WGU - MBA - C211 - Global Economics for Managers

Base of the pyramid (BOP)

Economies where people make less than $2,000 per capita per year.

BRICA

Brazil, Russia, India, and China.

Emerging economies

term that has gradually replaced the term "developing countries" since the 1990s.

Emerging markets

A term that is often used interchangeably with "emerging economies.

Expatriate manager

A manager who works abroad, or "expat" for short.

Foreign direct investment (FDI)

Investment in, controlling, and managing value-added activities in other countries.

Global Business

Business around the globe.

Globalization

The close integration of countries and peoples of the world.

Gross domestic product (GDP)

The sum of value added by resident firms, households, and governments operating in an economy.

Gross national income (GNI)

GDP plus income from non-resident sources abroad. The term used by the World Bank and other international organizations to supersede the term GNP.

Gross national product (GNP)

GDP plus income from non-resident sources abroad

Group of 20 (G-20)

The group of 19 major countries plus the European Union (EU) whose leaders meet on a biannual basis to solve global economic problems.

International business (IB)

(1) A business (or firm) that engages in international (cross-border) economic activities and/or (2) the action of doing business abroad.

International premium

A significant pay raise when working overseas.

Liability of foreignness

The inherent disadvantage that foreign firms experience in host countries because of their non-native status.

Multinational enterprise (MNE)

A firm that engages in foreign direct investment (FDI).

Nongovernmental organization (NGO)

An organization that is not affiliated with governments.

Purchasing power parity (PPP)

A conversion that determines the equivalent amount of goods and services that different currencies can purchase.

Reverse innovation

An innovation that is adopted first in emerging economies and is then diffused around the world.

Risk management

The identification and assessment of risks and the preparation to minimize the impact of high-risk, unfortunate events.

Scenario planning

A technique to prepare and plan for multiple scenarios (either high or low risk).

Semiglobalization

A perspective that suggests that barriers to market integration at borders are high, but not high enough to insulate countries from each other completely.

Triad

North America, Western Europe, and Japan.

Purchasing power parity (PPP)

adjustment made to the GDP to reflect differences in the cost of living

The bottom billion

Concentrated in Africa and Central Asia - 58 small countries, stuck at the bottom in terms of growth, incomes and human development

Enhance employability & advance career, better preparation to be expat, competence in interacting with foreign suppliers/partners/competitors/employees

Why study global business?

Institution-based view

A core perspective. Success and failure of firms are constrained by institutions

Formal rules

requirements that treat domestic and foreign firms as equals enhance the potential odds
for foreign firms' success or those that discriminate against foreign firms, would undermine the chances for foreign entrants

Informal rules

cultures, ethics, and norms play an important part in shaping the success and failure of firms around the globe

Resource-based view

A core perspective. Success and failure of firms is determined by their environment

New force in recent times, a long-running historical evolution, a pendulum swinging between extremes

What are the three views of globalization?

Four Tigers

Hong Kong, Singapore, South Korea and Taiwan

Absolute advantage

The economic advantage one nation enjoys that is absolutely superior to other nations.

Administrative policy

Bureaucratic rules that make it harder to import foreign goods.

antidumping duty

Tariffs levied on imports that have been "dumped" (selling below costs to "unfairly" drive domestic firms out of business).

Balance of Trade

The aggregation of importing and exporting that leads to the country-level trade surplus or deficit.

Classical trade theories

The major theories of international trade that were advanced before the 20th century, which consist of (1) mercantilism, (2) absolute advantage, and (3) comparative advantage.

Comparative advantage

Relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations.

Deadweight cost

Net losses that occur in an economy as a result of tariffs.

Export

Selling abroad.

Factor endowment

The extent to which different countries possess various factors of production such as labor, land, and technology.

Factor endowment theory

A theory that suggests that nations will develop comparative advantages based on their locally abundant factors.

Heckscher-Ohlin theory

Another name for factor endowment theory

First-mover advantage

Advantage that first movers enjoy and do not share with late entrants.

Free trade

The idea that free market forces should determine how much to trade with little or no government intervention.

Import

Buying from abroad.

Import quota

Restriction on the quantity of imports.

Import tariff

A tax imposed on imports.

