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international business midterm 1
lecture notes
International Studies
Undergraduate 3

Additional International Studies Flashcards





What is international Business?


  1. A transaction between paries located in 2 countires
  2. All the complexities of domestic business, but with additional layers:
  • differing political, legal and economic systems, and levels of uncertainty
  • differing cultures and consumer tastes
  • differing levels of development
  • different currencies, interest rates and rates of growth plus more..
Globalization of Markets
national markets are merging into one huge marketplace. However, t is important not to push this view too far
globalization of production

implies that firms are basing individual productive activities at the optimal world locations for the particular activities. As a consequence, it is increasingly irrelevant to talk about American products, Japanese products, or German products, since these are being replace by "global" products.

Example: Tee Shirt made all over the world

Foreign Direct Investment
When a firm invests resources in business activities outside of its home country
factors affecting globalization

1) education

2) limited liability forms of business ownership


4) growth in property rights, including intellectual property protection

5) diminishing restrictions on trade and investment flows

6) growing homogeneity in tastes

7) Plus other factors...


Globalization has period of growth and decline; not a constant process. What are the notable stops?

  1. Great Depression
  2. World war I and II
  3. Now? 
  4. Mobility of workers, visas, passports and security
Globalization 1.0


Military force drove global integration (often inspired by religion or imperialism or a combination of both)

Globalization 2.0

1800-2000 (interrupted by the Great Depression and the World Wars)

Multinational corporations drove global integration

technological innovation in hardware enabled pursuit of new markets-steamships, railroads, telephones, computers

breakdown of soviet system symbolized the end of this period of globalization: "the walls fell down"

Globalization 3.0


Shringing the world from a small size to a tiny size

individiuals (not countries or companies) will be the primary force driving globalization

software (not hardware) facilitates the new power of indiviual entrepreneurship

Global fiber-optic network allows individuals to connect seamlessly (call centers, radiologists, accountants, reservations)

economic systems
  1. Command economy: an economic system in which the government plans the goods and services that  a country produces, the quantity it which they are produced and the prices at which they are sold. Consistent with "collectivist" ideology of society. Instead of growing and becoming more prosperous, these economies tend to stagnate
  2. Market economy: an economic system in which the interaction of supply and demand determines the quantity in which goods and services are produced. has a major positive impact on economic growth and development. Innovation and entrepreneurship require a market economy.
  3. Mixed economy: Between Market and Command economy. in a mixed economy, certain sectors of the economy are left to private ownership and free market mecanisms while other sectors have significant state ownershp and government planning. . Government tends to take into state ownership troubled firms whose continued operation is thought to be vital to national iterests.
collectivism: a political system that emphasizes collective goals over individual goals. the needs of society as a whole are generally viewed as being more important than individual freedoms.

a political philosophy advocating substantial public involvement through govrnment ownership, in the means of producting and distribution

  1. communists: those who believe socialism can be achieved only through revoution and totalitarian dictatorship.
  2. social democrats: those committed to achieving socialism by democratic means. 
the sale of state-owned enterprises to private investors

an emphasis on the importance of guaranteeing individual freedom and self-expression. stresses that the interests of the individual should take precedence over the intersts of the state


it is built on 2 central tenants:

  1. an emphasis on the importance of guaranteeing individual freedom and self expression
  2. the welfare of the society is best served by letting people pusue their own economic sel-interest, as opposed to some collective body (such as government) dictating what is in society's best interest
individualism translates into an advocacy for democratic political systems and free market economics, which in general creates a more favorable environment for international businesses to operate in.

political system in which government is by the people, exercised either directly or through elected representatives


representative democracy: a politial system in which citizens periodially elect indiviuals to represent them. 


democracy and individualism go hand in hand


form of government in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parites.


