1. Global Test 2

2. Mercantilism
• Advocates that countries should
simultaneously encourage exports and
discourage imports

3. Adam Smith
• Theory of absolute advantage
• Explained why unrestricted free trade is
beneficial to a country
• Wealth of Nations
• 1776

4. Free Trade
• Where government doesn’t attempt to
influence through quotas or duties what its
citizens can buy from another country, or sell
to another country

5. David Ricardo
• Theory of comparative advantage

6. New Trade Theory
• In some cases countries specialize in the
production and export of particular products
because certain industries can only support a
limited number of firms

7. 0-sum game
• Situation in which an economic gain by one
country results in an economic loss by another
• Mercantilism assumed this was the case.
• You sell more than you buy, your country gains
and another country gets poorer. Doesn’t
work like that in reality

8. Positive – sum game
• Situation where all countries can benefit

9. Absolute Advantage
• When one country is more efficient at
producing something than any other country

10. Comparative Advantage
• A can either produce 20 cocoa or 15 rice,
while B can produce 5 cocoa or 7 rice.
• B has the comparative advantage for rice
• It is a measure of productivity

11. Samuelson Critique
• 20% cheaper groceries doesn’t necessarily
make up for wage losses in America

12. Heckscher-Ohlin theory
• Comparative advantage arises from
differences in national factor endowments,
not productivity
• Factor Endowments – extend to which a
country is endowed with resources like land,
labor, and capital

13. Leontief Paradox
• Goes against the H-O theory
• The U.S. is very high in capital, so according to
the H-O theory their exports should be very
capital intensive and imports more labor
intensive
• Yet in reality, U.S. imports are more capital
intensive than its exports

14. Product Life Cycle Theory
• United states starts as exporter of new
product because initial demand is not based
on price
• Later more people produce it, demand based
on price, production begins in countries that
can do it cheaper
• United states imports it from cheaper
countries

15. Economies of Scale
• Cost advantage associated with large-scale
production
• Spreading fixed costs by producing a ton of
units

16. First-Mover Advantages
• Economic and strategic advantages that
accrue to early entrants into an industry

17. Porters Diamond
• Said 4 factors determined comparative advantage
• Factor endowments – resources
• Demand Conditions – nature of home demand
• Relating and Supporting industries – related
industries. Stuff tends to be clustered
• Firm strategy, structure, and rivalry – how
companies are managed, organized, etc. Local
competition makes for better advantage globally

18. Tariff
• Tax on imports

19. Specific tariff
• Tariff levied as a fixed charge for each unit of
good imported

20. Ad Valorem Tariff
• Levied as a proportion of the value of an
imported good

21. Subsidies
• Government payment to a domestic producer

22. Import Quota
• Direct restriction on the number of a good
that may be imported into a country

23. Tariff Rate Quota
• Applying a lower tariff rate to imports within
the quota

24. Voluntary Export Restraint
• Quota imposed by the exporting country

25. Local Content Requirements
• A requirement that some specific fraction of a
good be produced domestically

26. Administrative Policies
• Rules designed to make it difficult for imports
to enter a country
• Example: japan required searching of
packages for pornography, making quick
deliveries impossible

27. Antidumping Policies
• Dumping – selling goods in a foreign market at
below their costs of production, or below fair
market value
• Antidumping Policies – designed to punish
foreign firms that engage in dumping and
protect domestic producers from unfair
foreign competition

28. Infant Industry Argument
• New industries should be temporarily
protected from foreign competition, until they
can hold their own in the global marketplace

29. Strategic Trade Policy
• Government should use subsidies to support
promising firms that are active in newly
emerging industries, to help them get first
mover advantage
• Second, when they are not the first, is to help
them overcome the first-mover advantages of
foreign countries

30. GATT
• Established 1947
• Objective – liberalize trade by eliminating
tariffs, subsidies, import quotas, etc

31. Uruguay Round
• Tariffs reduced
• Agricultural subsidies reduced
• Protection for intellectual property
• WTO created

