WGU C211 - Global Economics for Managers, Brian Final exam questions and answers(verified for accuracy)

3 views on globalization Globalization is when you do business internationally New, Evolutionary, and Pendulum "New" view on globalization A force sweeping through the world in recent times. Which view claims that the phenomenon of globalization was initially driven by the desire of Western economies to exploit their power through multinational enterprises? "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. Most popular Foreign Direct Investment (FDI) Foreign direct investments (FDI) are investments made by one company into another company that is located in another country. 3 Different political views on FDI Radical - radical view is hostile to FDI Free market - free market view calls for minimum or unrestricted government restriction in FDI. Leads to a win-win situation for both home and host countries. Pragmatic nationalism - most countries practice pragmatic nationalism, weighing the benefits and costs of FDI and only using it when benefits outweigh the costs. What are the benefits to a country receiving Foreign Direct Investment? Capital Inflow Technology Spillover Advanced Management Know-How Job creation What costs exist in a country when they receive Foreign Direct Investment? 1. Loss of Sovereignty (power), 2. Adverse effects on competition (drives domestic firms out of business) 3. Capital outflow How do resources and capabilities influence the competitive dynamics of a business? A firm's resources and capabilities must create value compared to its competition. A firms resources need to bring: Value, company resources must create value, patents are an example. Rarity, the rarer, and more desired the more of an advantage it has. Imitability, how easy is it to imitate your competition? Organization, some companies are better at answering challenges from competitors. Classical theories of international trade* The major theories of international trade that were advanced before the 20th century, they consist of: 1. Mercantilism, 2. Absolute advantage 3. Comparative advantage Classic Theory says things don't change, they are static. How does resource similarity impact competitive dynamics? Firms with a high degree of similarity are likely to make similar competitive decisions. (Starbuck's instant coffee & McDonald's iced coffee, if one increases the price because of a coffee shortage the other will likely also) What are modern trade theories of international trade? Modern theories account for changes in patterns over time whereas classical theories are static. Modern theories include (1) Product life cycles, (2) Strategic trade (3) National competitive advantage or "Diamond" What is the classical theory view of international trade regarding change? Static, not changing What is absolute advantage? The economic advantage one nation enjoys that is superior to other nations, which nation is best at producing a particular good? Trade can be a win/win Absolute advantage is achieved when one producer is able to produce a competitive product using fewer resources, or the same resources in less time. For example, Smith argued that because of better soil, water, and weather, Portugal enjoyed an absolute advantage over England in the production of grapes and wines. And England enjoyed an absolute advantage over Portugal as England produced more wool. If they trade, they would both benefit. international trade is not a zero-sum game as suggested by mercantilism. It is a win-win game. there are net gains from trade based on absolute advantage. Comparative advantage The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. Hypothetically, say that Michael Jordan could paint his house in eight hours. In those same eight hours, though, he could also take part in the filming of a television commercial which would earn him $50,000. By contrast, Jordan's neighbor Joe could paint the house in 10 hours. In that same period of time, he could work at a fast-food restaurant and earn $100. In this example, Joe has a comparative advantage, even though Michael Jordan could paint the house faster and better. The best trade would be for Michael Jordan to film a television commercial and pay Joe to paint his house. So long as Michael Jordan makes the expected $50,000 and Joe earns more than $100, the trade is a winner. Owing to their diversity of skills, Michael Jordan and Joe would likely find this to be the best arrangement for their mutual benefit. What is mercantilism? It is the first recorded theory. A theory that suggests that the wealth of the world (gold/sliver) is fixed and that a nation that exports more and imports less will be richer. Mercantilism trade theory states that viewed international trade as a zero-sum game. A nation becomes richer by exporting more than it imports. Features of the product life cycle? The first dynamic theory. New: production of a new product (such as a TV) that commands a price premium will concentrate in the United States, which exports to other developed nations. Maturing Stage: demand and ability to produce growth in other developed nations (such as Australia and Italy), so it is now worthwhile to produce there. Standardized: (or commoditized). Thus, much production will now move to low-cost developing nations, which export to developed nations. In other words, the comparative advantage may change over time What is strategic trade theory? Strategic intervention by governments in certain industries can enhance their odds for international success. When a government helps an infant industry until it is large enough to compete on its own. They do NOT believe that unrestricted free trade is in the best interest of all countries. What are these industries? They tend to be highly capital-intensive, high entry-barrier industries in which domestic firms may have little chance without government assistance. How are supply and demand related to the exchange rate of a country? A country's currency is determined by its supply and demand. Strong demand leads to price hikes; oversupply results in price drops. Which theory came first mercantilism or modern-day protectionism? Mercantilism, both state that governments should protect domestic industries from imports If a company seeks to limit foreign exchange rate fluctuation in the forward direction (they are exporting the product), what is the most effective way to do this? Currency hedging What is an international transaction risk? The exchange rate risk associated with the time delay between entering into a contract and settling it. The potential for loss associated with fluctuations in the foreign exchange market. What is hedging? A transaction, such as forward transactions, that protects traders and investors from exposure to the fluctuations of the spot rate. What is strategic hedging? When you spread out your business activities in different currency zones to offset any currency losses that could occur if you were only in one spot (currency diversification) What are first mover advantages? Benefits that come to companies that enter the market first. 