Term
| International Trade Theory |
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Definition
| Cosists of six (6) theories attempting to explain resons and motives for international trade |
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Term
| Mercantilist Theory (Hume & Colbert) |
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Definition
-Wealth consists of nation's gold & precious metals
-International trade built wealth (gold)
-Should maximize exports and minimize imports
-Nation has a Self sustaining economy
-Colonies should not manufacture
-Government controls international trade |
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Term
| Absolute Advantage Theory |
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Definition
-In order to maximize net worth, specialize and trade in that which you have an absolute advantage
-Specialize in that which has the least actual cost |
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Term
| Competitive Advantage Theory (Ricardo & Torrens) |
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Definition
-Used if one country has an absolute advantage in both goods
-Since actual cost is not useful, use the opportunity cost of goods
-In order to maximize net worth, specialize in commodity in which we posess a competitive advantage in and then trade
-Compare opportunity costs
-"The opportunity cost of A in terms of B"="How much B is sacrificed to produce on more unit of A" |
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Term
| Factor Proportion Theory (Hecksher-Ohlin Theorem) |
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Definition
Question: What commodity is a country likely to have a comparative advantage?
Answer: The Heckscher-Ohlin Theorem:
A country will have a CA in the commodity for which they can use the more abundant factor more intensively
Example: A labor abundant country will have a comparative advantage in labor intensive products |
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Term
| International Product Life Cycle Theory |
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Definition
Four stages in cycle:
1.Intro of Product-Production of product and Intro of product in industrial country
2.Growth of Product-Product and technology becoming standardized-still in developed countries
3.Maturity of Product-Product moves to limited developing countries
4.Decline of Product-Product makes its way to small countries and is imported into US and other developed countries |
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Term
| Theory of Competitive Advantage (Porter) |
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Definition
Global Competitiveness determined by:
a.Factor condition (Traditional/Advanced)
b.Demand Condition(Large/Sophisticated)
c.Related and Support Industries (Cooperation)
d.Domestic Environment (Competition) |
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Term
| Reasons for growth of FDI (Foreign Direct Investment),World Trade, and Output |
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Definition
1.Political-Collapse of communism and more open markets and privatization
2.Economic-Countries want to avoid trade barriers (form economic blocs like EU)
3.Deregulation-FDI becomes more receptive (Job creation) |
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Term
| Theories for FDI (Foreign Direct Investment) |
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Definition
Eight Theories:
1.Monopolistic Advantage Theory (Hymer)
2.Impoerfect Market Theory (Caves)
3.Oligopolistic Theory (Knickerbocker)
4.Cross Investment Theory(Graham)
5.Capital Market Theory (Aliber)
6.Diversification Theory
7.Internalization Theory(Buckley,Casson)
8.Eclectiv Theory(Dunning) |
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Term
| 1.Monopolistic Advantage Theory (Hymer) |
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Definition
When company enters a foreign market company posesses the "liability of foreigness"; it is a company just starting out in a very different market than it is used to and it is not known
Liability of Foreigness can be overcome with Monopolistic Advantages (Firm is only one in market) |
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Term
| Imperfect Market Theory (Caves) |
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Definition
| The superior knowledge/technology of multinational corporations gives them advantages in foreign markets over smaller firms |
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Term
| Oligopolistic Theory (Knickerbocker) |
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Definition
FDI made in the 1960s by US companies (all in the same industry, hence Oligopoly) for following reasons:
1.Few suppliers
2.Nonprice competition (differentiation of product)
3.Companies were defensive (Copied each other) |
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Term
| Cross Investment Theory (Graham) |
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Definition
| FDI viewed as a territorial war among Multi National Corporations (Country A invests in Country B, then Country B invests in Country A) |
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Term
| Capital Market Theory (Aliber) |
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Definition
People have purchasing power imparity (Same product has 2 different costs in different currencies, so price is different)
FDI moves from the strong currency country to the weak currency country |
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Term
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Definition
| Prime Motivation for FDI is to diversify the risk of earning fluctuation (variance), not necessarily to maximize profits |
