C211 Study Guide Questions PDF

**C211 Study Guide Questions** The following questions are developed as a study aid for the C211 COS. They cover important concepts in each competency. The *questions are not comprehensive* but are only designed to serve as an indicator of your preparedness to take the C211 assessment. After readin...

**C211 Study Guide Questions** The following questions are developed as a study aid for the C211 COS. They cover important concepts in each competency. The *questions are not comprehensive* but are only designed to serve as an indicator of your preparedness to take the C211 assessment. After reading the material for each competency, use these questions to reinforce your understanding and review further as necessary. Competency 1 ============ **COMPETENCY: Globalization (Peng Chapters 1, 5, 6, 11)** 1. Explain the New, Evolutionary, and Pendulum views of Globalization. How do these differ from one another? New -- a new force sweeping through the world in recent times. Evolutionary -- a long-run historical evolution since the dawn of human history. Pendulum -- a pendulum that swings from one extreme to another from time to time. More balanced and more realistic based on the ups and downs the world has experiences (Great Depression & Great Recession). 2. What is Foreign Direct Investment (FDI)? Investing in, controlling, and managing value-added activities in other countries. 3. What different political views exist on FDI (Foreign Direct Investment)? Radical view -- hostile to FDI Pragmatic nationalism -- view that only approves FDI when its benefits outweigh its costs. Free market view -- view that suggests that FDI unrestricted by government intervention is best. 4. What benefits exist to a country receiving FDI? Elaborate. - Capital inflow can help improve a host country's balance of payments. - Technology, especially more advanced technology from abroad, can create technology spillovers that benefit domestic firms and industries. - Advanced management know-how may be highly valued. It is often difficult for indigenous development of management know-how to reach a world-class level in the absence of FDI (see the Closing Case). - FDI creates jobs both directly and indirectly. Direct benefits arise when MNEs employ individuals locally. Indirect benefits include jobs created when local suppliers increase hiring and when MNE employees spend money locally resulting in more jobs. 5. What costs exist to a country receiving FDI? Elaborate. There are 3 primary costs 1. Loss of sovereignty, 2. Adverse effects on competition, 3. Capital outflow. - **Loss of sovereignty** - Because of FDI, decisions to invest, produce, and market products and/or to close plants and lay off workers in a host country are being made by foreigners or if locals serve as heads of MNE subsidiaries, they represent the interest of foreign firms. - **Adverse effects** - MNEs, in theory, may be able to monopolize local markets. While this is a relatively minor concern in developed economies, this is a legitimate concern for less-developed economies, where MNEs are of such a magnitude in size and strength and local firms tend to be significantly weaker. - **Capital outflow** - When MNEs make profits in host countries and repatriate (send back) such earnings to headquarters in home countries, host countries experience a net outflow in the capital account in their balance of payments. As a result, some countries have restricted the ability of MNEs to repatriate funds. Another issue arises when MNE subsidiaries spend a lot of money to import components and services abroad, which also results in outflows of capital and reduction of tax revenue. 6. How do resources and capabilities influence the competitive dynamics of a business? Certain aspects of business add value to products like, rarity, imitability, organization. Resource similarity is another area that can help add value to products and keep a business competitive in the industry. 7. What is resource similarity and how does this impact competitive dynamics? Resource similarity is defined as the extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those of the focal firm. Firms with a high degree of resource similarity are likely to have similar competitive actions. \*\*Resource similarity and market commonality can yield a powerful framework for competitor analysis. ** ** **COMPETENCY: International Trade and Foreign Exchange Market (Peng Chapters 5, 7, 10)** 1. Give a description of the classical theory of international trade. The major theories of international trade that were advanced before the 20^th^ century, which consist of Mercantilism, Absolute Advantage, and Comparative Advantage. 2. How would the modern theory compare to the classical theory? Modern theories account for changes in pattern over time whereas classical theories are static. 3. Compare absolute advantage to comparative advantage. What differences exist? Absolute advantage is one when a country produces a commodity with the best quality and at a faster rate than another. On the other hand, comparative advantage (relative, not absolute) is when a country has the potential to produce a particular product better than any other country. 