus, the firm’s marginal-cost curve is its supply curve.
Primary goal/objective of a firm
Maximize profit.
If the firm has price setting capacity, how will they use information about marginal costs and marginal revenues in order to accomplish their primary objective?
The monopolist’s profit-maximizing quantity of output is determined by the intersection of the marginal-revenue curve and the marginal-cost curve.
Describe the basic distinctions between the market models with respect to: number of market participants, type of product being marketed, ease of entry/exit into the market and the prevalence of advertising/marketing
Monopoly and Oligopoly have one to few firms, with limited products (cable TV), entry is difficult, and advertising is a natural feature. Monopolistic competition/perfect competition have many firms, mono comp has differentiated products (novels/movies) and perfect comp has identical products, entry is easy, and spend very little on advertising.
Fundamental truth realized when studying the behavior of an oligopolistic firm within the context/model called “prisoner’s dilemma”
Self-interest makes it difficult for the oligopolists to maintain the cooperative outcome. Relentless logic of self-interest drives the participants toward the non-cooperative outcome, which is worse for both parties.
How might an oligopolistic firm behave like a monopoly? What forces may prevent this?
Forming a cartel and acting like a monopolist, but self-interest drives them towards competition.
Federal Reserve’s monetary control
FOMC – Federal Open Market Committee and the open market operation, the purchase and sale of U.S. government bonds.
Open market operations
The purchase and sale of U.S. government bonds.
When the Fed buys bonds, what impact does this have on the money supply and aggregate demand?
After the purchase, these dollars are in the hands of the public. Thus, an open-market purchase of bonds by the Fed increases the money supply.
When the Fed sells bonds, what impact does this have on the money supply and aggregate demand?
After the sale, the dollars the Fed receives for the bonds are out of the hands of the public. Thus, an open-market sale of bonds by the Fed decreases the money supply.
Discount rate
The interest rate banks pay when borrowing from the Federal Reserve.
When the Fed reduces the discount rate, what impact will this have on the money supply and the aggregate demand?
A lower discount rate encourages banks to borrow from the Fed, increasing the quantity of reserves and the money supply.
When the Fed increases the discount rate, what impact will this have on the money supply and the aggregate demand?
Higher discount rate discourages banks from borrowing reserves from the Fed, reducing the quantity of reserves in the banking system, which in turn reduces the money supply.
Reserve ratio
The fraction of total deposits that a bank holds as reserves.
What would the Fed need to do with the reserve ratio in order to increase the money supply and aggregate demand in the economy?
Decrease the reserve requirements; therefore lowering the reserve ratio.
What would the Fed need to do with the reserve ratio in order to decrease the money supply and aggregate demand in the economy?
Increase the reserve requirements; therefore raising the reserve ratio.
If the Fed uses monetary policy in a way that increases money supply, what effect will this have on interest rates and aggregate demand (consider them separately)?
Interest rates lower and aggregate demand expands.
If the government uses fiscal policy to increase government spending what impact will this have on interest rates and aggregate demand?
Raises interest rates and an increase in aggregate demand.
If the government uses fiscal policy and cuts taxes, what effect will this have on interest rates and aggregate demand?
Raises interest rates and an increase in aggregate demand.
Explain the effect an income change might have on shifting the demand curve?
Lower income=less to spend in total=lower demand.
Higher income=more to spend in total=raise demand.
Normal good
A good for which an increase in income leads to an increase in demand
Inferior good
a good for which an increase in income leads to a decrease in demand (car vs bus ride)
Explain how the price of related goods is related to changes in the demand curve?
When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes (yogurt for ice cream).
When a fall in the price of one good raises the demand for another good, the two goods are called complements (hot fudge and ice cream).
If Luke and I are the only sellers of paper in a given market, and Luke drops his prices for paper, how will this impact the demand for my paper? Which way will the demand curve shift?
As Luke drops his price, your demand will decrease. Your demand curve will shift to the left.
What other factors might influence the position of the demand curve?
Price of the good itself, income, price of related goods, tastes, expectations, and number of buyers.
Numerical value that determines whether or not a product/service is considered price elastic versus inelastic
1 – greater than or less than
Income elasticity
A measure of how much the quantity demanded of a good responds to a change in consumers’ income, computed as the percentage change in quantity demanded divided by the percentage change in income.
Price elasticity of demand
A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
Elastic
Quantity moves proportionately more than the price (Price increase results in drastically lower demand).
Inelastic
Quantity moves proportionately less than the price (Price increase results in slightly lower demand)
Unit elastic
Percentage change in quantity equals the percentage change in price.
Results from income elasticity
(1) Necessities, such as food and clothing, tend to have small income elasticities.