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Term
| Internalization Theory (Buckley, Casson) |
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Definition
If multinational corporations produce in a foreign country without having their own facilities (factories) they face serious transaction costs (problems with 3rd party producers, etc)
MNCs establish FDI to reduce transaction costs |
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Term
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Definition
| In reference to the internalization theory, it is the handling/treating of foreign markets just like the domestic market (company does not contract work out) |
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Term
| Eclectic Theory (Dunning) |
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Definition
Mashes all other theories together:
Ability: Firm specific advantage (Monopolistic/imperfect theory)
Opportunity: Country specific advantage
Motivation: Minimize transaction costs |
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Term
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Definition
| Different views/ideologies of dealing with Foreign direct investment |
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Term
| Marxist Political Economy of FDI |
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Definition
| Marxists view FDI as imperialistic instrument to exploit countries and people They wish to prohibit FDI and prefer nationalization of businesses |
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Term
| Classic Political Economy of FDI |
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Definition
| View FDI as an instrument to allocate resources efficiently and wish to place no restrictions on FDI |
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Term
| Pragmatic Political Economy of FDI |
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Definition
View FDI as an instrument to develop economy
Wish to control FDI so Benefits>Costs |
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Term
| What are the benefits of FDI to Host Governments? |
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Definition
1.Resource Transfer Effects (Capital/Tech/Management Skills)
2.Employment Effects (Greenfield Investment)
3.Balance of Payment Effects (Initial Investment)
4.Economic Growth Effects (Increase National Income)
5.Competition Effects (Improve competitiveness of local firms) |
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Term
| What are some costs of FDI to host countries? |
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Definition
1.Adverse effects on competition (Large firms overpower small firms)
2.Adverse effect on Balance of payment (Initial investment vs. balance of payment)
3.Economic sovereignty and autonomy lost |
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Term
| What is the gold Standard system? |
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Definition
A foreign exchange system in which:
a.the exchange rate is pegged to a certain amount of gold
b.Gold convertability is maintained (There is a strict linkage between money and gold) |
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Term
| What are the advantages/disadvantages of a Gold standard system? |
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Definition
Advantages:
Stability in foreign exchange system
Built in adjustment mechanism(If trade deficit goes up then gold and money supply and price will adjust
Disadvantages:
Limited felibility in monetary policy (No gold=problem) |
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Term
| What is the Flexible (Floating) Exchange System? |
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Definition
| There is no linkage of gold to money-the value of currency is determined by supply/demand in the market |
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Term
| What are advantages/disadvantages of Flexible Exchange system? |
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Definition
Advantages:
Flexible monetary policy
Disadvantages:
1.Inherently inflationary
2.Volatility/instability |
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Term
| What is the Fixed Exchange (Bretton Woods) System? |
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Definition
Exchange system in which all countries' currencies are pegged to the dollar-the dollar was pegged to a certain amount of gold
Governments were obligated to maintain exchange rates with respect to dollar within a 1% margin |
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Term
| What are the advantages/disadvantages of a Fixed exchange system? |
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Definition
Advantage:
Stable
Disadvantage:
1.Serious burden to maintain fixed rates-to maintain a fixed rate, there is a need to create additional demand (country must buy its own currency) and pay in foreign currency
2.Chaos if country runs out of foreign currency
3.Shortage of international money (While world trade increased, the gold and money supply were limited)
4.Mistrust of Dollar (US Balance of payment deficit increased)
5.Gold convertability was suspended in 1971 |
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Term
| What was the Jamaica Agreement? |
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Definition
1.Agreement between countries of the world to abolish Fixed Exchange/Bretton Woods system
2.Each country selected its own system, either
pegged system or
floating system or
managed floating (dirty floating)<--What US has |
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