4. What is mercantilism and why is this an important term? A theory widely practiced between the 1600s and the 1700s that suggests that the wealth of the world is fixed (measured in gold and silver) and that a nation that exports more and imports less will be richer. 5. What are the critical features of the product life cycle? Product life cycle has 3 stages: New, Maturing, and Standardized. - New -- (1^st^ stage) production of a new product that commands a price premium will concentrate in the US, which exports to other developed nations. - Maturing -- (2^nd^ stage) demand and ability to produce growth in other developing nations (such as Australia and Italy), so it is now worthwhile to produce there. - Standardized -- (3^rd^ stage) the new product is standardized or commoditized. The, much production will now move to low-cost developing nations, which export to developed nations. Comparative advantage may change over time. 6. How would you describe strategic trade? Intervention by governments in certain industries can enhance their odds for international success. 7. How are supply and demand related to the exchange rate of a country? The price of a commodity, a country's currency is fundamentally determined by this. Strong demand leads to price hikes, and oversupply results in price drops. 8. Which theory came first, mercantilism or modern-day protectionism? Mercantilism 9. If a company seeks to limit foreign exchange rate exposure in the forward direction, what is the most effective way to do this? Forward transactions, and act known as currency hedging. 10. What is transaction risk? The exchange rate risk associated with the time delay between entering into a contract and settling it. 11. Explain the concept of "hedging" as it relates to reducing various types of risk. A transaction, such as forward transactions that protect traders and investors from exposure to the fluctuations of the spot rate. 12. What is the difference between currency hedging and strategic hedging? Currency hedging is a way to protect traders and investors from being exposed to fluctuations of the spot rate, whereas strategic hedging is a means of spreading out activities in different currency zones in order to offset the currency losses in certain regions through gains in other regions (i.e. currency diversification). 13. What advantages exist with first mover? Proprietary, technological leadership, pre-emption of scarce resources, establishment of entry barriers to late entrants, avoidance of clash with dominant firms at home, relationships with key stakeholders, such as governments. 14. What advantages exist with late mover? Late movers have opportunities to free ride on first-mover investments, resolution of technological and market uncertainties, and first mover's difficulty to adapt to market changes. - Foreign market entry types -- Non-equity and Equity Competency 2 ============ **COMPETENCY: Political and Economic Forces (Peng Chapter 2)** 1. How do institutions reduce uncertainty? They establish rule of the game that economic players must follow. A standard to follow in order to survive and prosper. By signaling which conduct is legitimate and which is not, institutions constrain the range of acceptable actions. 2. Discuss and compare the three pillars (regulatory, normative, and cognitive) - Regulatory pillar -- the coercive power of governments (laws, regulations, and rules) - Normative pillar -- values, beliefs, and actions of other relevant players (norms, cultures, and ethics) - Cognitive pillar -- the internalized, taken for granted values and beliefs that guide behavior (beliefs between right and wrong) 3. Compare formal and informal institutions. Formal institutions include laws and rules and regulations, whereas informal institutions include norms, cultures and ethics. 4. On what is the institution-based view of global business grounded? What core propositions lie at the root of this view? Mangers and firms rationally pursue their interests and make choices within institutional constraints (bounded rationally). In situations where formal constraints are unclear or fail, informal constraints play a larger role in reducing the uncertainty and providing constancy to managers and firms (personal relationships and connections). 5. How is global business affected by democracy? An individual's right to freedom of expression and organization. (Example: starting up a firm is an act of economic expression). 6. How is global business affected by totalitarianism? Totalitarian countries often experience wars, riots, protests, chaos, and breakdowns, which results in higher political risk. 7. What are the differences between democracy and totalitarianism? In democracy, citizens elect representatives to govern the country on their behalf, but in totalitarianism one person or party exercises absolute pollical control over the population. 8. Explain the core features of civil, common and theocratic law? How do they compare? - Civil law -- uses comprehensive statutes and codes as a primary means to form legal judgements. - Common law -- is shaped by precedents and traditions from previous judicial decisions. - Theocratic law -- a legal system based on religious teachings. 