(2) Luxuries, such as caviar and diamonds, tend to have large income elasticities.
Cross-price elasticity
A measure of how much the quantity demanded of one good responds to a change in the price of another good. Computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good. Substitutes=positive cross-price elasticity; complements=negative cross-price elasticity.
3 types of elasticity, their equations, purpose and outcomes
(1) Price elasticity of demand – % chg in Q D / % chg in P
(2) Income elasticity – % chg in Q D / % chg in income
(3) Cross-price elasticity – % chg in Q D Good 1/% chg in Good #2 P
In the net, how are price (P) and quantity (Q) changed by a simultaneous increase in demand and supply?
Price increases and quantity is ambiguous. (Dependent upon how large of a shift in supply/demand)
In the net, how are price (P) and quantity (Q) changed by a simultaneous increase in demand and decrease in supply?
Price increases and quantity is ambiguous. (Dependent upon how large of a shift in supply/demand)
In the net, how are price (P) and quantity (Q) changed by a simultaneous decrease in demand and supply?
Price is ambiguous, quantity decreases.
In the net, how are price (P) and quantity (Q) changed by a simultaneous decrease in demand and increase in supply?
Price decreases, quantity ambiguous.
Tariff.
Tax on goods produced abroad and sold domestically(tax on imported goods). A method used to restrict international trade.
Dead weight loss.
The fall in total surplus that results from a market distortion, such as a tax (new equilibrium price that is settled for the transaction will be higher and therefore some burden of this will be passed on to the consumer)
How are tariff’s and dead weight loss related? Explain.
A tariff causes a deadweight loss because a tariff is a type of tax. Like most taxes, it distorts incentives and pushes the allocation of scarce resources away from the optimum. (Oversupply and under demand)
Two primary categories of trade barriers
Tariffs and Non-Tariff
If an import tariff is imposed on coconuts that are imported into the U.S., how will this impact the price of coconuts for U.S. consumers?
Increase the price.
Why might a government be interested in imposing an import tariff on a good? What benefit would the government derive primarily?
The tariff will reduce the amount of importans, increase the amount of exports. The primary benefit is that it raises revenue for the government.
How would imposing an import tariff on cigars impact the domestic production of cigars?
Quantity increases for exporting at world price.
If an import tariff on coconuts was removed in the U.S., how would this impact the demand for coconuts by U.S. consumers?
The demand would increase.
What would happen to the overall domestic demand for a good if an import tariff were imposed on that good?
It would increase.
How does a tariff generally impact the following entities: consumers, producers, government? Compare the effects between the entities
Domestic sellers are better off, and domestic buyers are worse off. In addition, the government raises revenue.
Consumer surplus
The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
Who receives consumer surplus?
The buyer.
In relation to the demand curve and price, how is consumer surplus measured?
The area below the demand curve and above the price measures the consumer surplus in a market.
Producer surplus
The amount a seller is paid for a good minus the seller’s cost of providing it
Who receives producer surplus?
The seller.
In relation to the demand curve and price, how is producer surplus measured?
The area below the price and above the supply curve measures the producer surplus in a market.
How is total surplus determined?
The total value to buyers of the goods, as measured by their willingness to pay, minus the total cost to sellers of providing those goods.
In what ways might government or policy makers make use of surplus measures?
To measure the economic well being of a society, in terms of efficiency and equality. (i.e. maximizing total surplus received (efficiency) and distributing economic prosperity (equality) uniformly among the members of society
Macroeconomics
The study of economy-wide phenomena, including inflation, unemployment, and economic growth.
Microeconomics
The study of how households and firms make decisions and how they interact in markets.
Why must income equal expenditure in an economy as a whole?
An economy’s income is the same as its expenditure because every transaction has two parties: a buyer and a seller.
Gross domestic product (GDP)
The market value of all final goods and services produced within a country in a given period of time.
Four components of GDP
(1) Consumption (2) Investment (3) Govt purchases (4) Net exports
Why are transfer payments such as social security not counted in government expenditures?
Because they are not made in exchange for a currently produced good or service. Transfer payments alter household income, but they do not reflect the economy’s production.
Real GDP
The production of goods and services valued at constant prices, ie. $1
Nominal GDP
The production of goods and services valued at current prices, i.e. $1 in 2013, $2 in 2014, etc…
Reason to measure GDP in real terms
Because (answer) GDP is not affected by changes in prices, changes in (answer) GDP reflect only changes in the amounts being produced.
The term “emerging economies” has replaced the term
developing countries
The gross domestic product plus the income from non-resident sources abroad gives the
gross national product
Which of the following countries would be characterized as an emerging economy?