  1. communist totalitarianism: a version of collectivism advocating that socialism can be achieved only through a totalitarian dictatorship
  2. theocratic totalitarianism: a political system in which political power is monopolized by a party, group, or individual that governs according to religious principles
  3. tribal totalitarianism: a political system in which a party, group, or individual that represents the interests of a particluar tribe monoplizes political power. 
  4. right-wing-totalitarianism: a political system in which political power is monopolized by a party, group, or individual that generally permits individual economic freedom but restricts individual political freedom, including free speech, frequently on the grounds that it would lead to the rise of communism
goes along with collectivism
common law system

a system of law based on tradition, precedent, and custom


when law courts interpet common law, they do so with regard to these characteristics. This gives a comon law system a degree of glexibility that other systems lack


As new precendents arise, laws may be altered clarified, or ammended to deal with new situations


common law system

a system of law based on a detailed set of written laws and codes


Judges in a common law system have the power to interpret the law, whereas judges in a civil law system have the power only to apply the law

theocratic law system

a system of law based on religious teachings


islamic law is the most widely practiced theocratic legal system in the modern world

contract law

contract law: the body of law that governs contract enforcement


contracts drafted under a common law framework tend be very detailed with all contingencies spelled out. In a civil law system, however, contracts tend to be much shorter and less specific because many of the issues are already covered in the civil code

united nations convention on contracts for the international sale of goods (CIGS)
a set of rules governing certain aspects of the making and performance of commercial contracts between sellers and buyers who have their places o business in different nations
property rights
the bundle of legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource.
private action
the theft, piracy, blackmail, and the like by private individuals or groups
public action
the extortion of income or resources of property holders by public officials, such as politicians and gobernment bureaucrats
Intellectual property

products of the mind, such as computer software, a screenplay, a music score, or the chemical formula for new drug; can be protected by patents, copyrights, and trademarks.


  1. patent: grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sales of the invention.
  2. copyright: the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit.
  3. trademark: designs and names, often officially registered, by which merchants or manufacturers designated and differentiate their products
world intellectual property organization
an international organization whose members sign treaties designed to protect intellectual property
Paris convention for the protection of industrial property
international agreement to protect intellectual property; dates to 1883 and has been signed by some 170 nations


an economic philosophy advocating that counties should simultaneously encourage exports and discourage imports


to achieve this, imports were limited by tariffs and quotas, while exports were subsidized


a country will gain wealth when exports exceeds imports



  1. to earn goal and silver
  2. gain wealth=store of government's gold and silver
  3. have a trade surplus (not the current U.S. situation)
  4. Maximize exports through subsidies
  5. Limit imports through tariffs and quotas, or other methods
  6. Flaw: a "zero-sum game" (zero sum game is a situation in which an economic gain by one country results in an economic loss by another
David Hume on Mercantilism: 1752
Is maintaining a trade surplus a feasible goal?
  • Increased wealth (gold) and increased exports ultimately eads to growth and inflation
  • imports keep inflation low
  • result: a country initially exports ultimately becomes importer because of the changes in relative prices
  • in the long run, no one can keep a trade surplus
  • **there is no fixed pie of wealth
Today: neo-mercantilist=protectionists
Absolute Advantage

Adam Smith


a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it


Smith's basic argument is that a country should never produce goods at home that it can buy at a lower cost from other countries 

comparative advantage

David Ricardo took adam smith's theory one step further by exploring what might happen when one country has an absolute advantage in the production of all goods.


It makes send for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that is produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself.


ricardo's theory of comparative advantage is useful, but there are some issues/assumptions:

the world does not consist of two countries and tow goods; no transportation costs assumed; resources are mobile between goods within countries, but not across countries; constant returns to scale; fixed stocks of resources and no effects on income distribution within countries

constant returns to specialization
the units of resources required to produce a good are assumed to remain constant no matter where one is on a country's production possibility frontier
diminishing returns to specialization

occurs when more units of resourcs are required to produce each additional unit.


it is more realistic to assume diminishing returns than constant returns because:

  1. not all resources are of the same quality. As a country tries to increase its output of a certain good, it is increasingly likely to draw on more marginal resource whose productivity is not as great as those initially employed. the result is that it requires even more resources to produce an equal increase in output. (example: some land is more productive than other land. As ghana tries to expand its output of cocoa, it might have to utilize increasingly marginal land that is less fertile than the land it originally used.)
  2. different goods use resources in different proportions. (example: imagine that growing cocoa uses more land and less labor than growing rice, and that Ghana tries to transfer resources from rice production to cocoa production. The rice industry will release proportionately too much labor and too little land, the cocoa industry will have to shift toward more labor intensive methods of production.
diminishing returns to specialization suggest that the gains from specialization are likely to be exhausted before specialization is complete.
heckscher-ohlin theory

this theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce.