Infant industry argument

The argument that if domestic firms are as young as "infants," in the absence of government intervention, they stand no chances of surviving and will be crushed by mature foreign rivals.

Local content requirement

A requirement stipulating that a certain proportion of the value of the goods made in one country must originate from that country.

Merchandise

Tangible products being traded.

Modern trade theories

The major theories of international trade that were advanced in the 20th century, which consist of (1) product life cycle, (2) strategic trade, and (3) national competitive advantage of industries.

Nontariff barrier (NTB)

Trade barrier that relies on nontariff means to discourage imports.

Opportunity cost

Cost of pursuing one activity at the expense of another activity, given the alternatives (other opportunities).

Product life cycle theory

A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles.

Protectionism

The idea that governments should actively protect domestic industries from imports and vigorously promote exports.

Resource mobility

Assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry.

Services

Intangible services being traded.

Strategic trade policy

Government policy that provides companies a strategic advantage in international trade through subsidies and other supports.

Strategic trade theory

A theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success.

Subsidy

Government payment to domestic firms.

Tariff barrier

Trade barrier that relies on tariffs to discourage imports.

Theory of absolute advantage

A theory that suggests that under free trade, a nation gains by specializing in economic activities in which it has an absolute advantage.

Theory of comparative advantage

A theory that focuses on the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations.

Theory of mercantilism

A theory that suggests that the wealth of the world is fixed and that a nation that exports more and imports less will be richer.

Theory of national competitive advantage of industries (diamond theory)

A theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a "diamond.

Trade deficit

An economic condition in which a nation imports more than it exports.

Trade embargo

Politically motivated trade sanctions against foreign countries to signal displeasure.

Trade surplus

An economic condition in which a nation exports more than it imports.

Voluntary export restraint (VER)

An international agreement that shows that exporting countries voluntarily agree to restrict their exports.

Agglomeration

Clustering of economic activities in certain locations.

Bargaining power

Ability to extract favorable outcome from negotiations due to one party's strengths.

Demonstration (contagion or imitation) effect

The reaction of local firms to rise to the challenge demonstrated by MNEs through learning and imitation.

Dissemination risk

The risk associated with unauthorized diffusion of firm-specific know-how.

Downstream vertical FDI

A type of vertical FDI in which a firm engages in a downstream stage of the value chain in a host country.

Expropriation

Government's confiscation of foreign assets.

FDI flow

The amount of FDI moving in a given period (usually a year) in a certain direction.

FDI inflow

Inbound FDI moving into a country in a year.

FDI outflow

Outbound FDI moving out of a country in a year.

FDI stock

Total accumulation of inbound FDI in a country or outbound FDI from a country across a given period (usually several years).

Foreign portfolio investment (FPI)

Investment in a portfolio of foreign securities such as stocks and bonds.

Free market view on FDI

A political view that suggests that FDI unrestricted by government intervention is the best.

Horizontal FDI

A type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host country.

Internalization

The replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries.

Intrafirm trade

International transactions between two subsidiaries in two countries controlled by the same MNE.

Knowledge spillover

Knowledge diffused from one firm to others among closely located firms.

Location

Advantages enjoyed by firms operating in a certain location.

Management control rights

The rights to appoint key managers and establish control mechanisms.

Market imperfection (market failure)

The imperfection of the market mechanisms that make transactions prohibitively costly and sometimes make transactions unable to take place.

Obsolescing bargain

The deal struck by MNEs and host governments, which change their requirements after the initial FDI entry.

OLI advantages

A firms quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages via FDI.

Oligopoly

Industry dominated by a small number of players.

Ownership

An MNE's possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI.

Pragmatic nationalism on FDI

A political view that only approves FDI when its benefits outweigh its costs.

Radical view on FDI

A political view that is hostile to FDI.

Sunk cost

Cost that a firm has to endure even when its investment turns out to be unsatisfactory

Technology spillover

Technology diffused from foreign firms to domestic firms.

Upstream vertical FDI

A type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country.

Vertical FDI

A type of FDI in which a firm moves upstream or downstream at different value chain stages in a host country.

Antidumping law

Law that makes it illegal for an exporter to sell goods below cost abroad with the intent to raise prices after eliminating local rivals.