Brazil
More than 25% of global GDP comes from
BRICS countries
Viewing the global economy as a pyramid, the Triad refers to
North America, Western Europe, and Japan
People who earn _ a year comprise the base of the global economic pyramid.
less than $2,000
Which of the following would be an example of a top down innovation?
Lowering prices and features of existing products to meet emerging market needs
Which of the following is true of the Group of 20 (G-20)
It only has 19 member countries.
Which of the following does the institution-based view of global business lay emphasis on?
Understanding the laws and values of the firm’s host nation
The resource-based view of global business differs from the institution-based view of global business in that the resource-based view _
focuses on the internal strengths on the firm
The liability of foreignness is the inherent disadvantage faced by _
foreign firms in host nations due to their non-native status
Which of the following is true of globalization according to the “new force” perspective?
It is a western ideology focused on exploiting and dominating the world through MNEs
The concept of _ suggests that barriers to market integration at borders are high, but not high enough to completely insulate countries from each other
semiglobalization
The strategy of treating each country as a unique market and in total isolation is referred to as _
localization
MNEs from the Triad dominate the list of the 500 largest MNEs; their share has been _
shrinking
The term “emerging economies” has replaced the term _
developing countries
A conversion that determines the equivalent amount of goods and services that different currencies can buy is known as _
purchasing power parity
Which of the following countries would be characterized as an emerging economy?
Brazil
More than 25% of global GDP comes from _
BRICS countries
Which of the following countries is represented in the Triad of the global economic pyramid?
Japan
People who earn _ a year comprise the base of the global economic pyramid.
less than $2,000
A _ is defined as an innovation that is adopted first in emerging economies and then diffused around the world
reverse innovation
Which of the following is true of the Group of 20 (G-20)
It only has 19 member countries
The _ view suggests that the success and failure of firms are largely determined by their environments
institution-based
The _ view of global business focuses on internal factors that can help a firm overcome its external environment
resource-based
Which of the following is true of globalization according to the “pendulum view” perspective?
Globalization is a not a one-directional phenomenon.
The concept of _ suggests that barriers to market integration at borders are high, but not high enough to completely insulate countries from each other.
semiglobalization
_ is the strategy of treating the entire world as one market.
Standardization
Protectionism is similar to mercantilism as they both advocated _.
government involvement in international trade
The _ principle advocated that governments should actively protect domestic industries from imports and vigorously promote exports.
protectionism
Which of the following is a modern trade theory?
National competitive advantage
Which of the following trade theories divides the nations of the world into three categories?
Product life cycle
Which of the following was the first international trade theory to account for changes in the patterns of trade over time?
Product life cycle theory
In the third stage of the product life cycle theory, the _.
product is standardized
Which of the following describes resource mobility as assumed by the classical theories of international trade?
It is the assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry.
The theory of comparative advantage _.
explains patterns of trade based on factor endowments
Deadweight costs are net losses that occur when _ are imposed.
import tariffs
_ are government payments to domestic firms.
Subsidies
Which of the following is true of voluntary export restraints?
It is an export quota levied by a country on the quantity of its exports.
Which of the following is true of voluntary export restraints?
It is an export quota levied by a country on the quantity of its exports.
_ are tariffs levied on imports sold below costs to drive domestic firms out of business.
Antidumping duties
FPI refers to the _.
investment in a portfolio of foreign securities that do not entail the active management of foreign assets
A vertical FDI refers to a type of FDI in which _
a firm moves upstream or downstream at different value chain stages in a host country
_ refers to the total accumulation of inbound FDI in a country or outbound FDI from a country.
FDI stock
OLI advantages refer to a firm’s quest for _____via FDI
ownership advantages, location advantages, and internalization advantage
_ refers to the replacement of cross-border markets with one firm locating in two or more countries.
Internalization
Firms prefer FDI to licensing because FDI_____
provides the firm with direct ownership to its foreign assets
_ refers to the clustering of economic activities in certain locations.
Agglomeration
The television industry in the United States is controlled by seven giant corporations: The Walt Disney Company, CBS Corporation, Viacom, Comcast, Hearst Corporation, Time Warner, and News Corporation. Thus, the television industry in the U.S. is a typical _ industry.
oligopolistic
Which of the following economic perspectives on FDI has its principles rooted in Marxism?
The radical view
Which of the following is a benefit of FDI to home countries?
Learning from operations
_ refers to the deal struck by MNEs and host governments, which change their requirements after the initial FDI entry
Obsolescing bargain
Costs that a firm has to endure even when its investment turns out to be unsatisfactory are referred to as _.
sunk costs
A _ is the price of one currency, such as the dollar, in terms of another, such as the euro.
foreign exchange rate
Which of the following conditions will attract foreign funds into a country?