this theory argues that free trade is beneficial


Relative factor endowments: the extent to which a county is endowed with such resources as land, labor, and capital

  • resources vary among countries-oil,labor
  • goods vary in the amount of resources needed to produce them
  • a country will specialize in production of goods that align with its relative factor endowments of land, labor and capital.
  • What would a country with an abundance of labor export?
problems with this theory
  • assumes technology is same around the world
  • no accounting for movement of labor or capital
most economists prefer this theory because it makes fewer simplifying assumptions
Production Life-Cycle theory

Raymond vernon proposed this theory in the mid-1960s


Vernon argued that most new products were initially produced in America


the consequence of these trends for the pattern of world trade is that over time the United States switches from being an exporter of the product to an importer of the product as production becomes concentrated in lower-cost foreign locations

New Trade Theory



the ability of firms to attain economies of scale might have important implications for international trade


Economies of Scale: cost advantages associated with large-scale production. Economies of scale are a major source of cost reductions in many industries.


New trade theory makes 2 important points:

  1. through its impact on economies of scale, trade can increase the variety of goods available to consumers and decrease the average costs of those goods. 
  2. in those industries where the output required to attain economies of scale represents a significant proportion of total world demand, the global market may be able to support only a small number of enterprises.


 according to new trade theory, each nation may be able to specialize in producing a narrower range of products than it would in the absence of trade, yet by buying goods that it does not make from other countries, each nation can simultaneously increase the variety of goods available to its consumers and lower the costs of those goods--thus trade offers an opportunity for mutual gain even when countries do not differ in their resource endowments or technology

Trade is thus mutually beneficial because it allows for the specialization of production, the realization of scale economies, the production of a greater variety of products, and lower prices.


First mover advantage: advantages accruing to the first to enter a market. the first movers in an industry can gain a scale-based cost advantage that later entrants find almost impossible to match


implications of new trade theory:

  1. Nations may benefit from trade even when they do not differ in resource endowments or technology
  2. a country may predominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce the good.
  3. it is in variance with the Heckscher-Ohlin theory which suggests that a country will predominate in the export of a product when it is particularly well endowed with those factors used intensively in its manufacture.
  4. most contentious implication is the argument that it generates for government intervention and strategic trade policy
national competitive advantage

Michael porter-1990


Porter theorizes that 4 broad attributes of a nation shape the environment in which local firms compete and these attributes promote or impede the creation of competitive advantage. These attributes are:

  1. Factor endowments: a nation's position in factors for production such as skilled labor or the infrastructure necessary to compete in a given industry.
  2. Demand conditions: the nature of home demand for the industry's product or service.
  3. Relating and supporting industries: the presence or absence of supplier industries and related industries that are internationally competitive.
  4. Firm Strategy, structure, and rivalry: the conditions governing how companies are created, organized and managed and the nature of domestic rivalry
Today's thinking on trade theories
  • Cost competitiveness= comparative advantage
  • importance of location for strategic positioning
  • innovation is key, especially as technological change in countries like China and India is happening faster than developed economies are able to cope with
7 instruments of trade policy
  1. tariffs
  2. subsidies
  3. import quotas
  4. voluntary export restraints
  5. local content requirements
  6. administrative policies
  7. antidumping duties

tax levied on imports


Special tariff: a tariff levied as a fixed charge for each unit of good imported


Ad Valorem Tariff: a tariff levied as a proportion of the value of an imported good


Who are the winners and loser through the use of tariffs?

  • government gains because the tariff increases gvernment revenues
  • domestic producers gain because the tariff affords them some protection against foreign competitors by increasing the cost of imported foreign goods.
  • consumers lose because they must pay more for certain imports
2 conditions can be derived from economic analysis of the effect of import tariffs:
  1. tariffs are pro-producer and anti-consumer
  2. import tariffs reduce the overall eficiency of the world economy. they reduce efficiency because a protective tariff encourages domestic firms to produce products at home that in theory, could be produced more efficiently abroad
export tariffs have 2 objectives:
  1. to raise revenue for the government
  2. to reduce exports from a sector, often for political reasons

government financial assistance to a domestic producer


by lowering production costs, subsidies help domestic producers in 2 ways:

