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ECO 310, Unit 2

by: Tori Notetaker

ECO 310, Unit 2 Eco 310

Tori Notetaker
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About this Document

Interactive study guide for chapters 6 through 8 and a portion of chapter 9.
Issues in the Global Economy
Mary Reed
Study Guide
Murray State University, ECO 310, ECO Study Guide, ECO Unit 2, MSU
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This 6 page Study Guide was uploaded by Tori Notetaker on Sunday April 10, 2016. The Study Guide belongs to Eco 310 at Murray State University taught by Mary Reed in Spring 2016. Since its upload, it has received 11 views. For similar materials see Issues in the Global Economy in Economcs at Murray State University.

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Date Created: 04/10/16
Appendix A, International Business and Balance of Payments Intro:  International Trade involves the sale of goods and services to residents in other countries (exports) and the purchase of goods and services from residents in other countries  Balance of Payments keep track of the payments to and receipts from other country’s for a particular time period o Divided into 3 sections such as: Current Accounts, Capital Accounts, and Financial Accounts o Double Bookkeeping occurs through international transactions that are automatically entered in two offsetting entries that cancel each other out.  Chapter Questions o Does the Current Account Deficit Matter?  Key terms found in chapter 6 link. Chapter 6, International Trade Theory: o The Heckscher-Ohlin Theory argues that comparative advantage arises from differences in national factor endowments and that the more abundant each factor is, the lower its cost will be. o Countries will export goods that are locally abundant and import those that are locally scarce.  The Leontief Paradox  Differences in technology lead to differences in productivity, which then drives trade patterns o Follows that international trade is beneficial even when a country can produce for itself.  Allows a country to specialize in the manufacture and export of products that can be produced more efficiently domestically and importing products that can be produced more efficiently elsewhere o In 1776 Adam smith proposed the theory of Absolute Advantage, explains that countries should specialize in the production of goods for which they create most efficiently and trade for goods that they don’t. o In the 19 century David Ricardo proposed Comparative Advantage where a country will specialize in the production of goods that it produces most efficiently and buy the goods that it produces less efficiently from other countries, even if it means buying goods that it could produce more efficiently itself. o Suggests a positive-sum game o Provides a strong rationale for encouraging free trade o Diminishing Returns – o Dynamic Effects and Economic Growth – o The Samuelson Critique – o Porter’s Diamond o Michael Porter’s explanation why a nation achieves international success in a particular industry  Factor Endowments –  Demand Conditions –  Related and Supporting Industries –  Firm Strategy, Structure, and Rivalry – o Unrealistic Assumptions in trade o There are only two countries and two goods in the world. o There are no transportation costs in the world o That resources can move freely from the production of one good to another.  Governments may help retain displaced workers from interfering trade. o There are no differences in the prices of resources between countries. o Constant returns to scale o Fixed stock resources o There are no effects of trade on income distribution within a country o Product Life-Cycle Theory, proposed by Raymond Vernon in the 1960’s, explains that as products mature, both the sales and optimal production location will change, affecting the flow and direction of trade. Since most of production is outsourced today, this theory no longer holds as much relevancy. o New Trade Theory emerged in the 1970’s as economists pointed out the importance of firms attaining economies of scale o Economies of Scale – o By buying goods a country doesn’t make from other countries, each nation can simultaneously increase the variety of goods available to its consumers and lower the costs of those goods – providing mutual gain o First-movers in an industry can gain a scale-based cost advantage that later entrants find almost impossible to match  First-Mover Advantage – o Implications  Allows a nation to maintain specialization in a product  Allows a nation to buy products it doesn’t produce  Average prices should fall, freeing other resources of a nation to produce other goods  Creates a proactive trade policy where the government of the country helps and possibly creates infrastructure o Mercantilism – o Neo-Mercantilists – o Key Terms: cards/ o Chapter Questions o What is Free Trade? o How has International Trade Theory Evolved? o Why is it beneficial for countries to engage in free trade? o Is Porter’s theory right? o What are the implications of International Trade Theory for International Business? Chapter 7, Government Policy and International Trade o There are 7 main instruments of Trade Policy: o Tariffs – o Subsidies – o Import Quotas and Voluntary Export Restraints – o Local Content Requirements – o Administrative Policies – o Antidumping Policies – o The case for Government intervention is separated into 2 different arguments o The political argument is for the government to protect the interests of certain groups within a nation (Producers), at the expense of other groups (consumers), or to achieve a political objective outside of economic relationships, such as protecting human rights.  Arguments include:  Protecting Jobs and Industries from foreign competition (even though it raises consumer prices)  Governments will support industries who are important for national security  A government will retaliate to pressure from foreign markets by raising trade barriers (also used as a bargaining tool)  A government will issue regulations to limit or ban the importation of products to protect consumers  A government will use foreign trade policies to create strong inter-market relations or to punish a “rogue state” for not abiding to international laws or norms. As well as an attempt to better human rights. o The Economic argument is for the government to boost the overall wealth of a nation (benefiting both producers and consumers).  Arguments include:  In order for new industries to develop, older industries need to provide support. However, if the new industry doesn’t become efficient, it’s a waste of time. [Infant Industry Argument]  Strategic Trade Policy o A government can raise national income if it promises first mover advantages to domestic firms. o Arguments against strategic trade policy o Retaliation and Trade War – “Beggar-thy-neighbor” – o Domestic Policies o Describe the development of the world trading system and the current trade issue o Evolution from GATT to the WTO – o From Smith to the Great Depression – o 1947 to 1979 – o 1980 to 1993 – o The Uruguay Round and the WTO – o The WTO – o Trade Barriers can limit a firm’s ability to disperse production globally through: raising the costs of exports, quotas that limit export numbers, local content regulations, and the influence caused by threats of potentially increasing trade barriers in the future o Chapter Questions o What are the implications of Policy in global trade and production? o Why should international managers care about the political economy of free trade or about the relative merits of arguments for free trade and protectionism? o Why do governments intervene in trade, and what are possible outcomes of government intervention? o Who benefits from import quotas and voluntary export restraints? o Key Terms: cards/ Chapter 8, Foreign Direct Investment o Recognizing trends in the FDI means understanding not only the last 35 years of FDI in the world economy, but also understanding its direction, the source, and the form of FDI. o Theories behind FDI involve what makes FDI worth the “trouble”, The Pattern of Foreign Direct Investment, and the Eclectic Paradigm. o The Radical View of FDI argues that MNE’s are an instrument of imperialist domination and exploits host countries. o The Free Market View argues that international production should be guided by Comparative Advantage and that MNE’s are instruments for dispersing goods and services to the most efficient locations globally. o Pragmatic Nationalism benefits the host country by bringing capital, skills, technology, and jobs. o Understand the Costs and Benefits of FDI to both the host country and the home country o Understand how government policy influences FDI in restricting and encouraging FDI in the home and host countries. o Chapter Questions o What does FDI mean for international businesses? o What are the benefits and costs of FDI? o Key Terms: cards/ Chapter 9, Regional Economic Integration o Levels of Economic Integration include: o Free Trade Area – o Customs Union – o Common Market – o Economic Union – o Political Union – o There are Economic and Political arguments for Economic Integration o Regional economic integration is an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under international agreements such as the WTO o Political Integration helps link countries together and form structures for interaction, in turn decreasing the likelihood for violence between them. o Impediments to Integration are cost and resulting loss of national sovereignty o Key Terms: cards/


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