If the country’s interest rate is relatively high compared to other countries
_ is a country’s international transaction statement, which includes merchandise trade, service trade, and capital movement.
Balance of payments
Which of the following types of exchange rate policies is apt for a pure free market economy?
Clean float
The fixing of East and West Germany’s currencies at a 1:1 ratio to each other during the German unification in 1990 is an example of a _.
fixed exchange rate policy
In foreign exchange, a(n) _ is said to have occurred when investors move in the same direction at the same time, like a herd.
bandwagon effect
Between 1870 and 1914, the value of most major currencies was maintained by fixing their prices in terms of _.
gold
Which of the following was true of the Bretton Woods system?
All currencies were pegged at a fixed rate to the dollar.
The weight a member country carries within the IMF, which determines the amount of its financial contribution, its capacity to borrow from the IMF, and its voting power is referred to as a(n) _.
quota
_ allow participants to buy and sell currencies now for future delivery.
Forward transactions
_ is defined as the conversion of one currency into another at Time 1, with an agreement to revert it back to the original currency at a specific Time 2 in the future.
Currency swap
_ refers to non-financial companies spreading out its activities in different currency zones in order to offset the currency losses in certain regions through gains in other regions.
Strategic hedging
A currency board is a monetary authority that issues notes and coins convertible into a key foreign currency at a _ exchange rate.
fixed
A manager arguing against currency hedging would most likely argue that _.
currency hedging eats into company profits
Liability of foreignness is _.
the inherent disadvantage foreign firms experience in host countries
_ refers to the clustering of economic activities in certain locations.
Agglomeration
Which of the following conforms to the notion put forward by the school of thought associated with stage models?
Firms enter culturally distant countries in later stages when they may gain more confidence.
Which of the following is a first-mover advantage?
Avoidance of clash with a dominant firm at home
_ refers to the amount of resources committed to entering a foreign market.
Scale of entry
The distinction between _ is what defines an MNE from a firm that merely exports or imports.
equity and non-equity modes of entry
Which of the following is a non-equity mode of entry?
Turnkey projects
Which of the following entry modes is a type of strategic alliance?
Licensing
Which of the following is an advantage of R&D contracts?
Ability to tap into the best, cost-effective locations
Which of the following is true of indirect exports?
They export through domestically based export intermediaries.
A(n) _ is a non-equity mode of entry used to build a longer-term presence by building and then operating a facility for a period of time before transferring operations to a domestic agency or firm.
BOT agreement
Greenfield operations are similar to acquisitions in that they are both examples of _.
wholly owned subsidiaries
The country-of-origin effect refers to _.
the positive or negative perception of firms and products from a certain country
The process of anticipating rivals’ actions in order to both revise a firm’s plan and prepare to deal with rivals’ response is called _.
competitor analysis
_ occurs when firms engage the same rivals in numerous markets.
Multimarket competition
Which of the following industry characteristics contributes to collusion?
Existence of an industry price leader
Which of the following is defined as the degree of overlap between two rivals’ markets?
Market commonality
__ is an attack on a competitor’s other markets if this competitor attacks a firm’s original market
Cross-market retaliation
The act of setting prices below cost to eliminate rivals while intending to raise them in the long run to make up for the initial losses is known as _.
predatory pricing
A _ antirust policy would protect established firms that have already invested and nurtured an industry from new entrants.
pro-incumbent
Which combination of resource similarity and market commonality results in the most intense competition?
High resource similarity, low market commonality
Which of the following sets of words describes the initial set of actions a firm uses to gain competitive advantage and the other firm’s response to it?
Attack, counterattack
__ best suits situations where the pressures to globalize are relatively low, and local firms’ strengths lie in a deep understanding of local markets.
Defender strategy
If a firm is operating in an environment with a high pressure for globalization, which of the following is the most preferred strategy?
Dodger strategy
If a firm is operating in an environment that is customized to home market, which of the following is the most preferred strategy?
Dodger strategy
If a seller in a competitive market chooses to charge more than the going price, then
buyers will make purchases from other sellers.
An increase in the price of a good will
decrease quantity demanded.
Which of the following demonstrates the law of demand?
Jayden buys more donuts at $0.25 per donut than at $0.50 per donut, other things equal
The line that relates the price of a good and the quantity demanded of that good is called the demand
curve, and it usually slopes downward.
If the demand for a good falls when income falls, then the good is called
a normal good.
Currently you purchase ten frozen pizza per month. You will graduate from college in December, and you will start a new job in January. You have no plans to purchase frozen pizzas in January. For you, frozen pizzas are
an inferior good.
Two goods are complements when a decrease in the price of one good
increases the demand for the other good
Suppose scientists provide evidence that people who drink energy drinks are more likely to have a heart attack than people who do not drink energy drinks. We would expect to see
a decrease in the demand for energy drinks.
