International Economics

Frage	Antworten
Timeline of Economic Globalization (5)	1. Imperial powers 2. British free trade zone (gold standard) 3. Great Depression 4. Democratization waves 5. Creation of global economic institutions (IMF, WTO, etc)
Free Labour Movement	Concept which is popular with economists; opening borders and allowing free labour movement in order to foster competition Sometimes perceived negatively - "stealing jobs"
GDP	Value of final goods/services produced within a country (all transactions WITHIN a country)
GNP	GDP + net receipts factor income = GNP Goods and services produced by citizens of a country no matter where they are in the world
Purchasing Power Parity Dollars	PPP dollars are a way of measuring different currencies against each other, based on cost of living using "basket of goods" Represents "real costs", rather than comparing one for one
International Dollar	Also called the Geary-Khamis dollar Adjusts for purchasing power (like PPP) but also takes into account commodity pricing; uses a larger basket of goods than PPP Sometimes makes GDP look higher than it is
Business and Increasing GDP	Businesses are key in increasing GDP because if businesses prosper, there are more jobs, the wages get higher and consumers buy more This is why governments care about business
5 Types of Globalization	1. Cultural globalization (ex. McDonalds) 2. Economic globalization (ex. free trade) 3. Geographic globalization (ex. reduced travel/communication time) 4. Institutional globalization (ex. WTO, IMF) 5. Political globalization (ex. EU, UN)
Price Wedge	When a certain factor (such as tariffs) literally drive a wedge between supply and demand at equilibrium, thereby causing the price to be higher or lower than natural
Fragmentation of Production	The process by which production processes get subdivided into distinct phases; allows further division of labour, so that firms can have different aspects of production completed wherever costs are lowest Usually caused by technological and communicative advancements
Fisher Equation	Money Supply (M) x Velocity (V) = Price Level (P) x Transactions (T) The idea that the amount of money in the economy is multiplied by how fast the money circulates within the economy. According to this, you can manipulate price levels by adding/subtracting from money supply (and this can effect inflation/deflation)
Important Aspects of Macroeconomics (8)	1. Output/income measurements (GDP) 2. (Un)employment 3. Money supply 4. Inflation/deflation 5. Central banks, monetary policy 6. Fiscal policy (taxes, etc) 7. Interest rates 8. Wage rates
National Governments and Regulating Markets (7)	1. They regulate monetary policy 2. Monopoly on legislature 3. Regulate imports/exports 4. Tax rates/distribution 5. Consumer protection 6. Labour laws 7. Regulating zoning/building permits
Floating Currency	Value determined by foreign exchange market; banks defend value (keep it stable) by buying or selling currencies on foreign exchange market
Effects of Sudden Currency Value Decrease (4)	1. Companies cut production (leading to higher unemployment) 2. Inflation 3. People save/cut back 4. Good thing: goods are now cheap on global market, so can undercut competition
Bond Market	International market fuelled by investment bonds issued by national central banks (thought to be a safe market) Confidence in economy/government is key
Fiscal Policy	Concerns what national governments do to control tax rates (cut taxes or increase them)
Laffer Curve	Theory that there is a maximum tax rate that will maximize government revenue; however if taxes go too high, receipts go down as people bail out
Business Cycle	Periods of boom/bust which is based on buying and selling on the market, as well as confidence in the market; when capital markets move, everyone gets dragged along
Combating Recession (5)	1. Keynesian stimulus (government spending) 2. Fiscal policy (tax cuts) 3. Monetary policy (decrease interest rates) 4. Increase money supply (stimulate exports) 5. Trade barriers (protectionism)
Philips Curve	Inverse relation between unemployment and inflation which is counter-intuitive As unemployment increases, so to does inflation
Causes of Stagflation (4)	1. Supply shock 2. Bad monetary policy 3. Bad labour regulation (ex. minimum wage too high) 4. Inefficient market regulations (ex. tariffs, quotas, subsidies)
Money Supply	Amount of money in an economy, as is regulated by central banks Banks can either inject money into the system or buy bonds from banks to take it out
Horizontal Activity	Firm produces in two countries (domestic and foreign), and sells finished product in both countries
Vertical Activity	Firm produces in a foreign plant, but only sells in local markets
Target Canada Case Study	Target wanted to move in to Canada, but incorrectly judged their target consumer. The stores they acquired in Canada were too low-brow for their target consumer, but too expensive for the existing clientele. Target crashes in Canada, negatively effecting the home market, too.
