WGU - C211 Global Economics for Managers test questions and answers.

Explain the New, Evolutionary, and Pendulum views of Globalization. How do these differ from one another? New globalization is a new force sweeping through the world in recent times. Pendulum globalization is a pendulum that swings from one extreme to the the other from time to time. Evolutionary globalization is a long historical evolution since the dawn of human history. What is Foreign Direct Investment? Investment in controlling and managing value-added activities in other countries. What different political views exist on FDI? Radical - hostile to FDI, roots to Marxism, treates FDI as an instrument of imperialism and as a vehicle for exploitation of domestic resources by foreign capitalists and firms. Free Market - suggests that FDI unrestricted by government intervention will enable countries to tap into their absolute comparative advantages by specializing in the production of certain goods and services.. win-win logic FDI friendly polices Brazil, China, Hungary, India, Ireland, Russia. Pragmatic Nationalism - Practiced by most countries. Viewing FDI as having both pros and cons and only aprroving FDI when its benefits outweigh costs. What benefits exist to a country receiving FDI? Capital inflow - can help improve a host country's balance of payments Technology - can create technology spillovers that benefit domestic firms and industries Advanced managment - know-how may be highly valued. FDI creates jobs both directly and indirectly. Direct benefits arise when MNEs employ individuals locally. Indirect benefits include jobs created when local suppliers increase hiring and when MNE employees spend money locally resulting in more jobs. Repatriated earnings from profits from FDI. Increased exports of components and services to host countries. Learning via FDI from operations abroad. What costs exist to a country receiving FDI? -Loss of sovereignty because of decisions to invest, produce and market products and/or to close plants and lay off workers in a host country are being made by foreigners. -Adverse effects on competiton. May drive some domestic firms out of business. Having driven domestic firms out of business MNE's in theory may be able to monopolize local markets. -Capital outflow when MNE's make profits in host countries and repatriate (send back) such earnings to headquarters in home countries, host countries experience a net outflow in the capital account in their balance of payments. How do resources and capabilities influence the competitive dynamics of a business? Strong resources and capabilities help to compete and/or cooperate more effectively. What is resource similarity and how does this impact competitive dynamics? Extent to which a given competitor possesses strategic endownment comparable, in terms of both type and amount, to those of the focal firm. Give a description of the classical theory of international trade. Mercantilism, absolute advantage, comparative advantage How would the modern theory compare to the classical theory? Modern Trade Theories are the major theories of international trade that were advanced in the 20th century, which consist of (1) product life cycle, (2) strategic trade, and (3) national competitive advantage of industries instead of relying on simple factor analysis, modern theories rely on more realistic product life cycles, first-mover advantages, and the "diamond" to explain and predict patterns of trade. Compare absolute advantage to comparative advantage. What differences exist? Absolute advantage is the ability of an individual, firm or country to produce more of a good or service than competitors when using the same amount of resources. (WinWin) Comparative advantage is the ability of an individual, firm or country to produce a good or service at a lower opportunity cost than other producers. (Opportunity cost) What is mercantilism and why is this an important term? An economic theory that advocates government regulation of international trade. It is an important tool in creating more wealth for by reducing the trade deficit. (Zero-sum WinLose) What are the critical features of the product life cycle? New, maturing and standartdized First theory to incorporate dynamic changes in patterns of trade. More realistic with trade in industrial products in the 20th century. How would you describe strategic trade? A theory that suggests that stategic 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 supply of a currency is determined by the domestic demand for imports from abroad. Which theory came first, mecantilism or modern-day protectionism? Mercantilism 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 (currency Hedging) What is transaction risk? The exchange rate risk associated with the time delay between entering into a contract and settling it. Explain the concept of "hedging" as it relates to reducing various types of risk. Currency hedging- the practices of protecting traders and investors from exposure to the fluctuations of the spot rate. Strategic hedging- spreding out activites in a number of countries in different currency zones to offset any currency losses in one region through gains in other regions. What advantages exist with the first mover? Benefits that accure to firms that enter the market first and that late entrants do not enjoy, propriety technological leadership and preemption of scarce resources. What advantages exist with the late mover? Benefits that accrue to firms that enter the market later and that early entrants do not enjoy, opportunity to free ride on first mover investments and resolution of technological and market uncertainty. Consider the model of foreign market entries. How is scale-of-entry related/relevant? Equity vs non-equity modes of entry, how much you are willing to commit to entering the foreign market. Scale of entry is the amount of resources committed to entering a foreign market. How do institutions reduce uncertainty? Curtail transaction costs and combating opportunism Discuss and compare the three pillars (regulatory,normative, and cognitive) Regulatory- the coercive power of governments Normative- how the values, beliefs and actions of other relevant players known as norms influence the behavior of local individuals and firms. Cognitive- refers to the internalized, taken for granted values and beliefs that guide individual and firm behavior. Compare formal and informal institutions. Formal- Laws,Regulations and rules (Regulatory) Informal- Rules are not formalized, values (Normative,Cognitive) Three legal traditions Civil Law- Deived from Roman