The shift from Da to Db is called
an increase in demand.
The law of supply states that, other things equal, when the price of a good
rises, the quantity supplied of the good rises.
The movement from point A to point B on the graph is called
an increase in the quantity supplied.
Which of the following changes would not shift the supply curve for a good or service
A change in the price of the good or service
A improvement in production technology will shift the
supply curve to the right.
Which of the following events could cause an increase in the supply of ceiling fans?
The number of sellers of ceiling fans increases.
Equilibrium quantity must decrease when demand
decreases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease.
Which of the following would not increase in response to a decrease in the price of ironing boards?
The quantity of irons supplied at each possible price of irons
A yard sale is an example of a market.
True
For a particular good, a 2 percent increase in price causes a 12 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?
The good is a luxury.
Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result,
the equilibrium quantity decreases, and the equilibrium price is unchanged.
Which of the following could be the price elasticity of demand for a good for which a decrease in price would increase total revenue?
4
If the demand for donuts is elastic, then a decrease in the price of donuts will
increase total revenue of donut sellers.
For which of the following goods is the income elasticity of demand likely highest?
Diamonds
You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles, yours would
be positive, and your roommate’s would be negative.
If the cross-price elasticity of two goods is negative, then the two goods are
complements
Suppose the demand function for good X is given by: Qdx = 15 − 0.5Px − 0.8Py where Qdx is the quantity demanded of good X, Px is the price of good X, and Py is the price of good Y, which is related to good X.
Using the midpoint method, if the price of good X is constant at $10 and the price of good Y decreases from $10 to $8, the cross-price elasticity of demand is about
−2.57, and X and Y are complements
Suppose that two supply curves pass through the same point. One is steep, and the other is flat. Which of the following statements is correct?
The steeper supply curve represents a supply that is inelastic relative to the supply represented by the flatter supply curve.
Suppose the price elasticity of supply for cheese is 0.6 in the short run and 1.4 in the long run. If an increase in the demand for cheese causes the price of cheese to increase by 15 percent, then the quantity supplied of cheese will increase by
9 percent in the short run and 21 percent in the long run.
Which of the following statements is valid when the market supply curve is vertical?
Market quantity supplied does not change when the price changes.
The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10 percent.
The equilibrium quantity will
decrease in both the aged cheddar cheese and bread markets
Which of the following was not a reason OPEC failed to keep the price of oil high?
The agreement OPEC members signed allowed each country to produce as much oil as each wanted.
Which of the following statements is not correct?
The quantity of illegal drugs demanded is very responsive to changes in price.
Demand is said to be price elastic if
buyers respond substantially to changes in the price of the good.
For a good that is a luxury, demand
tends to be elastic.
The demand for grape-flavored Hubba Bubba bubble gum is likely
elastic because there are many close substitutes for grape-flavored Hubba Bubba.
Suppose the price of a bag of frozen chicken nuggets decreases from $6.50 to $5.75 and, as a result, the quantity of bags demanded increases from 600 to 800. Using the midpoint method, the price elasticity of demand for frozen chicken nuggets in the given price range is
2.33.
When the demand for a good increases and the supply of the good remains unchanged, consumer surplus
may increase, decrease, or remain unchanged.
A seller’s opportunity cost measures the
value of everything she must give up to produce a good.
Producer surplus is
the amount a seller is paid minus the cost of production
Which of the following will cause an increase in producer surplus?
The price of a substitute increases
We can say that the allocation of resources is efficient if
total surplus is maximized
A simultaneous increase in both the demand for tablets and the supply of tablets would imply that
the value of tablets to consumers has increased, and the cost of producing tablets has decreased.
A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it
maximizes the combined welfare of buyers and sellers .
The particular price that results in quantity supplied being equal to quantity demanded is the best price because it
maximizes the combined welfare of buyers and sellers.
You are offered a free ticket to see the Chicago Cubs play the Chicago White Sox at Wrigley Field. Assume the ticket has no resale value. Willie Nelson is performing on the same night, and his concert is your next-best alternative activity. Tickets to see Willie Nelson cost $40. On any given day, you would be willing to pay up to $50 to see and hear Willie Nelson perform. Assume there are no other costs of seeing either event. Based on this information, at a minimum, how much would you have to value seeing the Cubs play the White Sox to accept the ticket and go to the game?
$10
Henry is willing to pay 45 cents, and Janine is willing to pay 55 cents, for 1 pound of bananas. When the price of bananas falls from 50 cents a pound to 40 cents a pound,
both Janine and Henry experience an increase in consumer surplus.