9. What is a property right? In what way are property rights essential? The legal rights to use an economic resource and to derive income and benefits from it. Can be used as collateral for starting a firm; not as common in developing countries, therefore hindering economic growth. 10. What is an intellectual property right? Rights associated with the ownership. They primarily include rights associated with patents, copyrights, and trademarks. - Command economy -- defined by a government taking all factors of production to be government-owned or state-owned, and all supply, demand, and pricing are planned by the government. - Market economy -- is characterized by the invisible hand of market forces. All factors of production should be privately owned. - Mixed economy -- has elements of both market economy and command economy. It boils down to the relative distribution of market forces versus command forces. Competency 3 ============ **COMPETENCY: Consumer Behavior (Mankiw Chapter 21)** 1. What is an indifference curve? A curve that shows consumption bundles that give the consumer the same level of satisfaction. The shape of an indifference curve reveals the consumer's willingness to trade one good for the other. When the goods are easy to substitute for each other, the indifference curves are less bowed; when the goods are hard to substitute, the indifference curves are very bowed. 2. What are the four properties of an indifference curve? 1. Higher indifference curves are preferred to lower ones. People usually prefer to consume more goods rather than less. 2. Indifference curves are downward sloping. The slope of an indifference curve reflects the rate at which the consumer is willing to substitute one good for the other. 3. Indifference curves do not cross. 4. Indifference curves are bowed inward. The slope of an indifference curve is the marginal rate of substitution. The rate at which the consumer is willing to trade off one good for the other. ** ** **COMPETENCY: Firm Behavior under Different Market Structures (Mankiw Chapters 13-17)** ** ** Competency 4 ============ **COMPETENCY: Macroeconomic Principles (Mankiw Chapters 29 & 34)** 1. What tools does the Federal Reserve have with regards to monetary control? They use the Federal Open Market Committee (FOMC) and the open market operation -- the purchase and sale of US government bonds. 8. What is a reserve ratio? The fraction of total deposits that a bank holds as reserves. 9. What would the Fed need to do with the reserve ratio in order to increase the money supply and aggregate demand in the economy? Decrease the reserve requirements; therefore, lowering the reserve ratio. 10. What would the Fed need to do with the reserve ratio in order to decrease the money supply and aggregate demand in the economy? Increase the reserve requirements; therefore, raising the reserve ratio. 11. If the Fed uses monetary policy in a way that increases money supply, what effect will this have on interest rates and aggregate demand (consider them separately)? Interest rates lower and aggregate demand expands. 12. If the government uses fiscal policy to increase government spending what impact will this have on interest rates and aggregate demand? Raises interest rates and an increase in aggregate demand. 13. If the government uses fiscal policy and cuts taxes, what effect will this have on interest rates and aggregate demand? Raises interest rates and an increase in aggregate demand. ** ** **COMPETENCY: Microeconomic Principles (Mankiw Chapters 4 & 5)** 1. Explain the effect an income change might have on shifting the demand curve? Lower income equals less to spend in total equals lower demand. 2. What is the difference between a normal good and an inferior good? Explain. Normal good is a good for which an increase in income leads to an increase in demand, whereas an inferior good's increase in income leads to a decrease in demand (Example: car vs. bus ride). 3. Explain how the price of related goods is related to changes in the demand curve? When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes (yogurt for ice cream). When a fall in the price of one good raises the demand for another good, the two goods are called complements (hot fudge and ice cream). 4. If Luke and I are the only sellers of paper in a given market, and Luke drops his prices for paper, how will this impact the demand for my paper? Which way will the demand curve shift? When Luke drops his price for paper, the other paper suppliers demand will decrease and the demand curve will shift to the left. 5. What other factors might influence the position of the demand curve? Price of the good itself, income, price of related goods, consumer tastes and expectations, and the number of buyers. 6. What numerical value determines whether or not a product/service is considered price elastic versus inelastic? 1 -- greater than or less than 7. What is income elasticity and how is it measured? 