IB chapter 5
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What is mercantilism and why is it no longer available?
A country prospers by exporting to other countries in return for gold or currency. David Hume in his essay on the price-specie flow mechanism shows that mercantilism is unsustainable over time because a country that hoards and accumulates gold or other currencies faces inflationary pressures that eventually reduce their exports.
Explain and contrast absolute advantage and comparative
a country has an absolute advantage in producing goods when, for the same amount of resources, it can produce more goods than another country. A country may not possess an absolute advantage in producing a good, but it may still have a comparative advantage in producing the good. This is measured by the trade-off in producing one good against the other.
What is the basic premise of the Heckscher-Ohlin theory on international trade?
If a country has abundant labor, it should be able to produce labor-intensive goods more efficiently. Unfortunately, this theory did not explain trade patterns in the United States in the first part of the 1900s. The United States continued to export labor-intensive commodities to countries with abundant labor and import capital-intensive goods.
Explain Leontief paradox (L)
Wassily Leontief theorized that since the U.S. was relatively abundant in capital compared to other nations, the U.S. would be an exporter of capital-intensive goods and an importer of labor-intensive goods. However, he found U.S. exports were less capital intensive than U.S. imports. It was at variance with the predictions of the theory.
New Trade Theory
the ability of firms to gain economies of scale (unit cost reductions associated with a large scale of output) can have important implications for international trade. Trade can increase the variety of goods available to consumers and decrease the average cost of those goods in those industries when output required to attain economies of scale represents a significant proportion of total world demand, the global market may only be able to support a small number of enterprises. First mover advantage and cost advantage.
Mike Porter’s Diamond
promote or impede the creation of competitive advantage: Factor endowments, Demand conditions, Relating and supporting industries, Firm strategy, structure, and rivalry
Discuss key founders and main themes (drivers) of the above theories (L)
productivity (advantage theories), factor endowments (Heckscher-Ohlin), PLC time), economies of scale (New Theory), nation’s competitive edge (Porter’ Diamond)
What is the WTO, and what role does it play in international trade?
Supranational agencies comprised of over 150 member countries whose mission is to foster and encourage trade among countries in an equitable manner. It was the General Agreement on Trade and Tariffs (GATT). It fosters to create a level playing field to engage in free and fair trade among its members.
List three groups who protest and disrupt the WTO conventions (L)
human rightests, environmentalists, labor unions
Distinguish between foreign direct investment and foreign portfolio investment.
FDI refers to capital investments by multinationals in other country such as building factories and plants. Foreign portfolio investment refers to the purchase of stocks and bonds of companies in other countries. The line between direct and portfolio investments can become blurred because a portfolio investment of stocks may result in control of ownership of a firm.
What are the forms and types of FDI? Explain the differences?
Greenfield (new investments), Brownfield (acquisitions of existing investments) and licensing agreements. The two types of foreign investments are horizontal (within the same line of business) and vertical (upstream and downstream investments)
What are the major motivations for FDI? Explain within the context of Dunning’s OLI paradigm.
FDI takes place when there are imperfections in the marketplace at the macro-level and or because of unique knowledge possessed by a firm. Dunning’s OLI paradigm focuses on the ownership advantages (O) where a company possesses specific knowhow unique, locational advantage (L) where a company has a geographic advantage such as being near to resources essential for the production of output, and internalization (I) where a company possesses the ability to exploit a range of factors through its global reach.
How can governments influence the flow of FDI into or out of a country?
Tax incentives or disincentives, regulation, subsidized loans and ownership restrictions. By lowering or raising withholding taxes, a county can impact the flow of FDI
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