  1. competing against foreign imports 
  2. gaining export markets
types of subsidies:
Direct: payments to reduce costs
  • payments to contine operations (conservation payments)
  • tax breaks
  • loans
  • public/private partnerships
  • insurance
  • efforts to keep currency low
  • more...
  1. keeps inefficient farms in business
  2. encourages production of subsidized products
  3. produce products grown more cheaply elsewhere
  4. reduces agriculture trade.
**paid by tax paying individuals
**helps producers compete internationally

import quota: a direct restriction on the quantity of some good that may be imported into a country


tariff rate quota: the process of applying a lower tariff rate to imports within the quota than those over the quota (common in agriculture, where their goal is to limit imports over quota)


voluntary export restraint (VER): a quota on trade imposed by the exporting country, typically at the request of the importing country's government. (foreign producers agree to VERs because they fear ore damaging punitive tariffs or import quotas might follow if they do not)


**import quota or VER always raises the domestic price of an imported good. 


Quota Rent: the extra profit producers make when supply is artificially limited by an import quota.


Hurts consumers and Helps producers: Raises domestic prices of imported goods (and possibly exported good)

Local content requirements

a requirement that some specific fraction of a good be produced domestically (this can be expressed in physical amount such as 75 percent of component for this product must be produced locally or value amount such as 75 percent of the value of this product must be produced domestically)


it was initially used by developing countries to help shift from assembly to prodcution of goods


developed countries beginning to implement

Benefits producers, not consumers

administrative policies

bureaucratic rules designed to make it difficult for imports to enter a country


some countries impose a lot of rules:

  • tulip bulbs-cutting bulbs (japan)
  • federal express-opening packages (japan)
  • licensing arrangement
  • administrative delays
  • reciprocal requirements
  • service restrictions
  • environmental standards
  • currency and investment controls
anti-dumping policies

dumping: sellin goods in a foreign market at below their costs of production or below their "fair market value"

used to unload excess production or predatory pricing


antidumping policies are used to punish foreign firms by protecting local industry from "unfair" practices and imposing "countervailing" duties

Helms-Buront Act
Act passed in 1996 that allowed americans to sue foreign firms that use cuban property confiscated from them after 1959 revolution
D'Amato Act
act passed in 1996, similar to the helms burton act, aimed at Libya and Iran
Infant industry arguement
New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations
strategic trade policy
government policy aimed at improving the competitive position of a domestic industry or domestic firm in the world market
Smoot-Hawley Act
Enacted in 1930 by the U.S. congress, this tariff erected a wall of barriers against imports into the United States
Balance of Payments

national accounts that track both payments to and receipts from other countries


it accounts for a country's international transactions for a period of time, typically a calendar year.



  1. the current account
  2. the capital/financial account
BOP accounting

double entry system so each (+) transaction has a balancing (-) transaction. Also each current account entry is offset by a financial account entry. So, overall the account should be in balance.


Positive (+) transactionson current account result from receipt of payment from foreigners

  • Merchandise exports
  • transportation and travel receipts
  • income received from investments abroad
  • gifts received from foreign residents
  • aid received from foreign governments
Negative transactions (-) on current account involve payments to foreigners
  • merchandise imports
  • transportation and travel expenditures
  • income paid on investments of foreigners
  • gifts to foreign residents
  • aid given by home government
  • overseas investments by home country residents
Foreign Direct Investment

Occurs when a firm invests directly in facilities to produce or market a product in a foreign county.


In the US, FDI occurs whenever a U.S. citizen, organization or affiliated group takes an interest of 10 percent or more in foreign business entity.


involves ownership of entity abroad for:

  • production
  • marketing/service
  • R&D
  • raw materials or other resources access
the degree of direct managerial control depends on the extent of ownership of the foreign entity and on other contractual terms of the FDI
  • test is typically at leas 10% ownership
  • nomanagerial involvement=portfolio investment


Horizontal and Vertical FDI

Horizontal: FDI in the same industry as the firm operates at home


Vertical (2 types):

  • Backward: providing inputs (raw materials, parts) for a firm's domestic production processes
  • Forward: an industry abroad sells the outputs of the firm's domestic production processes
Forms of FDI

This takes on 2 forms:

  1. greenfield investment: No local entity exists or is available for sale, local financial incentives may encourage, no inherited problems, long lead time to generation of sales or other desired outcomes. involves the establishment of a new operation in a foreign country
  2. Merge and acquisition (M&A): quick entry, local market know-how, local financing may be possible, eliminate competitor, buying problem. involves acquiring or merging with an existing firm in the foreign country. (acquisitions can be minority where the firm take a 10 percent to 49 percent interest in the firm's voting stock or majority where the firm takes 50 to 99 percent  or full outright stake where the foreign interest is 100 percent)
Eclectic Paradigm
argument that combining location-specific assets or resource endowments and the firm's own unique assets often require FDI; it requires the firm to establish production facilities where those foreign assets or resources and endowments are located
FDI: Pros and Cons
  • FDI circumvents potential future trade barriers and transportation costs.
  • keeps up with competition
  • control
  • potential profits
  • but... FDI is expenseive and risky compared to exporting or licensing
Why foreign direct investment?
  • limitations of exporting: trader barriers do not have to be physically in place for FDI to be favored over exporting. Often, the desire to reduce the threat that trade barriers might be imposed is enough to justify foreign direct investment as an alternative to exporting.
limitations of licensing:
  • licensing may result in a firm's giving away valuable technological know-how to a potential foreign competitor
  • licensing does not give a firm the tight control over manufacturing, marketig, and strategy in a foreign country that may be required to maximize its profitability
  • a third problem with licensing arises when the firm's competitive advantage is base not as much on its products as on the management, marketing, and manufacturing capabilities that produce those products. such capabilities are often not amenable to licensing
Poliitical ideology and foreign direct investment

Radical view: inbound FDI is harmful

  • Multinational enterprises(MNE) is an instrument of imperialist domination
  • exploit host to the advantage of the home country
  • argue that MNEs extract profits from the host country and take them to their home country, giving nothing of value to the host country in exchange.
  • Because of this , according to the radical view, FDI by the MNEs of advanced capitalist nations keeps the less developed countries of the world relatively backward and dependent on advanced capitalist nations for investment, jobs, and technology
Free market view: FDI should be encouraged
  • Adam smith, Ricardo: international production should be distributed according to comparative advantage
  • the MNE increases the world economy efficiency because it brings to bear unique ownership advantages on the local economy's comparative advantages.
  • such resource transfers benefit the host country and stimulate its economig growth
Pragmatic nationalism
  • FDI has both benefits and costs
Host country effects of FDI


  • resource-transfer (supplying capital, technology, and management resources)
  • employment (direct effects arise when a foreign MNE employs a number of host-country citizens and Indirect effects arise when jobs are created in local suppliers as a result of the investment and when jobs are created because of increased local spending by employees of the MNE)
  • balance of payment: (1) import substitution (2) source of exports potentially increases
  • more competition and lower prices
  • Adverse effects on the BOP: (1) outflow of earnings from the foreign subsidiary to its parent company and (2) substantial number of its inputs from abraod
  • adverse effects on competition because MNE may be able to draw on funds generated elsewhere to subsidize its costs in the host market, which could drive indigenous companies out of business and allow the firm to monopolize the market
  • national sovereignty and autonomy because of loss of economic independence)
home country effects


  • Adverse BOP current account effects mitigated by inward flow of foreign earnings
  • positive employment effects from increased exports of raw materials or assemlies to the overseas subsidiary
  • BOP trade position is negatively affected
  • Loss of employment to overseas Markets
Home country policies on FDI

Encourage outward FDI:

  • risk reduction policies (financing, insurance, tax incentives)
Outward FDI restriction:
  • National Security, BOP
Host country FDI policies

Inward FDI encouragement:

  • invest incentives
  • Job creation incentives
Inward FDI restrictions:
  • Ownership extent restrictions (national security; local nationals can safeguard host country's interests)
what is meant by culture?
  • a system of values and norms shared by a society
  • values: abstract ideas about good, the right, and the deirable
  • social rules and morals (and often laws)
Hofstede: power distance

degree of social inequality considered normal by people. Distance between individuals at different levels of a hierachy


scale: from equal (small power distance) to extremely unequal (large power distance



  • directive styles leadership
  • social strata
  • Informal leadership
  • Social mobility


