International Business Test 1

Material Covering Test 1 For Hoon Park
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Two Basic Economic problems
1) How to produce wealth 2) How to distribute wealth
Why is there continual turmoil in the political environment after the fall of the Soviet Union
Because there is no bipolar system of power. The communist system controlled many countries which are now in regional warfare.
Communist way of tackling the two basic economic problems:
1) Joint production (here is were communism fails, because no one wants to work at maximum efficiency because there is no incentive to do so) 2)Equal distribution of wealth
Consequences of the fall of the Soviet Union
Instead of one big enemy, we were left with many small enemies. We lost the balance of power, stability and control.
Because of the fall, there was (is) a higher risk of regional wars, and made it near impossible to have a solid foreign policy.
Neo conservatives
a political group that created the concept of pre-emptive defense.
Are we living in a transitory period today?
Yes, because there is no political system for world peace without another super power.
What is Socio-cultural-economic environment? (aka Globilization)
Think of his example of Princess Dianas death, and the many products and nations involved.
Where does the world become interdependent?
1)National Level 2)Personal level
Growing social/cultural/economic interdependence of countries abetted by the recent technology.
Sociological aspect of globalization provides:
A sense of global unity (aka deterritorialization)
Cultural aspect of globalization provides:
"the west on the rest" and cultrual convergencec. Meaning that the cultures of the west are impacting the rest of the world, and cultures which at one time were very unique, are not converging into new cultures.
Political aspect of globalization provides:
process of losing the sovereighty of the nation state. Note here that this is also an important drawback to F.D.I.
Economic aspect of globalization provides:
acceleration of cross border transactions, more international trading. Since globalization the world GDP has increased from 2 trillion (1965) to 30 trillion (2000). Trade has increased from 2 trillion to 6 trillion.
List the importance of each of the three factors of Globalization
1) Technological development has yielded the "death of distance", as well as time and space compression by new technology, and example of such being satellites and the jumbojet. 2) Institutional arrangment: having international committees has forwarded globalization, such as the WTO, IMF, and the OECD 3) Deregulation/Liberization by governments themselves has also spurred on globalization.
What is the Janus face of globalization and list its factors.
The Janus face is the postive and the negative aspects of each factor for globalization. 1)Economic Prosperity --> income disparity (rich get richer, poor get poorer) 2)More interdependence ---> more insecurity at the national level 3)Cultural convergence --> cultural decay 4) "Pollution Halo" ---> "Pollution haven" (poorer countries with less stringet environmental controls will yield companies who pollute like hell) 5)Cost saving to MNCs develop local economies ---> Job flight (loss) and the exploitation of cheap labor
What are some of the impacts, if any, of globalization on MNCs?
1) Globalization is the process of losing soverighnty of the nation state to the MNCs (note: Canada). the power of the MNCs override a countrys ability to control their own economy. 2) The size of economic activities increase with globalization (500 MNCs control 70% of trade, 200 MNCs produce more than 1/3rd of the worlds output). 3) It also creates a "borderless market" where national boundries become meaningless 4) Globalization developed the use of strategic alliances (look at Daemlyr-Crystler) which formed stateless corporations where the nationality of firms/products become obscure.
New Rule of the game under Globalization
If you arnt globally competitive, you cant survive even in your own domestic market.
Definition of International Business
Sudy of any business activity conducted across national boundries either by provate or government sectors.
Rule of Transfer
"Law of One Price" dictates the transfer of goods, from the low priced market to high priced market (think of it as the opposite to the law of gravity)
What are the two ways of implementing the rule of Transfer:
1) Arbittrage: where you buy/sell from/to different places. This tactic must be carried out quickly, because time is of the essence
2) Speculation: "buy now low, sell later at a high price".
Objective of the Economist
Maximise efficiency of the use of scarce resources.
Objective of business
How to maximize return to shareholders.
How does International Economics differ from International Business?
I.B. pays more attention to behavioral aspects, whereas I.E. does not.
What is the Balance of Payment?
a summary of International Business activities of one country, which uses a double entry system to reflect a countrys "external liquidity" position. The balance of payment uses a Credit and Debit System, where cash flows in are a "Credit" and cash flows out are a "Debit"
What does "External Liquidity" mean?
It is a countrys ability to meet foreign claims and to buy foreign goods and services, in the amount of internationally acceptable currency.
What are the major accounts included in the Current Account in the Balance of Payment, and what subaccounts are included within it?
I. Current account includes the: a) Merchandise account b) Services account (which then include the Travel and Transport, Fees, and Income Abroad accounts) and c) Unilateral Transfers (one way transfer of funds, such as gifts, aid, etc.)
The Merchandiese account yields the Merchandise Balance, the Services account yeilds the "Trade Balance" and with the addition of the Unilateral Transfer account it yields the overal "Current Account Balance".
What are the Major accounts included in the Capital Account in the Balance of Payment?
The Capital Account when added together is the Basic Balance. This reflects the ability of a country to pay for goods and services and to pay foreign debt. Included in the Capital account are the:
a) Long Term Capital Account (such as FDI and Loans)
b) Short term Capital Account (such as Certificates of Deposit [CD] and Money Market Instruments [MMI]. The S.T.C.A does not truley reflect a countrys ability to pay for debt.
What are the major accounts included in the Official Reserve Account in the Balance of Payment?
The Official Reserve Account shows what changes are occuring on the Balance of Payment. It includes a) Gold and Foreign Exchange (F.X.) and b) S.D.R (Special Drawing Right) which is the right to print money.
When this account is added to all the other accounts, it will yield an "Overall Balance"
What is the effect of a deficit/surplus on the Balance of Payment?
If there is a deficit, the value of the countrys economy will decrease, and if there is a surplus, the value will increase.
What are the three economic variables that can affect the BOP?
1)Inflation: This will always influence the BOP condition. High inflation is a negative impact on BOP.
2)Interest Rate: A high interest rate yeilds higher inflow of foreign money, yeilding a more positive B.O.P.
3)National Income increase: When our income goes up, consumers begin to buy large quantities of foreign goods and services, thus decreasing our B.O.P.
What are the external and internal reasons for the 600 Billion dollar U.S. merchandise deficit?
External Reasons: 1)Lack of reciprocity: we open our markets to almost everyone, but they wont open theirs to the extent to which we open ours 2)Foreign governments subsidies: these create an artifical market and means that there isnt a "true" market, and trade becomes managed trade, not fair trade.
Internal Reasons 1) The U.S.s inefficient management of cash 2)Strong Regulation of environment and saftey causes massive cost increases 3)Cultural insenstivity (we assume that if it works in the U.S. it will work everywhere else) 4)Inflexible labor market (even if the market goes south, you cant lower salaries or fire people because of unions etc.) 5) Political objectives 6) Lack of government support to business 7) Exports have been replaced by F.D.I of U.S. companies in foreign markets.

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