Suppose there is an early freeze in California that reduces the size of the lemon crop. As the price of lemons rises, what happens to consumer surplus in the market for lemons?
Consumer surplus decreases.
Denmark is an importer of computer chips, taking the world price of $12 per chip as given. Suppose Denmark imposes a $5 tariff on chips. Which of the following outcomes is possible?
More Danish-produced chips are sold in Denmark.
When a country that exported a particular good abandons a free-trade policy and adopts a no-trade policy,
producer surplus decreases and total surplus decreases in the market for that good.
For a small country called Boxland, the equation of the domestic demand curve for cardboard is Q D = 200 − 2P , where Q D represents the domestic quantity of cardboard demanded, in tons, and P represents the price of a ton of cardboard. For Boxland, the equation of the domestic supply curve for cardboard is Q S = -60 + 3P , where Q S represents the domestic quantity of cardboard supplied, in tons, and P again represents the price of a ton of cardboard.
If Boxland prohibits international trade in cardboard, then the equilibrium price of a ton of cardboard is
$52 and the equilibrium quantity of cardboard is 96 tons.
For a small country called Boxland, the equation of the domestic demand curve for cardboard is Q D = 200 − 2P , where Q D represents the domestic quantity of cardboard demanded, in tons, and P represents the price of a ton of cardboard. For Boxland, the equation of the domestic supply curve for cardboard is Q S = -60 + 3P , where Q S represents the domestic quantity of cardboard supplied, in tons, and P again represents the price of a ton of cardboard.
Suppose the world price of cardboard is $45. Then Boxland’s gains from international trade in cardboard amount to
$122.50
Which of the following is not a commonly-advanced argument for trade restrictions?
The efficiency argument
The problem with the protection-as-a-bargaining-chip argument for trade restrictions is
if it fails, the country faces a choice between two bad options.
The nation of Wheatland forbids international trade. In Wheatland, you can buy 1 pound of corn for 3 pounds of fish. In other countries, you can buy 1 pound of corn for 2 pounds of fish. These facts indicate that
if Wheatland were to allow trade, it would import corn.
Suppose Brazil has an absolute advantage over other countries in producing almonds, but other countries have a comparative advantage over Brazil in producing almonds. If trade in almonds is allowed, Brazil
will import almonds
When the nation of Duxembourg allows trade and becomes an importer of software,
residents of Duxembourg who produce software become worse off; residents of Duxembourg who buy software become better off; and the economic well-being of Duxembourg rises.
Cindy’s Car Wash has average variable costs of $2 and average fixed costs of $3 when it produces 100 units of output (car washes). The firm’s total cost is
$500
Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that when four units of output are produced, the total cost is $175, and the average variable cost is $33.75. What would the average fixed cost be if ten units were produced?
$4
Average total cost is increasing whenever
marginal cost is greater than average total cost
In the short run, a firm that produces and sells house paint can adjust
how many workers to hire.
The most likely explanation for economies of scale is
specialization of labor.
In the long run a company that produces and sells popcorn incurs total costs of $1,050 when output is 90 canisters and $1,200 when output is 120 canisters. The popcorn company exhibits
economies of scale because average total cost is falling as output rises
When a firm experiences diseconomies of scale,
long-run average total cost increases as output increases.
Billy’s Bean Bag Emporium produced 300 bean bag chairs but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. The price for each of the 275 units sold was $95. Total profit for Billy’s Bean Bag Emporium would be
−$3,875
Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she withdrew $20,000 from her savings, which earned 5 percent interest. She also turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui’s economic profit from running her own business?
$4,000
Korie wants to start her own business making custom furniture. She can purchase a factory that costs $400,000. Korie currently has $500,000 in the bank earning 3 percent interest per year.
Suppose Korie purchases the factory using $200,000 of her own money and $200,000 borrowed from a bank at an interest rate of 6 percent. What is Korie’s annual opportunity cost of purchasing the factory?
$18,000
If a firm uses labor to produce output, the firm’s production function depicts the relationship between
the number of workers and the quantity of output.
Ms. Joplin sells colored pencils. The colored-pencil industry is competitive. Ms. Joplin hires a business consultant to analyze her company’s financial records. The consultant recommends that Ms. Joplin increase her production. The consultant must have concluded that , at her current level of production, Ms. Joplin’s
marginal revenue exceeds her marginal cost
Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck’s revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should
continue flying until the lease expires and then drop the run
Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm’s marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit.
At Q = 1,000, the firm’s profits equal
$1,000
The information below applies to a competitive firm that sells its output for $40 per unit.
- When the firm produces and sells 150 units of output, its average total cost is $24.50.
- When the firm produces and sells 151 units of output, its average total cost is $24.55.