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.) What are late mover advantages? Benefits that come to companies that enter the market later. Opportunity to free ride on first-mover investments, Resolution of technological and market uncertainty, First mover's difficulty to adapt to market changes.) Consider the model of foreign market entries. How is scale-of-entry related/relevant? Scale of entry is the amount of resources committed to entering a foreign market, should the scale of entry be large or small? What is a non-equity mode? Reflects relatively smaller commitments to enter overseas markets. Determines the firm's MNE (Multinational Enterprise) status. What is an equity mode? Mode of entry that indicates a relatively larger, harder-to-reverse commitment into a foreign business. Determines a firm's MNE status. How do institutions reduce uncertainty? They establish "rules of the game" that economic players play by. What is a regulatory pillar? The power of governments (laws, regs, rules) What is a normative pillar? The mechanism through which norms (unwritten rules of society) influence individual and firm behavior. They are emotional. What is a cognitive pillar? The internalized, taken-for-granted values of beliefs between right/wrong. Your conscience! What is right and wrong? For example, what triggered whistleblowers to report Enron's wrongdoing was their belief in what's right and wrong. Essentially, whistleblowers choose to follow their internalized personal beliefs on what is right by overcoming the norm that encourages silence What is a formal institution? One that has laws, regulations, and rules Their primary supportive pillar, the regulatory pillar, is the coercive power of governments. Examples: Businesses, congress, and churches. What is an informal institution? An institution that is defined by norms, cultures, and ethics. Many societies, for example, have informal institutions regarding courtship and marriage. When and how is it ok to date and marry. No real law but there is an unwritten rule. What core views lie at the root of the institution-based view on global business and what propositions are the foundation of this view? It suggests that the success and failure of firms are enabled and constrained by institutions. (1) Managers and firms rationally pursue their interests and make choices within legal constraints (bounded rationality) (2) When formal constraints are unclear or fail, informal constraints play a larger role. The institution based view of global business is grounded upon what?* The success or failure of your business is enabled or constrained by institutions. 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? Totalitarianism (also known as a dictatorship), which is defined as a political system in which one person or party exercises absolute political control over the population. 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 exercises absolute political control over the population. What is civil law? A law that uses statutes and laws to make legal judgments. England and much of the world follow this, not the US though. What is common law? A legal tradition that comes from previous judicial decisions. Common law has more flexibility than civil law because judges have to resolve specific disputes based on their interpretation of the law, and such interpretation may give new meaning to the law, which will shape future cases. The US is Common Law. Common law is more confrontational, because plaintiffs and defendants, through their lawyers, must argue and help judges to favorably interpret the law largely based on precedents. Examples are: Nuisance or defamation. What is theocratic law? A legal system based on religious teachings. Examples include Jewish law and Islamic law. Although Jewish law is followed by some elements of the Israeli population, it is not formally embraced by the Israeli government. Islamic law is the only surviving example of a theocratic legal system that is formally practiced by some governments, such as those in Iran and Saudi Arabia How do civil, common, and theocratic laws compare? Common law has more flexibility than civil because judges have to resolve issues based on their interpretation of the law. Civil law has less flexibility because judges only have the power to apply the law. Theocratic laws follow religious teachings only. What is a property right? The legal right to use a resource and to receive income and benefits from it. A fundamental economic function that legal systems protect. What is an intellectual property right? Rights associated with the ownership. They primarily include rights associated with patents, copyrights, and trademarks. What is a market based economy* An economy that is characterized by the "invisible hand" of market forces Government has a hands-off approach. (laissez-faire) Specifically, all factors of production should be privately owned. The government should only perform functions that the private sector cannot perform (such as providing roads and defense) No country has FULLY embraced this principle There are more market-based economies than command-based economies. TEST QUESTION What is a command based economy? One that is defined by a government taking control over all factors of production. It is government-owned or state-owned, and all supply, demand, and pricing are planned by the government. During the heydays of communism, the former Soviet Union and China approached such an ideal. What is a mixed economy? One that has elements of both a market economy and a command economy. What is an indifference curve? A curve that shows all the combinations of goods that will make you equally happy. An indifference curve shows a combination of choices that give a consumer equal satisfaction making the consumer indifferent. What are 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. What is the marginal rate of substitution?* The slope at any point on an indifference curve at which the consumer is willing to substitute one good for the other as both options will make them equally happy. 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 maximum amount of income the consumer can spend. How might a budget constraint be impacted by an increase in income? When the consumer's income rises, the budget constraint shifts outward. If both goods are normal goods, the consumer responds to the increase in income by buying more of both of them. Then the consumer buys more pizza and Pepsi. What two graphical elements are needed to determine a consumer's optimal point of consumption Indifference curve and budget constraint. The point at which this indifference curve and the budget constraint touch is called the optimum. 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.