Law, Oldest, most influential and most widely used (France, Brazil, China) Common Law- Shaped by precendents and traditions from previous judicial decisions. English speaking countries. (U.S., Canada, Australia) Theocratic Law- Based on religious teachings. Jewish law and Islamic law (Iran, Saudi Arabia, UAE) BRIC Brazil, Russia, India, China Base if the Pyramid Economies where people make less that $2000 per capita a year Group of 20 (The 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. Gross Domestic Product (GDP) The sum of value added by resident firms, households, and governments operating in an economy. Gross National Income (GNI) GDP plus 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 plus income from non-resident sources abroad On what is the institution-based view of global business grounded? What core propositions lie at the root of this view? A leading perspective in global business that suggests that the success and failure of firms are enabled and constrained by institutions Prop1- Managers and firms rationally pursue their interest and make choices within formal and informal institutional framework. Prop2- When formal constraints are unclear or fail, informal constraints will play a larger role How is global business affected by democracy? There is freedom of expression and economic expression, you have the right to set up a firm whether domestically or internationally. How is global business affected by totalitarianism? Not as good for business, these countries often experience higher political risks. What are the differences between democracy and totalitarianism? The political system is completely different, in a democracy the government is chosen by the people and in a totalitarianism the government is made up of a single person or party. Explain the core features of civil, common and theocratic law? How do they compare? Civil law: A legal tradition that uses comprehensive statues and codes as a primary means to form legal adjustments (80 plus countries) Common Law: A legal tradition that is shaped by precedents and traditions from previous judicial decisions. Theocratic law: A legal system based on religious teachings. What is a property right? In what way are property rights essential? Property rights: The legal rights to use an economic property(resource) and to derive income and benefits from it. What the developing world lacks and desperately needs is formal protection of property rights in order to facilitate economic growth. What is an intellectual property right? An intangible property that is the result of intellectual activity. IP rights are rights associated with the ownership of intellectual property; like patents, copyrights, and trademarks. Contrast the market, command, and mixed economy types. Market- an economy that is characterized by the 'invisible hand' of market forces, a hand forces a hands-off approach. What is an indifference curve? A curve that shows consumption bundles that give the consumer the same satisfaction. The slope at any point on indifference curve equals the rate at which the consumer is willing to substitute on a good for the other, this rate is called the marginal rate of substitution(MRS): The rate at which a consumer is willing to trade one good for another. The MRS is the slope of the curve. What are the four properties of an indifference curve? 1) Higher indiffernce curves are preffered to lower ones, people usually prefer to consume more rather than less. 2)Indifference curves are downward sloping, in most cases the consumer likes both goods, so if the quantity of one good is reduced the other good must increase. 3)Indifference curves do not cross 4)Indifference curves are bowed inward, the bowed shape of the Indifference curve reflects the consumer's greater willingness to give up a good that they already have in large quantity. Explain marginal rate of substitution. The rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility. What is budget constraint? The limit on the consumption bundles that a consumer can afford How might a budget constraint be impacted by an increase in income? Outward shift of the bduget constaint and it is parallel shift for income increase What two graphical elements are needed in order 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? At optimum, the slope of the indifference curve=the slope of the budget constraint, the consumer has to be able to afford it. The optimum represents the best combination of good 1 and good 2 to the customer. The marginal rate of the substitution is equal to the ratio of the prices. How is marginal cost derived? marginal cost is the increase in total cost that results from an increase in production by 1 unit How is marginal cost related to total cost? Marginal cost is the increase in total cost that arises from an extra unit of production. Total cost the market value of the inputs a firm uses in production. Marginal cost represents a change in total cost. What is the specific formula to calculate marginal cost? Change in cost / Change in quantity = marginal cost 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? $15/1 = $15 Marginal Cost is then $15 Total cost is made of two types of cost, what are they? Variable and Fixed How does a firm determine to shutdown in the short-run? What rule characterizes this? Shutdown if total revenue is lower that variable cost. What is a price taker? Which of the market structures are characterized as being " price takers"? When buyers and sellers are in a market with many buyers and sellers trading identical products. Perfect Competition When a market is characterized as being a price taker, what fundamental shape does the demand curve for this market take? A perfectly competitive firm faces a demand curve that is horizontal line equal to the equilibrium price of the market. How is the dmenad curve for a perfectly competitive firm distinct from the demand curve for a monoplolistic market? Competitive- a horizontal line equal to the equilibrium price of the market Monopolistic- The demand curve is downward sloping, because entyr shifts the demand curve to the left as the demand for the incumbent firm's product falls, these firms experience declining profit. What does "downward sloping" with regards to a demand curve mean? Illustrates the relationship between price and quantity demanded for a good or service. Where do firms with market power determine the quantity of product/service they will produce? Firms with market power are price makers so they can set the quantity of product/services they will produce What is the primary goal/objective of the firm? Maximizing profit