When the firm produces 150 units of output, its profit is
$2,325.00
The information below applies to a competitive firm that sells its output for $40 per unit.
- When the firm produces and sells 150 units of output, its average total cost is $24.50.
- When the firm produces and sells 151 units of output, its average total cost is $24.55.
Suppose the firm is currently producing and selling 150 units of output. Should the firm increase its output to 151 units?
Yes, because the marginal revenue exceeds the marginal cost
The short-run supply curve for a firm in a perfectly competitive market is
the portion of its marginal cost curve that lies above its average variable cost
A firm that shuts down temporarily has to pay
its fixed costs but not its variable costs
The competitive firm’s long-run supply curve is that portion of the marginal cost curve that lies above average
total cost
If there is an increase in market demand in a perfectly competitive market, then in the short run
profits will rise
Suppose a firm in each of the two markets listed below were to increase its price by 25 percent. In which pair would the firm in the first market listed experience a dramatic decline in sales, but the firm in the second market listed might not?
Corn and satellite radio
When firms are said to be price takers, it implies that if a firm raises its price,
buyers will go elsewhere
If a firm in a perfectly competitive market triples the quantity of output sold, then total revenue will
exactly triple
The fundamental source of monopoly power is
barriers to entry
A natural monopoly occurs when
there are economies of scale over the relevant range of output
When a firm has a natural monopoly, the firm’s
average total cost curve is downward sloping
When a monopolist increases the amount of output that it produces and sells, average revenue
decreases, and marginal revenue decreases
A monopolist’s profits with price discrimination will be
higher than if the firm charged just one price because the firm will capture more consumer surplus
When deciding what price to charge consumers, the monopolist may choose to charge them different prices based on the customers’
geographical location
A perfectly price-discriminating monopolist is able to
maximize profit and produce a socially optimal level of output
Antitrust laws have economic benefits that outweigh the costs if they
. prevent mergers that would decrease competition and raise the costs of production
If government regulation sets the maximum price for a natural monopoly equal to its marginal cost, then the natural monopolist will
earn economic losses
Which of the following is true about a monopolistically competitive firm?
It can earn an economic profit in the short run, but not the long run
When a monopolistically competitive firm raises its price,
quantity demanded declines but not to zero
When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal cost,
the firm may be incurring economic losses
When a market is monopolistically competitive, the typical firm in the market is likely to experience a
positive or negative profit in the short run and a zero profit in the long run.
In monopolistically competitive markets, free entry and exit suggests that
all firms earn zero economic profits in the long run
all firms earn zero economic profits in the long run.
consumer surplus that is generated from the introduction of a new product
If a firm in a monopolistically competitive market successfully uses advertising to decrease the elasticity of demand for its product, the firm will
be able to increase its markup over marginal cost
According to one theory, advertising sends a signal to consumers about the quality of the product being offered. An implication of this theory is that
the existence of an expensive advertisement is more important than the content of the advertisement
Which of the following statements about oligopolies is not correct?
Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal costs
As the number of sellers in an oligopoly becomes very large,
the quantity of output approaches the socially efficient quantity
When an oligopoly market reaches a Nash equilibrium,
a firm will have chosen its best strategy, given the strategies chosen by other firms in the market
As the number of firms in an oligopoly increases,
the total quantity of output produced by firms in the market gets closer to the socially efficient quantity.
Suppose that Thierry and Abdul are duopolists. Thierry is producing 700 units of output, and Abdul is producing 500 units of output. When Abdul produces 500 units, Thierry maximizes profit by producing 700 units. When Thierry produces 700 units of output, Abdul maximizes profit by producing 500 units. Thierry and Abdul are
at a Nash equilibrium
Juan Pablo and Zak are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $8,000. If they both advertise on radio, each will earn a profit of $14,000. If neither advertises at all, each will earn a profit of $20,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $12,000 and the other will earn $10,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $22,000 and the other will earn $4,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $24,000 and the other will earn $8,000. If both follow their dominant strategy, then Juan Pablo will
advertise on radio and earn $14,000
Assume that Samorola has entered into an enforceable resale price maintenance agreement with Trint and U-Mobile. Which of the following will always be true?
U-Mobile and Trint will always sell Samorolas for exactly the same price
Assume that a local restaurant sells two items, salads and steaks. The restaurant’s only two customers on a particular day are Mr. Carnivore and Ms. Leafygreens. Mr. Carnivore is willing to pay $20 for a steak and $7 for a salad. Ms. Leafygreens is willing to pay only $8 for a steak, but is willing to pay $12 for a salad. Assume that the restaurant can provide each of these items at zero marginal cos
If the restaurant is unable to use tying, what is the profit-maximizing price to charge for a steak?