32. WTO
• Polices the GATT agreement

33. Flow of FDI
• Amount of FDI undertaken over a given time
period

34. Stock of FDI
• Total accumulated value of foreign-owned
assets at a given time

35. Outflows of FDI
• Flow of FDI out of a country

36. Inflows of FDI
• Flows of FDI into a country

37. United states big part of FDI
• It had a large economy during the post-war
period and many large enterprises

38. Oligopolies
• Firms tend to imitate each other’s FDIs

39. Product Life Cycle
• At some point, businesses will use FDI for their
products when there is demand in other
countries

40. Free Market View of FDI
• FDI benefits both source country and host
country

41. Radical View of FDI
• Source country exploits host country for
profits

42. Pragmatic Nationalism
• FDI benefits host countries, but it comes at a
cost

43. Location-specific advantages
• Advantages that arise from utilizing resources
that are tied to a particular foreign location

44. Benefits of FDI to host country
• Resource transfer – they get stuff they may
not normally get (like technology)
• Employment – gives jobs to host country
• Balance of payments – gives country more
exports and less imports
• Increases global competition, reducing prices

45. Costs to host country
• Competitors to domestic companies
• Balance of accounts – hurts it if they import
most of their parts, rather than buy them in
the nation
• Fear of losing economic independence

46. Home Country Benefits
• Creates demand for home country exports
• Profits for companies
• Multinationals learn skills from their foreign
companies that can be used at home

47. Home country costs
• Reduced home country employment

48. FDI types
• Greenfield Investment – new facility
• Acquisition or merger with existing local firm

49. Gross Fixed Capital Formation
• Summarizes the total amount of capital
invested in factories, stores, office buildings,
and the like

50. Internalization Theory
• Argument that firms prefer FDI over licensing
to retain control over know-how,
manufacturing, marketing and strategy
• They wanna do it themselves

51. Licensing
• Firm licenses right to produce a product to a
foreign firm, and collects a royalty for it

52. Economic Integration
• Agreements among countries in a geographic
region to reduce, and ultimately remove,
tariffs and barriers to the free flow of goods
and services between eachother

53. European Union EU
• The countries dropped their trade borders to
eachother and adopted a single currency for
doing business

54. NAFTA
• North American Free Trade Agreement
• Free trade between Canda, USA, and Mexico

55. Levels of Economic Integration

56. Free Trade area
• No barriers to trade between countries in
agreement
• Individual countries still free to decide how to
deal with non-members
• NAFTA
• EFTA (european free trade association)

57. Customs Union
• Group of countries committed to removing all
barriers to flow of goods and services
• Pursuit of a common external trade policy

58. Common Market
• Everything customs union has, but also factors
of production can move freely between
members
• Labor and capital are free to move

59. Economic Union
• Same as those before, but requires common
currency, harmonization of tax rates, and
common monetary and fiscal policy
• EU is an economic union, though imperfect
since not all of its countries have adopted the
Euro

60. Political Union
• Where all of the above are true, and
government coordinates
• United States is an example

61. Trade Creation
• Trade created due to regional economic
integration, occurs when high-cost domestic
producers are replaced by foreign producers

62. Trade Diversion
• When low-cost foreign suppliers outside a free
trade area are replaced by higher-cost foreign
suppliers in a free trade area

63. EU
• Global Superpower due to high GDP
• 27 member states

64. Single European Act
• Committed members to establishing an
economic union
• Remove trade barriers
• Mutual product standards between countries
• Reduce restrictions on transporting between
countries

65. Euro Benefits
• Simpler between-country transactions
• Easier to compare prices across europe
• Long term efficiency of countries

66. Euro costs
• Nations lose control over monetary policy

67. Joining the EU
• Have to privatize state assets, deregulate
markets, restructure industries, and tame
inflation
• Enshrine EU laws into their own systems,
establish democratic governments, and
respect human rights

68. Optimal Currency Area
• Similarities in the underlying structure of
economic activity make it feasible to adopt a
single currency

69. European Council
• Most important EU authority
• Represents interests of member states
• Draft legislation from Commission can only
become law if the council agrees

70. European Commission
• Body responsible for proposing EU legislation,
implementing it, and monitoring compliance

71. European Parliament
• Elected EU body that consults on issues
proposed by the european commission

72. Court of Justice
• Supreme appeals court for EU law