Antitrust law

Law that outlaws cartels (trusts).

Antitrust policy

Government policy designed to combat monopolies and cartels.

Attack

An initial set of actions to gain competitive advantage.

Blue ocean strategy

Strategy that focuses on developing new markets ("blue ocean") and avoids attacking core markets defended by rivals, which is likely to result in a bloody price war or a "red ocean.

Capacity to punish

Sufficient resources possessed by a price leader to deter and combat defection.

Cartel (trust)

An output- and price-fixing entity involving multiple competitors.

Collusion

Collective attempts between competing firms to reduce competition.

Collusive price setting

Price setting by monopolists or collusion parties at a level higher than the competitive level.

Competition policy

Government policy governing the rules of the game in competition.

Competitive dynamics

Actions and responses undertaken by competing firms.

Competitor analysis

The process of anticipating rivals' actions in order to both revise a firm's plan and prepare to deal with rivals' response.

Concentration ratio

The percentage of total industry sales accounted for by the top four, eight, or twenty firms.

Contender

Strategy that centers on a firm engaging in rapid learning and then expanding overseas.

Counterattack

A set of actions in response to attack.

Cross-market retaliation

Retaliatory attacks on a competitor's other markets if this competitor attacks a firm's original market.

Defender

Strategy that centers on local assets in areas in which MNEs are weak.

Dodger

Strategy that centers on cooperating through joint ventures with MNEs and sell-offs to MNEs.

Dumping

An exporter selling goods below cost.

Explicit collusion

firms directly negotiate output and pricing and divide markets.

Extender

Strategy that centers on leveraging homegrown competencies abroad.

Game theory

A theory that studies the interactions between two parties that compete and/or cooperate with each other.

Market commonality

The overlap between two rivals' markets.

Multimarket competition

Firms engage the same rivals in multiple markets.

Mutual forbearance

Multimarket firms respect their rivals' spheres of influence in certain markets, and their rivals reciprocate, leading to tacit collusion.

Predatory pricing

An attempt to monopolize a market by setting prices below cost and intending to raise prices to cover losses in the long run after eliminating rivals.

Price leader

A firm that has a dominant market share and sets "acceptable" prices and margins in the industry.

Prisoners' dilemma

In game theory, a type of game in which the outcome depends on two parties deciding whether to cooperate or to defect.

Resource similarity

The extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those of the focal firm.

Tacit collusion

Firms indirectly coordinate actions by signaling their intention to reduce output and maintain pricing above competitive levels.

appreciation

an increase of the value of currency

Balance of payments

A country's international transaction statement, which includes merchandise trade, service trade and capital movement.

Bandwagon effect

The effect of investors moving in the same direction at the same time, like a herd.

Bid rate

The price to buy a currency.

Bretton Woods system

A system in which all currencies were pegged at a fixed rate to the US dollar.

Capital flight

A phenomenon in which a large number of individuals and companies exchange domestic currency for a foreign currency.

Clean (free) float

A pure market solution to determine exchange rates.

Common denominator

A currency or commodity to which the value of all currencies are pegged.

Currency board

A monetary authority that issues notes and coins convertible into a key foreign currency at a fixed exchange rate.

Currency hedging

A transaction that protects traders and investors from exposure to the fluctuations of the spot rate.

Currency risk

The potential for loss associated with fluctuations in the foreign exchange market.

Currency swap

A foreign exchange transaction between two firms in which one currency is converted into another at Time 1, with an agreement to revert it back to the original currency at a specified Time 2 in the future.

Depreciation

A loss in the value of the currency.

Dirty (managed) float

Using selective government intervention to determine exchange rates.

Fixed exchange rate policy

A government policy to set the exchange rate of a currency relative to other currencies

Floating (flexible) exchange rate policy

A government policy to let supply-and-demand conditions determine exchange rates.

Foreign exchange market

The market where individuals, firms, governments, and banks buy and sell foreign currencies.

Foreign exchange rate

The price of one currency in terms of another.

Forward discount

A condition under which the forward rate of one currency relative to another currency is higher than the spot rate.

Forward premium

A condition under which the forward rate of one currency relative to another currency is lower than the spot rate.