$20
Liana consumes only beer and chips. Her indifference curves are all bowed inward. Consider the bundles (2,6), (4,4), and (6,2). If Liana is indifferent between (2,6) and (6,2), then Liana must
prefer (4,4) to (6,2)
Bundle J contains 10 units of good X and 5 units of good Y. Bundle K contains 5 units of good X and 10 units of good Y. Bundle L contains 10 units of good X and 10 units of good Y. Assume that the consumer’s preferences satisfy the four properties of indifference curves. The price of X is $1, the price of Y is $2, and the consumer has an income of $20. Which bundle will the consumer choose?
Bundle J
A consumer consumes two normal goods, popcorn and Pepsi. The price of Pepsi rises. The substitution effect, by itself, suggests that the consumer will consume
more popcorn and less Pepsi
Ryan experiences an increase in her wages. The hours of labor that she supplies to the market would increase if
the substitution effect is larger than the income effect
The basic tools of supply and demand are
central to macroeconomic analysis as well as to microeconomic analysis
For an economy as a whole
income must equal expenditure
In the actual economy, households
divide their income among spending, taxes, and saving
In order to include many different goods and services in an aggregate measure, GDP is computed using, primarily
market prices
Most goods and services produced at home
and most goods and services produced illegally are excluded from GDP
A newspaper article informs you that most businesses reduced production in the last quarter but also sold from their inventories during the last quarter. Based on this information GDP likely
decreased
U.S. GDP and U.S. GNP are related as follows:
GNP = GDP − Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad
National income differs from net national product because
of a statistical discrepancy
Disposable personal income is
the income that households and businesses have remaining after satisfying their obligations to the government
The Carters’ oldest son attends Big State University. He and his parents pay all his fees and tuition. These payments count in GDP as
consumption of services
Unemployment compensation is
not part of GDP because it is a transfer payment
Changes in real GDP reflect
only changes in the amounts being produced
Changes in the GDP deflator reflect
only changes in prices
If in some year nominal GDP was $20 billion and the GDP deflator was 50, what was real GDP?
$40 billion
GDP per person tells us the income and expenditure of the
average person in the economy
International data on GDP and socioeconomic variables
leave no doubt that a nation’s GDP is closely associated with its citizens’ standard of living
The existence of money leads to
greater specialization and to a higher standard of living
Which of the following is not a function of money?
Protection against inflation
You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in your piggy bank illustrates money’s function as a . The laptop’s price is posted as $500. The $500 price illustrates money’s function as a . You use the $500 to purchase the laptop. This transaction illustrates money’s function as a .
store of value, unit of account, medium of exchange
The measure of the money stock called M1 includes
wealth held by people in their checking accounts
If traveler’s checks were $1000 higher and saving deposits were $500 higher, M1 would be
$1,000 higher and M2 would be $1,500 higher
When conducting an open-market purchase, the Fed
buys government bonds, and in so doing increases the money supply
A bank which must hold 100 percent reserves opens in an economy that had no banks and a currency of $150. If customers deposit $50 into the bank, what is the value of the money supply?
$150
A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can, given the reserve requirement.
It has $800 in reserves and $9,200 in loans
If the reserve requirement is 10 percent, a bank desires to hold no excess reserves, and it receives a new deposit of $500, it
must increase required reserves by $50
If the reserve ratio is 5 percent, then $500 of additional reserves would ultimately generate
$10,000 of money
Which of the following increase when the Fed makes open market purchases?
Currency and reserves
The banking system currently has $10 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 12.5 percent and at the same time buys $1 billion worth of bonds, then by how much does the money supply change?
It falls by $12 billion
Which of the following will help to prevent bank runs?
100% reserve banking
A goal of monetary policy and fiscal policy is to
offset shifts in aggregate demand and thereby stabilize the economy
For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?
The interest-rate effect
While a television news reporter might state that “Today the Fed raised the federal funds rate from 1 percent to 1.25 percent, ” a more precise account of the Fed’s action would be as follows:
“Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent. “
When the Fed buys government bonds, the reserves of the banking system
increase, so the money supply increases
An increase in the money supply will
reduce interest rates, increasing investment and aggregate demand
In the short run, open-market purchases
increase investment and real GDP, and decrease interest rates
Take the following information as given for a small economy:
- When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250.
The multiplier for this economy is
4.00
The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates
the multiplier effect
If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then
aggregate demand falls by 11/2 × $40 billion
If a $1,000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is
0.8 and the multiplier is 5
When taxes decrease, interest rates
increase, making the change in aggregate demand smaller
Suppose there is a tax increase. To stabilize output, the Federal Reserve could
increase the money supply
Critics of stabilization policy argue that
policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived