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Globalization
The shift toward a more integrated and interdependent world economy.
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Globalization of markets
merging of distinctly separate national markets into a global marketplace
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globalization of production
the sourcing of goods and services from locations around the world to exploit national differences in the cost and quality of factors of production
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Drivers of globalization
declining trade and investment barriers, technological change
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technological change
microprocessors, internet, transportation technology
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limits to globalization of production
very complex, costs of using a nation's factors of production can change (transportation costs, exchange rate fluctuations)
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risks in international business
commercial, political, economic, legal, cultural
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positives of globalization
lowers prices for goods and services, stimulates economic growth, creates jobs
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concerns with globalization
eliminates manufacturing jobs in wealthy countries, decreases wage rates of unskilled workers, encourages companies to move to countries with fewer labor and environmental regulations.
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tariff trade barriers
duties imposed by a government on imported or exported goods
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nontariff trade barriers
any governmental regulation or policy
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beggar-thy-neighbor trade policy
trade policy that results in one trading partner gaining an advantage at the expense of another nation
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economies of scale
cost advantages resulting from increased production
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global web of production facilities
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factors of production
resources used in the production of goods and services (land, labor, capital)
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events that contributed to the popularity of Keynsian economic theory
world war II ended, and the world was in a depression. people were looking for anything to dig them out of it.
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events that contributed to the unpopularity of Keynesian economic theory
stagflation occurred
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disadvantages of state-owned enterprises
greed, political favoritism, quality and quantity of products
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Troubled asset relief program (TARP)
$700 billion bailout program for financial institutions and automakers
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american recovery and reinvestment plan
$787 billion stimulus package to jumpstart the economy and create and save jobs
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totalitarianism
one person or party exercises absolute control over all spheres of life. there is often political oppression, no free elections
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socialism
belief that the state should own enterprises and run them for public good rather than private profit
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market economies
productive activities are privately owned, good produced through supply and demand, role of government is to promote vigorous free and fair competition.
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command economies
good and services produced, and quantity produced is planned by government. all businesses are state owned.
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fiscal policy
attempts to influence the direction of the economy through changes in government taxes or through governmental spending
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monetary policy
attempts to influence the economy by controlling interest rates and the supply of money
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monetary policy tools
banking reserve requirements, buying and selling US securities, discount rates
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common law
- -past court decisions act as precedents to form future policies.
- -judge plays significant role as a law maker.
- -an action is legal unless prohibited.
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civil law
- -every law is codified or written into comprehensive codes
- -an action is illegal unless specifically allowed by code
- -duty of the judge is to apply the law as enacted
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theocratic law
based on religious teachings (islamic law)
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islamic law
- -quasi-religious system mostly based on the koran and the teachings of the prophet mohammed
- -crimes have pre-established punishment
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mercantilism
theory contends a country should maintain a trade surplus to accumulate wealth by exporting more than it imports
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theory of absolute advantage
countries should engage in trade when they have an absolute advantage in their ability to produce goods efficiently
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ricardo's theory of comparative advantage
- -demonstrates that countries can benefit from trade even if a country has an absolute advantage of production in all products
- -a country should specialize in the production of goods that it produces most efficiently and buy other goods
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heckscher-olin theory
countries should export goods that intensively use factor endowments which are locally abundant and import goods made from locally scarce factors
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product life-cycle theory
introduction, growth, maturity, decline
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new trade theory
countries sometimes specialize in the production and export of certain products because of economies of scale and first mover advantages
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balance of payment accounts
national accounting system that tracks both payments to and receipts from other countries
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current account
records transactions involving the import and export of good and services
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capital account
income earned on assets held abroad
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financial account
records transactions that involve the purchase or sale of assets
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balance of payments accounts
the current, capital, and financial account balances should always add up to zero but never do.
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subsidies
governments payments to domestic producers that lower production costs (grants, tax breaks, low-interest loans)
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specific tariffs
fixed charge for each unit
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ad valorem tariffs
proportion of the value of the good
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import quotas
restriction of the quantity of a good to be imported into a country
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voluntary export restraints
quota on trade imposed by exporting country, typically at the request of the importing country
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local content requirements
requires some specific fraction of a good to be produced domestically
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administrative trade policies
bureaucratic rules designed to make it difficult for imports to enter a country
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antidumping policies
designed to prevent foreign firms from selling goods below production costs and fair market value
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countervailing duties
duties assessed if the government believes that the foreign firm has engaged in dumping.
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political arguments for intervention
protecting jobs, national security, protecting consumers
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economic arguments for intervention
infant industry, strategic trade policy
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the world trade organization
it's a set of rules, a negotiating forum, and a forum for settling disputes
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current challenges for the WTO
- -agricultural subsidies
- -dispute resolution processes
- -anti-dumping actions
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regional economic integration
preferential trading arrangements in which member countries agree to coordinate their trade, fiscal, and monetary policies
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economic case for integration
- -increases world production
- -stimulates economic growth
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political case for integration
economic interdependence creates incentives for political cooperation and this reduces potential for violent confrontation
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impediments to integration
nation as a whole may benefit, but groups within countries may be hurt
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case against regional integration
only beneficial if it creates more trade than it diverts
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trade creation occurs when:
free trade leads to substitution of inefficient domestic production for efficient production
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trade diversion occurs when:
efficient non-member production is replaced by inefficient production
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GATT's article 24 allows regional trade arrangements if:
- -an agreement impacts substantially all sectors of trade
- -non-members are not exposed to more restrictive trade than before the agreement
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benefits of the euro
- -lowers foreign exchange costs
- -facilitates price comparisons
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concerns with the euro:
- -european central bank controls monetary policy for the euro zone
- -the EU is not an optimal currency area
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north american free trade agreement (NAFTA)
goals of the agreement were to remove barriers to trade and to expand investment opportunities.
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