Balance of Payments	Summary of all international transactions (imports/exports) for one country Importing must equal exporting (debit = credit)
Balance of Payments Deficit	When a country does more importing than it does exporting
Balance of Payments Surplus	If a country is doing more exporting than importing
Reacting to Balance of Payment Deficit (4)	1. Earn counterbalancing funds from foreign investments 2. Receive loans from other countries (sell bonds) 3. Run down central bank foreign reserves 4. WTO can step in to help
Current Account	Country's net income (trade in goods and services including international activity)
Financial Account	Net transfer of assets; can be short term (which is quite volatile) or long term (stable)
Measuring Imports/Exports	Through firm's statements of income: operating (financial) profit + income before and after taxation
Problems with Firm Statements (4)	1. Numbers are often fudged because it is hard to measure ongoing expenses 2. Amortization of assets 3. Country-specific regulation 4. Exchange rate difficulties
Capital Account	The exchange of capital between parent and subsidiary across international borders through FDI
Foreign Direct Investment (3 types)	Lasting, long-term investment, usually involving a firm opening a production plant internationally 1. Greenfield investments: building factory 2. Acquisitions and mergers: merging/buying existing firms 3. Joint ventures: two firms cooperate
3 Components of FDI	1. Equity capital transactions: purchases and sales by share owner of enterprise in foreign country 2. Reinvested earnings: earnings which aren't in the form of dividends but are immediately reinvested into the market 3. Intra-company debt transactions: borrowing and lending between parents and affiliate
Flows vs Stocks	Flows: transaction of capital over given period Stocks: value of that capital ^
Rational Choice Theory	In economics, the theory goes that individuals will always act to maximize profits and efficiently allocate resources
Producer Surplus	The producer of a product would have sold it for less money (but is nonetheless happy to sell it for more)
Consumer Surplus	The consumer would have been willing to pay a higher price for a good
Elasticity of Supply and Demand	Supply and demand curves change depending on the nature of the good and the price of that good (for example, demand might go up if the price goes down)
Inelasticity	When people will buy a good no matter how much the producer charges for it (ex. we will buy bread even if it goes up by 40c)
Marginal Revenue	The idea that the more you sell, the less you earn PER UNIT, possibly due to a saturated market
Marginal Utility	Production of goods that only has so much utility; the market can be easily saturated. For example, you buy one bag of grain for your family, one for the pigs and one to store, and then you don't want any more - market is saturated
Why is International Trade Good (3)	1. Increases degrees of economic freedom; demand can be met by variety 2. International price comparison/competition 3. Increases arbitrage possibilities for merchants/investors
Arbitrage	The act of buying in one market and selling for profit in another, taking advantage of price differences
Comparative Advantage	Theory that if two countries trade at what they are relatively good at producing, it increases both economies to everyone's benefit - international trade is NOT zero-sum game
David Ricardo	1772-1823 Came up with theory of Comparative Advantage and the Ricardian model Argued against the prevailing assumptions of the time: mercantilist economic thought
Mercantilist Economic Thought	Traditional economic theory that you should maximize exports and minimize imports in order to increase national treasure (zero-sum game) Lasted until the end of the World Wars
Ricardian Model Basics (4 assumptions)	1. Labour is the only factor 2. Labour can move between firms in a country, but not across borders 3. Markets are in perfect competition 4. 2 countries, 2 commodities (one to import and one to export)
Absolute Cost Advantage	One of the countries in Ricardian Model is actually producing most efficiently in both goods; however comparative advantage says it is still worthwhile to specialize and trade
Heckshcher-Olin-Samuelson Model	HOS model states that the Ricardian model is too simplified, and so introduces a second factor, and therefore deals with CAPITAL and LABOUR and the relation between the two (as well as 2 countries, 2 commodities, etc)
