International Test 2
Terms
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- horizontal FDI
- foreign direct investment in the same industry abroad as a firm operates in at home
- vertical FDI
- FDI in an industry abroad that provides input into a firm’s domestic operations, or FDI into an industry abroad that sells the outputs of a firm’s domestic operations.
- product life cycle theory
- The optimal location in the world to produce a product change as the market for the product matures
- What does the product life cycle theory predict about FDI?
- This predicts that when a foreign market is large enough to support local production, FDI will occur
- What is a free trade area?
- A group of countries committed to removing all barriers to the free flow of goods and services between each other, but pursuing independent external trade policies.
- capital accounts
- The Capital Account shows a decrease from the initial capital outflow.
- current accounts
- The Current Account shows a decrease if the home market is served from a low-cost production company
- What is the EFTA
- European Free Trade Association – A free trade association including Norway, Iceland, and Switzerland
- Plaza Accord
- – A group of 5 major industrial countries (GB, France, Japan, Germany, and the US) met in New York and reached the Plaza Accord. They announced that it would be desirable for most major currencies to appreciate vis-à -vis the US dollar and pledged to intervene in the foreign exchange markets, selling dollars, to encourage this objective. (boost the value of the $)
- What can a Host Country do to encourage FDI
- Make Low interest rates on loans, provide a tax break, provide insurance
- What can a host country do to discourage FDI
- Arrest you, Tarrifs & Quotas, economic constraints CCR, Raise Taxes, Restrict currency convertibility.
- Describe the origin and development of the EEC
- The EEC was formed by the Treaty of Rome to produce a common market (1957)
- Describe how an exchange rate is derived from the law of one price
- in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price, the exchange rate is derived from these two
- What is the Fisher effect?
- i = r + I
- What did the Jamaica agreement allow? (2)
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Floating & fixed rates are acceptable
Dirty floats are accepted (government intervention) - Why do governments restrict the convertibility of their currencies? (2)
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1) to prevent capital flight
2) prevent speculation
3) to prevent negative impact on currency - Make three arguments for fixed exchange rates
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1) Monetary Discipline
2) Speculation
3) Uncertainty
4) Trade Balance Adjustments - Make three arguments for floating exchange rates
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1) Monetary Policy Autonomy
2) Trade Balance Adjustments - Name three trade pacts and list the countries that a part of each pact. (5)
- 1) Andean Pact of 1969 – Chile, Peru, Columbia, Ecuador, Bolivia. 2) Asean Pact of 1967 – Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand. 3) Central American Pact of the 1960 – El Salvador, Costa Rica, Honduras, Nicaragua, Guatemala, Panama