Forward transaction

A foreign exchange transaction in which participants buy and sell currencies now for future delivery.

Gold standard

A system in which the value of most major currencies was maintained by fixing their prices in terms of gold.

International Monetary Fund (IMF)

An international organization that was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements.

Offer rate

The price to sell a currency.

Peg

A stabilizing policy of linking a developing country's currency to a key currency.

Post-Bretton Woods system

A system of flexible exchange rate regimes with no official common denominator.

Quota

The weight a member country carries within the IMF, which determines the amount of its financial contribution (technically known as its "subscription"), its capacity to borrow from the IMF, and its voting power.

Spot transaction

The classic single-shot exchange of one currency for another.

Spread

The difference between the offer price and the bid price.

Strategic hedging

Spreading out activities in a number of countries in different currency zones to offset any currency losses in one region through gains in other regions.

Target exchange rate (crawling band)

Specified upper or lower bounds within which an exchange rate is allowed to fluctuate.

Build-operate-transfer (BOT) agreement

A non-equity mode of entry used to build a longer-term presence by building and then operating a facility for a period of time before transferring operations to a domestic agency or firm.

Co-marketing

Efforts among a number of firms to jointly market their products and services.

Country-of-origin effect

The positive or negative perception of firms and products from a certain country.

Cultural distance

The difference between two cultures along identifiable dimensions such as individualism.

Equity mode

A mode of entry (JV and WOS) that indicates relatively larger, harder-to-reverse commitments to overseas markets.

First-mover advantages

Benefits that accrue to firms that enter the market first and that late entrants do not enjoy.

Greenfield operations

Building factories and offices from scratch (on a proverbial piece of "green field" formerly used for agricultural purposes).

Institutional distance

The extent of similarity or dissimilarity between the regulatory, normative, and cognitive institutions of two countries.

Joint venture (JV)

A new corporate entity created and jointly owned by two or more parent companies.

Late-mover advantages

Benefits that accrue to firms that enter the market later and that early entrants do not enjoy.

LLL advantages

A firm's quest for linkage (L) advantages, leverage (L) advantages, and learning (L) advantages. These advantages are typically associated with multinationals from emerging economies.

Location-specific advantages

The benefits a firm reaps from the features specific to a place.

Mode of entry

Method used to enter a foreign market.

Non-equity mode

A mode of entry (exports and contractual agreements) that tends to reflect relatively smaller commitments to overseas markets.

R&D contract

Outsourcing agreement in R&D between firms

Scale of entry

The amount of resources committed to entering a foreign market.

Turnkey project

A project in which clients pay contractors to design and construct new facilities and train personnel.

Wholly owned subsidiary (WOS)

A subsidiary located in a foreign country that is entirely owned by the parent multinational.

Beijing Consensus

A view that questions Washington Consensus' belief in the superiority of private ownership over state ownership in economic policy making, which is often associated with the position held by the Chinese government.

Bounded rationality

The necessity of making rational decisions in the absence of complete information.

Civil Law

A legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments.

Cognitive pillar

The internalized (or taken-for-granted) values and beliefs that guide individual and firm behavior.

Command economy

An economy that is characterized by government ownership and control of factors of production.

Common law

A legal tradition that is shaped by precedents and traditions from previous judicial decisions

Copyright

Exclusive legal right of authors and publishers to publish and disseminate their work.

Democracy

A political system in which citizens elect representatives to govern the country on their behalf.

Economic system

Rules of the game on how a country is governed economically

Formal institutions

Institutions represented by laws, regulations, and rules.

Informal institutions

Institutions represented by cultures, ethics, and norms

Institution-based view

A leading perspective in global business that suggests that the success and failure of firms are enabled and constrained by institutions.

Institutional framework

Formal and informal institutions governing individual and firm behavior.

Institutional transitions

Fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect firms as players.

Institutions

Formal and informal rules of the game.

Intellectual property

Intangible property that is the result of intellectual activity.

Intellectual property rights (IPR)

Rights associated with the ownership of intellectual property.

Legal system

The rules of the game on how a country's laws are enacted and enforced.

Market economy

An economy that is characterized by the "invisible hand" of market forces.

Mixed economy

An economy that has elements of both a market economy and a command economy.