Isoquant	Graphical representation of how to choose which technique of combining labour and capital a firm should choose to maximize efficiency You look at how much labour and how much capital is needed for the production of one unit
Lerner Diagram	Representation of production of two different products being produced on the same cost line (shows the ratio of capital to labour)
Opportunity Cost	The cost of what you could have received had you made another decision (cost of what you've given up)
Negative Opportunity Cost	When that which you gave up actually turned out to yield more profit; caused by bad decision making
Types of Markets (8)	1. Consumer market 2. Business market 3. Labour market 4. Non-physical market (media, internet) 5. Financial market (stocks) 6. Grey market (legal but unofficial trade) 7. Black market (trade of illegal goods)
Types of Market Competition (7)	1. Perfect competition 2. Monopoly (one seller) 3. Monopsony (one buyer) 4. Oligopoly (a few key sellers) 5. Duopoly (two sellers) 6. Oligopsony (a few key buyers) 7. Natural monopoly (concerned with high start up prices)
Firms "Going Public"	Process of selling share of the company to investors in the forms of stocks in order to gain more capital
Venture Capital	High risk investment in start-ups which start out public from the beginning
Coordinated Market Economies	Found in European Union; the market economy is highly regulated by national plans, collusion and tax breaks Concerned with long-term sustainability, stability and growth Does not foster innovation, like more capitalist system as seen in US
Stockholder Company	Firm where the board answers to stockholder interests, resulting in a 2-tiered system: board of governors elected by shareholders and and upper management hired by board
Management Team	CEO: manager in chief COO: day-to-day manager (marketing, sales) CFO: financial expert concerned with firm's profitability
Game Theory	Mathematical explanation for behaviour; how to predict and optimize behaviour to be most profitable
Information Theory	The better one's knowledge of the market is, the more likely he or she is to be successful in it This is why people hire stockbrokers and agents; using their information lowers risks in investment
Labour Economics	In microeconomics, this is used to analyze game theory and see further into the behaviour of workforce indiviudals
Ronald Coase	1910-2013 Came up with the theory of the firm in order to answer questions on why firms exist
5 Problems Addressed by Theory of the Firm	1. Existence: why do firms always emerge? 2. Organization: why not just be mediated by the market? 3. Boundaries: where are the boundaries between firms and markets? 4. Heterogeneity: how are companies organized and why? 5. Evidence: what drives differences between forms?
Transaction Costs and Types (5)	Costs incurred for using the market 1. Holding costs 2. Search and info costs (brokers can reduce this) 3. Bargaining costs 4. Enforcement costs (lawyers) 5. Transportation costs
Why are there Transaction Costs? (5)	According to Williamson (1932) 1. Frequency of transactions 2. Specificity of asset 3. Uncertainty 4. Limited rationality 5. Opportunistic behaviour
Firms Doing Imperfect Competition	Part of modern trade theory which concerns intra-industry trade To do so, firms can create monopolies by merging, or avoid government imposed competition by maintaining oligopoly
3 Sets of Return to Scale	1. Increasing (output goes up more than debt) 2. Constant (mix factors and plot against price) 3. Decreasing (output is less than changing input)
Profit Maximization Problem	Each "batch" of a product which is produced reduces the price; with the 1st product, you can assume that someone will be willing to pay a lot for it. As the market gets more and more of the product, people wont pay as much for it
Average Costs	Fixed costs you need before production can begin (ex. buying a factory/machinery) As you make a profit, average cost goes down
Monopolistic Competition	Usually finds low demand, because the demand curve will increase when there are more companies because people love variety; we'll pay for competition
Flexicon	Privately-held, middle sized company which transfers bulk goods like sugar or medicine. Successful through Europe, though has trouble with the currencies. Hit intellectual property right problems when trying to expand into China
Why Protectionism? (4)	1. Happens in times of crisis 2. Increases short-term revenue, but is bad for long-term 3. Protectionism means padding friends' pockets 4. Good for pandering votes
