Economics Chapter 3: The World Marketplace

Questions and Answers

What is opportunity cost?

Opportunity of giving up the second-best choice when making a decision

What is absolute advantage?

When a country can produce more of a product than other nations using the same amount of resources

What is comparative advantage?

Benefit a country has in a given industry if it can make products at a lower opportunity cost than other countries

How has access to technology and decreases in barriers to trade affected global business opportunities?

They have increased global business opportunities Signup and view all the answers

What is an important indicator of economic growth?

Growing usage of cell phones Signup and view all the answers

What is balance of trade?

Difference between a nation's exports and imports Signup and view all the answers

What is a trade surplus?

When the total value of exports is higher than the total value of imports Signup and view all the answers

What is a trade deficit?

When the total value of imports is higher than the total value of exports Signup and view all the answers

What is balance of payments?

The total flow of money into or out of a country Signup and view all the answers

What is a balance of payments surplus?

More money flows in than out Signup and view all the answers

What is a balance of payments deficit?

More money flows out than in Signup and view all the answers

What are exchange rates?

Measure the value of one nation's currency relative to the currency of other nations Signup and view all the answers

What is countertrade?

Barter of products for products rather than for currency Signup and view all the answers

What is foreign outsourcing?

Contracting with foreign suppliers to produce products at a fraction of the cost of domestic production Signup and view all the answers

What is importing?

Buying products domestically that have been produced or grown in foreign nations Signup and view all the answers

What is exporting?

Selling products in foreign nations that have been produced or grown domestically Signup and view all the answers

What is foreign licensing?

Organization (licensor) granting a foreign firm (licensee) the rights to produce and market products or to use its trademark in a defined geographical area Signup and view all the answers

What is foreign franchising?

Firms (franchisor) expand by offering businesses (franchisees) in other countries the right to produce and market their products according to specific operations requirements Signup and view all the answers

What is direct investment?

Acquiring foreign firms or developing new facilities from the ground up in foreign countries Signup and view all the answers

What is offshoring?

Developing new facilities from scratch Signup and view all the answers

What are joint ventures?

When two or more companies join forces to pursue specific opportunities Signup and view all the answers

What are the two types of joint ventures?

<ol> <li>Partnership 2) Strategic alliance</li> </ol> Signup and view all the answers

What is a partnership?

Long-term agreement, a type of joint venture Signup and view all the answers

What is a strategic alliance?

A less encompassing and informal agreement, a type of joint venture, often connecting a foreign company with a local firm Signup and view all the answers

According to Mihir Desai, what are the only circumstances that call for a joint venture?

In countries that require local political and cultural knowledge as a core element of doing business Signup and view all the answers

What are the three barriers to trade?

<ol> <li>Sociocultural differences 2) Economic differences 3) Political and legal differences</li> </ol> Signup and view all the answers

What is infrastructure?

A country's physical facilities that support economic activity Signup and view all the answers

What does the political climate influence?

It influences whether a certain nation is attractive to foreign business Signup and view all the answers

What is protectionism?

National policies designed to restrict international trade, usually with the goal of protecting domestic business Signup and view all the answers

What are the four common trade restrictions?

<ol> <li>Tariffs 2) Quotas 3) VERs (Voluntary export restraints) 4) Embargos</li> </ol> Signup and view all the answers

What are tariffs?

Taxes levied against imports, a common trade restriction Signup and view all the answers

What are quotas?

Limitations on the quantity of a product that can be imported or exported Signup and view all the answers

Study Notes

Economic Concepts

Opportunity Cost: The value of the best alternative that is forgone when making a decision.
Absolute Advantage: A nation's ability to produce a greater quantity of a good using the same resources compared to others.
Comparative Advantage: A country’s ability to produce a good at a lower opportunity cost than its trading partners.

Trade and Economic Indicators

Balance of Trade: The difference between the value of exports and imports for a nation.
Trade Surplus: Occurs when the value of exports exceeds imports.
Trade Deficit: Occurs when the value of imports exceeds exports.
Balance of Payments: The total monetary flow in and out of a country.
Balance of Payments Surplus: More money is received from abroad than is paid out.
Balance of Payments Deficit: More money is paid out than is received from abroad.

Currency and Trade Mechanisms

Exchange Rates: The relative value of one currency compared to another, influencing international trade.
Countertrade: The exchange of goods for other goods without the use of currency.
Foreign Outsourcing: Contracting with overseas suppliers to produce goods at lower costs than domestic production.

Importing and Exporting

Importing: Purchasing foreign-produced goods for domestic use.
Exporting: Selling domestically produced goods to foreign markets.
Foreign Licensing: Granting a foreign company the right to produce and market products under a license.
Foreign Franchising: Allowing foreign entities to operate businesses under specific operational guidelines.

Investment Strategies

Direct Investment: Investing in foreign markets through acquisition or new facilities, providing high control but also high costs and risks.
Offshoring: Establishing new facilities abroad, offering high profit potential but substantial costs.
Joint Ventures: Collaborative efforts between two or more companies to pursue specific objectives.

Joint Venture Types

Partnership: A formal, long-term cooperative agreement between companies.
Strategic Alliance: An informal arrangement to cooperate on projects, often involving local firms to facilitate market entry.

Trade Barriers and Protectionism

Trade Barriers: Factors that hinder international trade, including:
- Sociocultural differences
- Economic differences
- Political and legal differences
Protectionism: Policies aimed at restricting international trade to benefit domestic industries.
Common Trade Restrictions:
- Tariffs: Taxes on imports to protect local industries.
- Quotas: Limits on the quantity of goods imported.

Additional Economic Factors

Infrastructure: Physical facilities supporting economic activity, crucial for trade efficiency.
Political Climate: Influences the attractiveness of a nation for foreign investment.

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Test your knowledge on key concepts from Chapter 3 of Economics, focusing on the world marketplace. This quiz covers essential terms such as opportunity cost, absolute advantage, and comparative advantage, critical for understanding international trade dynamics.