Moral hazard

Recklessness when people and organizations (including firms and governments) do not have to face the full consequences of their actions.

Normative pillar

The mechanism through which norms influence individual and firm behavior.

Norms

Values, beliefs, and actions of relevant players that influence the focal individuals and firms.

Opportunism

The act of seeking self-interest with guile.

Patent

Exclusive legal right of inventors of new products or processes to derive income from such inventions.

Piracy

Unauthorized use of intellectual property.

Political risk

Risk associated with political changes that may negatively impact domestic and foreign firms.

Political system

The rules of the game on how a country is governed politically.

Property rights

The legal rights to use an economic property (resource) and to derive income and benefits from it.

Regulatory pillar

The coercive power of governments.

Sovereign wealth funds (SWFs)

A state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets.

State-owned enterprise

A firm owned and controlled by the state (government).

Theocratic law

A legal system based on religious teachings.

Totalitarianism (dictatorship)

A political system in which one person or party exercises absolute political control over the population.

Trademark

Exclusive legal right of firms to use specific names, brands, and designs to differentiate their products from others.

market

a group of buyers and sellers of a particular good or service

competitive market

a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

quantity demanded

the amount of a good that buyers are willing and able to purchase

law of demand

the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

demand curve

a graph of the relationship between the price of a good and the quantity demanded

normal good

a good for which, other things being equal, an increase in income leads to an increase in demand

inferior good

a good for which other things being equal an increase in income leads to a decrease in demand

substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other

complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other

quantity supplied

the amount of a good that sellers are wiling and able to sell

law of supply

the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

supply curve

a graph of the relationship between the price of a good and the quantity supplied

equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

equilibrium price

the price that balances quantity supplied and quantity demanded

equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

surplus

a situation in which quantity supplied is greater than quantity demanded

shortage

a situation in which quantity demanded is greater than the quantity supplied

law of supply and demand

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

total revenue

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

total cost

the market value of the inputs a firm uses in production

total revenue

the amount a firm receives for the sale of its output

profit

total revenue minus total cost

explicit costs

input costs that require an outlay of money by the firm

implicit costs

input costs that do not require an outlay of money by the firm

economic profit

total revenue minus total cost, including both explicit and implicit costs

accounting profit

total revenue minus total explicit cost

production function

the relationship between quantity of inputs used to make a good and the quantity of output of that good

marginal product

the increase in output that arises from an additional unit of input

diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the input increases

fixed costs

costs that do not vary with the quantity of output produced

variable costs

costs that vary with the quantity of output produced

average total cost

total cost divided by the quantity of output

average fixed cost

fixed cost divided by the quantity of output

average variable cost

variable cost divided by the quantity of output

marginal cost

the increase in total cost that arises from an extra unit of production

efficient scale

the quantity of output that minimizes average total cost

economies of scale

the property whereby long-run average total cost falls as the quantity of output increases

diseconomies of scale

the property whereby long-run average total cost rises as the quantity of output increases

constant returns to scale

the property whereby long-run average total cost stays the same as the quantity of output charges

competitive market

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

average revenue

total revenue divided by the quantity sold

marginal revenue

the change in total revenue from an additional unit sold

sunk cost

a cost that has already been committed and cannot be recovered

monopoly

a firm that is the sole seller of a product without close substitutes

natural monopoly

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

price discrimination

the business practice of selling the same good at different prices to different customers

oligopoly

a market structure in which only a few sellers offer similar or identical products

monopolistic competition

a market structure in which many firms sell products that are similar but not identical

game theory

the study of how people behave in strategic situations

collusion

an agreement among firms in a market about quantities to produce or prices to charge

cartel

a group of firms acting in unison

Nash equilibrium

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

prisoners' dilemma

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

dominant strategy

a strategy that is best for a player in a game regardless of the strategies chosen by the other players

budget constraint

the limit on the consumption bundles that a consumer can afford

indifference curve

a curve that shows consumption bundles that give the consumer the same level of satisfaction

marginal rate of substitution

the rate at which a consumer is willing to trade one good for another

perfect substitutes

two goods with the straight-line indifference curves

perfect complements

two goods with right-angle indifference curves

normal good

a good for which an increase in income raises the quantity demanded

inferior good

a good for which an increase in income reduces the quantity demanded

income effect

the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve

substitution effect

the change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution

Giffen good

a good for which an increase in the price raises the quantity demanded

money

the set of assets in an economy that people regularly use to buy goods and services from other people

