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Questions and Answers
What does the term 'factor endowments' refer to in Michael Porter’s Diamond model?
What is an ad valorem tariff?
The Uruguay Round of negotiations aimed to achieve which of the following?
Which aspect is NOT included in the four determinants of national competitive advantage in Porter's Diamond?
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What is the primary function of the World Trade Organization?
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What is the primary focus of mercantilism in international trade?
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Which concept explains that countries should specialize based on their absolute advantages?
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How does the Heckscher-Olin theory explain comparative advantage?
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What is a significant outcome of the New Trade Theory?
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What scenario best illustrates the concept of comparative advantage?
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What is the primary function of the foreign exchange market?
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What describes a forward exchange rate?
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Which of the following is a primary activity in strategic positioning?
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What is a localization strategy primarily focused on?
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What is meant by capital flight in the context of currency convertibility?
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Study Notes
Mercantilism
- Emphasizes exporting more than importing to accumulate gold and silver, increasing national wealth and power.
- A zero-sum game where one nation's gain leads to another's loss.
Absolute Advantage
- Specialize in producing goods where you have an absolute advantage (producing more efficiently than others) and trade with other countries for what they produce more efficiently.
- Avoid producing what you can buy cheaper from other countries.
Comparative Advantage
- Countries can increase their combined production and consumption by specializing in goods they produce relatively more efficiently.
- Arises from differences in productivity across countries.
Heckscher-Olin Theory
- Comparative advantage stems from differences in national factor endowments (land, labor, capital).
- Abundant factors are cheaper, leading countries to export goods using that factor and import goods using scarce factors.
New Trade Theory
- Economies of scale can lead to a wider variety of goods at lower prices for consumers.
- Industries with significant economies of scale may support only a few global enterprises.
National Competitive Advantage: Michael Porter's Diamond
- Factor Endowments: A nation's resources like skilled labor and infrastructure.
- Demand Conditions: The nature of domestic demand for a product or service.
- Related and Supporting Industries: The presence of competitive supplier industries and related industries.
- Firm Strategy, Structure, and Rivalry: How companies are created, organized, managed, and their level of domestic competition.
- Chance and Government: External factors and government policies influencing the diamond.
Tariffs
- Taxes on imports or exports.
- Specific Tariffs: A fixed charge per unit.
- Ad Valorem Tariffs: A proportion of the good's value.
Anti-Dumping Duties
- Used when firms sell excess production in foreign markets below cost.
- This is considered unfair competition.
The Uruguay Round
- The 8th round of GATT negotiations to reduce tariffs and expand GATT rules to services and intellectual property.
- Agreed upon in 1993 and took effect in 1995.
The World Trade Organization (WTO)
- Umbrella organization encompassing GATT, covering trade in goods, services, and intellectual property.
Multilateral and Bilateral Trade Agreements
- Reciprocal trade agreements between two or more partners.
Currency Conversion
- Converting a currency into another, either local or a primary currency.
Main Uses of the Foreign Exchange Market
- Converting payments or income from foreign companies.
- Converting money for payments to foreign countries.
- Foreign investment.
- Profiting from exchange rate fluctuations.
Forward Exchange Rate
- An agreement to exchange currencies at a specific future date.
- Sets the exchange rate for future transactions.
Currency Swaps
- Simultaneous purchase and sale of a currency for different value dates.
Currency Convertibility
- Restrictions on foreign exchange transactions.
- Capital Flight: Converting money in case of hyperinflation.
Value Creation
- Increasing a firm's profitability by:
- Increasing the product's value to consumers.
- Reducing the cost of production per unit.
- Differentiation Strategy: Creating unique value for consumers.
Michael Porter on Value Creation
- Two key competitive advantage strategies:
- Low Cost: Being the most efficient producer.
- Differentiation: Offering unique value to consumers.
Strategic Positioning
- Efficiency Frontier: A curve representing all possible value-creating positions a firm can adopt.
Primary Activities
- Activities directly related to producing and delivering a good or service.
- R&D
- Production
- Marketing and Sales
- Customer Service
Support Activities
- Activities supporting primary activities.
- Information Systems: Managing inventory, sales, etc.
- Company Infrastructure: Supporting operations.
- Logistics: Managing materials flow.
- Human Resources: Managing workforce.
Localization Strategy
- Customizing goods or services to fit national tastes and preferences.
Learning Effect
- Cost savings from gaining experience and efficiency through repeated production.
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Description
This quiz explores key concepts in international trade, focusing on Mercantilism, Absolute and Comparative Advantage, Heckscher-Olin Theory, and New Trade Theory. Test your understanding of how these theories explain the dynamics of trade between nations and their impact on global economics.