Hofstede: individualsm vs collectivism

degree to which people in country prefer to act as individuals rather than in groups


describes the relations between the individual and his/her fellows

Hofstede: uncertainty avoidance

degree of need to avoid uncertainty about the future

degree of preference for structured versus unstructered situations



  • formal, rigid relationships and patterns
  • people with more nervous energy
  • risk averse
  • Entrepreneurship. If business fails, okay start another one
  • Change and risk okay
Hofstede: masculinity vs. Femininity

Division of roles and values in a society


musculine values prevail:

  • assertiveness
  • success
  • competition
feminine values prevail
  • quality of life
  • maintenance of warm personal relationships
  • service
  • care for the weak
  • solidarity
hofstead: confucian dynamism

Atttudes towards:

  • time
  • persistence
  • status in society
  • "Face"
  • Respect for tradition
  • Gifts and Favors
additional work-related dimensions of culture

independent vs interdependent

egalitarian vs hierarchical

risk vs restraint

direct communication vs indirect

task orientation vs relationship orientation

short term relationships vs long term

low comfort with silence vs High

self initiated vs awaits direction

low context vs high context

factors influencing currency values

economic factors:

  1. Balance of Payments
  2. interest rates
  3. inflation
  4. monetary and fiscal policy
  5. international competitiveness
  6. monetary reserves
  7. government controls and incentives
  8. importance of currency in world
political factors:
  1. political pary and leader philosophies
  2. proximity of elections or change in leadership
expectation factors
  1. expectations
  2. forward exchange market prices

the foreign exchange (forex market)



it's almost a 24/7 market (except weekends and bank holidays)


USD 6 trillion worth of exchange daily for:

  1. trade
  2. investments
  3. speculation
  4. risk management
  5. tourism


Spot "current" exchange rate

the exchange rate at which a foreign exchange dealer will convert one currency into another currency on a particular day

example: 1 EUR=1.40 USD


settlement for "spot" deals:

  • 2 business days for most currencies
  • 1 business day for USD with Canada or Mexico
Forward Exchange rate

When two parties agree to exchange currency and execute the deal at some specific date in the future


delivery for "forward" deals"

  • one, three or six months
  • up to one year common for widely traded currencies
Low of One price

in competitive markest free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their prices is expressed in terms the same currency


example: US/Euro exchange rate is $1=.6 euro. A jacket selling for $100 in New York should retail for 60 Euros in Paris

Purchasing Power Parity

By comparing the prices of identical products in different currencies, it should be possible to determine the "real" or PPP eschange rate if markets were efficient


in relatively efficient markets (few impediments to trade and investment) then a "basket of goods' should be roughly equivalent in each country) 


Big Mac Index

currency exchange controls

government controls the limit the legal uses of a currency in international transactions


in general, only the relatively rich industrial countries have fwe or no currency exchange controls


methods of control:

  1. Official exchange rates
  2. convertibility restrictions: 
  • freely convertible: a country's currency is freely convertible when the government of that country allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it
  • externally convertible currency: non residents can convert their holdings of domestic currency into foreign currency, but the ability of residents to convert the currency in limited in some ways
  • nonconvertible currency: a a currency is not convertible when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency.
capital flight
residents convert domestic currency into a foreign currency
transaction expsure
extent to which income from individual transactions is affected by fluctuation in foreign exchange values 
translation exposure
the extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values
economic exposure
the extent to which a firm's future international earning power is affected by changes in exchange rates
freely floating

closest approach to a perfect competition -aggregate supply and demand for currency affects exchange rates - not government intervention


equilibrium follows from overall macroeconomic indicators


governments focus more on interest rates and fiscal policy

Managed (dirty) float

Governments intervene in the currency markets as they perceive their national interests to be served


nations may explain their interventions in terms of "soothing market irregularities" or "assuring orderly markets"

pegged exchange rate

exchange rate regime where a country will peg the value of its currency to that of a major currency so that, for example, as the U.S. dollar rises in value, its own currency rses too.


pegged exchange rates are popular among many of the world's smaller nations

the role of the world bank

refinance post-WWII reconstruction and development

Provides low-interest long term loans to developing economies


Issues with World Bank

  1. voting power
  2. accountability
  3. future role?
International Development Agency (IDA)

an arm of the bank created in 1960


raises funds from member states

loans only to poorest countries

50 year repayment at 1% per year interest

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