medium of exchange

an item that buyers give to sellers when they want to purchase goods and services

unit of account

the yardstick people use to post prices and record debts

store of value

an item that people can use to transfer purchasing power from the present to the future

liquidity

the ease with which an asset can be converted into the economy's medium of exchange

commodity money

money that takes the form of a commodity with intrinsic value

fiat money

money without intrinsic value that is used as money because of government decree

currency

the paper bills and coins in the hands of the public

demand deposits

balances in bank accounts that depositors can access on demand by writing a check

Federal Reserve (Fed)

the central bank of the United States

central bank

an institution designed to oversee the banking system and regulate the quantity of money in the economy

money supply

the quantity of money available in the economy

monetary policy

the setting of the money supply by policymakers in the central bank

reserves

deposits that banks have received but have not loaned out

fractional reserve banking

a banking system in which banks hold only a fraction of deposits as reserves

reserve ratio

the fraction of deposits that banks hold as reserves

money multiplier

the amount of money the banking system generates with each dollar of reserves

bank capital

the resources a bank's owners have put into the institution

leverage

the use of borrowed money to supplement existing funds for purposes of investment

leverage ratio

the ratio of assets to bank capital

capital requirement

a government regulation specifying a minimum amount of bank capital

open-market operations

the purchase and sale of US government bonds by the Fed

discount rate

the interest rate on the loans that the Fed makes to banks

reserve requirements

regulations on the minimum amount of reserves that banks must hold against deposits

federal funds rate

the interest rate at which banks make overnight loans to one another

theory of liquidity preference

Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance

fiscal policy

the setting of the level of government spending and taxation by government policymakers

multiplier effect

the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending

crowding-out effect

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

automatic stabilizers

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action

Welfare economics

the study of how the allocation of resources affects economic well-being

willingness to pay

the maximum amount that a buyer will pay for a good

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

cost

the value of everything a seller must give up to produce a good

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it

efficiency

the property of a resource allocation of maximizing the total surplus received by all members of society

equality

the property of distributing economic prosperity uniformly among the members of society

microeconomics

the study of how households and firms make decisions and how they interact in markets

macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

gross domestic product (GDP)

the market value of all final goods and services produced within a country in a given period of time

consumption

spending by households on goods and services, with the exception of purchases of new housing

investment

spending on capital equipment, inventories, and structures, including household purchases of new housing

government purchases

spending on goods and services by local, state, and federal governments

net exports

spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

nominal GDP

the production of goods and services valued at current prices

real GDP

the production of goods and services valued at constant prices

GDP deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP times

Mercantilism, Absolute Advantage & Comparative Advantage

What are the three classical trade theories?

Product Life Cycles, Strategic Trade, Diamond

What are the three modern trade theories?

Product Life Cycle Theory

What is the first dynamic trade theory?

Mercantilism

What theory has strengths: Forerunner of modern-day protectionism?

Mercantilism

What theory has the weaknesses: Inefficient allocation of resources, reduces the wealth of the nation in the long run?

Absolute Advantage

What theory has the strengths: Birth of modern economics, forerunner of the free trade movement, defeats mercantilism intellectually?

Absolute Advantage

What theory has the weaknesses: when one nation is absolutely inferior there is no advice, when there are many nations it may be difficult to find an absolute advantage?

Comparative Advantage

What theory has the strengths: more realistic guidance to nations interested in trade but having no absolute advantage, explains patterns of trade based on factor endowments?

Comparative Advantage

What theory has the weaknesses: relatively static assuming that comparative advantage and factor endowments do not change over time?

Product Life Cycle

What theory has the strengths: First theory to incorporate dynamic changes in patterns of trade, more realistic with trade in industrial products in the 20th Century?

Product Life Cycle

What theory has the weaknesses: The United States may not always be the lead innovation nation, many new products are now launched simultaneously around the world?

Strategic Trade

What theory has the strengths: more realistic and positively incorporates the role of governments in trade, provides direct policy advice?