GATT/WTO	GATT came out after the Depression, which had highlighted the dangers of protectionim. GATT was a step towards free trade, also believed to foster peace Became WTO after 1994
International Mergers and Acquisitions	Buying chains and merging them into their own operations; has increased hugely as an option for firms in the last twenty years
Arguments for Trade Restriction (4)	1. Infant Industry Argument: must protect growing industries in one country until they can compete globally 2. Import substitutional policy: protects suppliers by getting consumers to buy local 3. Dumping complaint: protecting against companies radically undercutting competitors until they crash 4. Income distribution/government finance
Types of Protectionism (4)	1. Import tariffs (hurts foreign sellers) 2. Export tariff (hurts domestic international sellers) 3. Import subsidy (helps foreign sellers) 4. Export subsidy (helps domestic international sellers)
Tariff Effect	Tariffs drive a wedge between what the domestic and the foreign supplier receives for their goods (and the difference goes to the government)
Effects of Tariffs on Different Sects (4)	1. Domestic demand goes down because prices have gone up 2. Domestic producers can increase price and quantity 3. Domestic government gets tariff revenue 4. Can actually negatively effect global demand, if the economy imposing the tariff is big enough
Subsidy	When the government pays producers to supply more than they would have normally; often used to keep prices reasonable Leads to oversupply, which leads to dead weight loss
Common Agriculture Policy	Emerged in Europe after WWII as a step towards free trade; made countries nervous despite acknowledging benefits of free trade Allowed access from one country into the market of another
Arguments for EU Agriculture Subsidies (5)	1. Limits intra-EU competition (increasing productivity) 2. Subsidizes "public goods" 3. Living standards for farmers protected 4. Stabilizes agriculture market 5. Provides food at reasonable prices
Voluntary Export Restraint (VER)	In response to threat of retaliation (maybe to dumping?) a producer can choose not to export to a certain area This is an example of a non-tariff measure which leads to higher market price in import country
Trading Blocs	Areas where free trade has been agreed upon (bilateral agreements) which are sometimes seen as an obstacle to global trade Ex. NAFTA or ASEAN
Trans Pacific Partnership (TPP)	Trading agreement being pushed through possibily to influence/curb Chinese economic power Shows how FTAs often have political sides
Mercosur Case Study	Mercosur was a Latin America free trade agreement, which failed when currency problems in Brazil allowed them to undercut prices. Argentina responded by protecting their own industry, leading to a chain of protectionism which still persists.
3 Factors of Trading Costs	1. Government tariffs 2. Access to water (significantly effects transport costs) 3. Distance (between importing/exporting countries or within countries)
Free on Board (FOB)	Value of goods as they are in the exporting port (before transport costs, tariffs, etc)
Cost, Insurance, Freight (CIF)	Values of goods in the importing port (after transport costs, tariffs, etc)
Ad Valorem Rate	Freight rate set as percentage of value of goods
Decision Tree	Process of decisions firms have to make in order to decide which market to target (will they export, import, etc)
Liabilities of Foreign Business (5)	1. Cost of distance 2. Firm specific costs (unfamiliarity, lack of roots) 3. Costs from host countries 4. Costs from home country 5. Cultural distance costs (different rules to the game)
Subsidiarity	Decisions should be made at the most local level; that is with the most input from citizens
Principle of Conferral in EU	Fundemental principal of EU law which states that because EU is a collection of states, and competences are conferred on it by members, the EU has no competences in itself
Single Market Programme (EU)	Introduced in 1985 by European Commission in response to recent Oil Crisis; it was intended to heighten European competitiveness. To do so it involved removing trade barriers
Cockfield White Paper	Publication in 1985 which called for the further elimination of trade barriers and tariffs between EC countries by 1992; coincided with neoliberalist agenda of Thatcher and Reagan
Optimum Currency Area (OCA)	Geographical area in which it would maximize economic efficiency to share a common currency (argument for EuroZone)

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