Strategic Trade

What theory has the weaknesses: Ideological resistance from many "free trade" scholars and policy makers, invites all kinds of industries to claim they are strategic?

National Competitive Advantage of Industries (Diamond)

What theory has the strengths: most recent most complex and most realistic among the various theories, it directly connects research on firms, industries and nations?

National Competitive Advantage of Industries (Diamond)

What theory has the weaknesses: has not been comprehensively tested, overseas demand may stimulate the competitiveness of certain industries?

valuable, rare, hard to imitate and organizationally embedded

What are VRIO assets?

Reduces Dissemination risks, provides tight control over foreign operations, facilitates the transfer of tacit knowledge through "learning by doing

Why do firms prefer FDI to Licensing (3 reasons)?

80%

What % of the world's foreign exchange transactions are in dollars?

65%

What % of the world's foreign exchange transactions are in USD$?

Relative price differences & PPP, Interest rates & money supply, productivity & balance of payments, exchange rate policies, investor psychology

What are the five determinants of foreign exchange rates?

Current account = balance o trade + net factor income from abroad + net unilateral transfers from abroad

Current account balance equation

United States, Canada, Australia, Japan & United Kingdom

Countries currencies under managed float since 1970s?

Brazil, Mexico & South Korea

Countries currencies under managed float since 1990s?

China

What country doesn't fix their currency?

spot transactions, forward transactions and swaps

What are the three primary types of foreign exchange transactions?

Strong

Weak or strong dollar: US consumers benefit from low prices on imports

Strong

Weak or strong dollar: Lower prices on foreign good help keep US level high and inflation level low

Strong

Weak or strong dollar: US tourists enjoy lower prices abroad

Strong

Weak or strong dollar: US firms find it easier to acquire foreign targets

Strong

Weak or strong dollar: US exporters have a hard time competing on price abroad

Strong

Weak or strong dollar: US firms in import-competing industries have a hard time competing with low-cost imports

Strong

Weak or strong dollar: Foreign tourists find it more expensive when visiting the US

Weak

Weak or strong dollar: US exporters find it easier to compete on price abroad

Weak

Weak or strong dollar: US firms faces less competitive pressure to keep prices low

Weak

Weak or strong dollar: foreign tourists enjoy lower prices in the US

Weak

Weak or strong dollar: foreign firms find it easier to acquire US targets

Weak

Weak or strong dollar: The US can print more dollars to export its problems to the rest of the world

Weak

Weak or strong dollar: US face higher prices on imports

Weak

Weak or strong dollar: Higher prices on imports contribute to higher price level and inflation level in the US

Weak

Weak or strong dollar: US tourists find it more expensive when traveling abroad

Weak

Weak or strong dollar: Governments, firms and the individuals outside the US holding dollar=denominated assets suffer from value loss on their assets

Natural-resources, market, efficiency, innovation

Four types of strategic goals in finding a location to enter

Regulatory, normative and cognitive

What are the three 'pillars' of institutions?

Common law, civil law & theocratic law

What are the three legal traditions?

patents, copyrights and trademarks

Three types of intellectual property

culture, geography and institutions

Three reasons that a country is either developed or underdeveloped

Private

Private Ownership or State ownership: Maximize profits for private owners who are capitalists and maximize shareholder value if the firm is publicly listed

Private

Private Ownership or State ownership: Entry is determined by entrepreneurs, owners and investors

Private

Private Ownership or State ownership: Financing is from private sources and public shareholders if the firm is publicly traded

Private

Private Ownership or State ownership: Exit is forced by competition. A firm has to declare bankruptcy or be acquired if it becomes financially insolvent

Private

Private Ownership or State ownership: Management appointments are made by owners and investors larely based by merit

Private

Private Ownership or State ownership: Manager's compensation is determined by competitive market forces.

State

Private Ownership or State ownership: Optimal balance for a fair deal for all stakeholders. Maximizing profit is not the sole objective. Protecting jobs and minimizing social unrest are legitimate goals.

State

Private Ownership or State ownership: entry is determined by government officials an bureaucrats

State

Private Ownership or State ownership: Financing is from states sources such as direct subsidiaries or banks owned or controlled by governments

State

Private Ownership or State ownership: Exit is determined by government officials and bureaucrats. Firms deemed too big to fail may be supported by taxpayer dollars indefinitely

State

Private Ownership or State ownership: Management appointments are made by government officials and bureaucrats who may use non-economic criteria

State

Private Ownership or State ownership: manager's compensation is determined politically with some consideration given to the sense of fairness and legitimacy in the eyes of the public.

Washington Consensus

View centered on unquestioned belief in the superiority of private ownership over state ownership in economic policy making spearheaded by the International Monetary Fund and the World Bank

Goods offered are exactly the same and buyers and sellers are so numerous that they have no influence on the market price

A Market must have what two characteristics to be perfectly competitive:

Elastic demand

quantity demanded responds substantially to changes in price

Inelastic demand

quantity demanded responds only slightly to changes in price

Availability of close substitutes, necessities vs. luxuries, Definition of the market, time horizon

Determinants of price elasticity of demand?

More elastic demand

Good with close substitutes: more or less elastic demand

Inelastic Demand

Necessities- inelastic or elastic demand?

Elastic Demand

Luxuries - inelastic or elastic demand?

more elastic demand

Narrowly defined market: more or less elastic demand?

More elastic demand

Long time horizon: more or less elastic demand

Equation for computing price elasticity of demand

Percentage change in quantity demanded divided by the percentage change in price

Elastic

If the price elasticity of demand is more than 1, the demand is ________

Inelastic

If the price elasticity of demand is less than 1, the demand is ________

Unit Elastic

If the price elasticity of demand equals 1, the demand is _______

perfectly inelastic

If the price elasticity of demand equals 0, the demand is _____

perfectly elastic

If the price elasticity of demand equals infinity, the demand is _______

The greater the price elasticity of demand

The flatter the demand curve, __________

Equation for computing the income elasticity of demand

percentage change in quantity demanded divided by the percentage change in income

Positive Income elasticity

Normal goods have positive or negative income elasticity?

Negative income elasticity

Inferior goods have negative or positive income elasticity?

Equation for computing cross-price elasticity of demand

Percentage change in quantity demanded of the first good divided by the percentage change in pice of the second good

Positive

Do substitute goods have positive or negative cross-price elasticity?

Negative

Do completmentary goods have positive or negative cross price elasticity?

Increase

If demand is inelastic, a price increase causes total revenue to ______

Decrease

If demand is elastic, a price increase causes total revenue to _______

Equation for computing the price elasticity of supply

Percentage change in quantity supplied divided by the percentage change in price

More

Supply is more or less elastic in the long run?

elastic

If the price elasticity of supply is more than 1, the demand is ________

inelastic

If the price elasticity of supply is less than 1, the demand is ________

Unit Elastic

If the price elasticity of supply equals 1, the demand is _______

elastic

If the price elasticity of supply equals infinity, the demand is _______

Inelastic

If the price elasticity of supply equals zero, the demand is _______

economic profit

total revenue minus total cost including opportunity costs and explicit costs

explicit costs

input costs that require an outlay of money by the firm

implicit costs

input costs that do not require an outlay of money by the firm (ignored by accountants)

explicit cost and implicit cost

What two types of costs make up total cost?

accounting profit

total revenue minus total explicit cost

Perfect Competition, Monopolistic Competition, Oligopoly, Monopoly

Four types of market structures

aggregate demand

the total demand for final goods and services in the economy at a given time and price level.

aggregate demand

specifies the amounts of goods and services that will be purchased at all possible price levels.

The wealth effect, the interest- rate effect and the exchange rate effect

What are the three reasons that the aggregate demand curve slopes downward?

the wealth effect

A lower price level raises the real value of households' money holdings

the interest rate effect

A lower price level reduces the amount of money people want to hold.

the exchange rate effect

When a lower price level reduces the interest rate, investors move some of their funds overseas in search of higher returns - this movement of funds causes the real value of the domestic currency to fall in the market for foreign-currency exchange.

Value to buyers - Amount paid by buyers

Equation for consumer surplus

Amount received by sellers - cost to sellers

Equation for producer surplus

Consumer surplus + Producer Surplus

Equation for total surplus

Consumption + Investment + Govt. Purchases + Net Exports

Equation for GDP