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. 8. What is price elasticity of demand? Explain the distinctions between elastic, inelastic, and unit-elastic. 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. Elastic -- Quantity moves proportionately more than the price. (Price increase results in drastically lower demand). Inelastic -- Quantity moves proportionately less than the price. (Price increase results in slightly lower demand). Unit Elastic -Percentage change in quantity equals the percentage change in price. 9. What two results stem from income elasticity? Why is this important to an economist? 1. Necessities, such as food and clothing tend to have small income elasticities. 2. Luxuries, such as caviar and diamonds tend to have large income elasticities. 10. What is cross-price elasticity? How is this defined and what result comes from this measure of elasticity? 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. - Substitutes = positive cross-price elasticity - Complements = negative cross-price elasticity 11. Can you summarize the 3 types of elasticity, their equations, purpose and outcomes? - Price elasticity of demand is the 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. - Income elasticity of demand is the 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 in income. - Cross-price elasticity is the measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as percentage change in quantity demanded of the first good divided by the percentage change in price of the second good. 12. In the net, how are price (P) and quantity (Q) changed by a simultaneous increase in demand and supply? Price is ambiguous and quantity decreases 13. In the net, how are price (P) and quantity (Q) changed by a simultaneous increase in demand and decrease in supply? Price increases and quantity is ambiguous (Dependent upon how large of a shift in supply and demand) 14. In the net, how are price (P) and quantity (Q) changed by a simultaneous decrease in demand and supply? Price is ambiguous and quantity decreases ** ** Price decreases and quantity is ambiguous Competency 5 ============ **COMPETENCY: International Trade (Mankiw Chapter 9)** 1. Explain the concept of a tariff. A tax on good produced abroad and sold domestically. 2. Explain dead weight loss. The fall in total surplus that results from a market distortion, such as a tax. 3. How are tariff's and dead weight loss related? Explain. A tariff causes a deadweight loss because a tariff is a type of tax. Like most taxes it distorts incentives and pushes the allocation of scarce resources away from the optimum. (Oversupply and under demand) 4. What are the two primary categories of trade barriers that exist? Tariffs and Non-Tariffs 5. If an import tariff is imposed on coconuts that are imported into the U.S., how will this impact the price of coconuts for U.S. consumers? Increase the price. 6. Why might a government be interested in imposed an import tariff on a good? What benefit would the government derive primarily? The tariff will reduce the amount of imports, increase the amount of exports. This raises revenue for the government. 7. How would imposing an import tariff on cigars impact the domestic production of cigars? Quantity increases for exporting at world price. 8. If an import tariff on coconuts was removed in the U.S., how would this impact the demand for coconuts by U.S. consumers? The demand would increase. 9. What would happen to the overall domestic demand for a good if an import tariff were imposed on that good? It would increase. 10. How does a tariff generally impact the following entities: consumers, producers, government? Compare the effects between the entities. Domestic sellers are better off and domestic buyers are worse off. In addition, the government raises revenue. ** ** **COMPETENCY: Measuring Economic Performance (Mankiw Chapters 7 & 23)** 1. What is consumer surplus? Is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays or it. 2. Who receives consumer surplus? The buyer 3. In relation to the demand curve and price, how is consumer surplus measured? The area below the demand curve and above the price measures the consumer surplus in a market. 4. What is producer surplus? Is the amount a seller is paid for a good minus the seller's cost of providing it. In relation to the supply curve and price, how is producer surplus measured? The area below the price and above the supply curve. 6. How is total surplus determined? Sum of producer surplus and consumer surplus. 7. In what ways might government or policy makers make use of surplus measures? Consumer surplus is a good measure of economic well-being if policymakers want to satisfy the preference of buyers in terms of efficiency and equality. Maximizing total surplus received (efficiency) and distributing economic prosperity (equality) uniformly among the members of society. 8. What is the difference between macroeconomics and microeconomics? Macroeconomics is the study of economy-wide phenomena whereas microeconomics studies how households and firms make decisions and interact in markets. 9. Why must income equal expenditure in an economy as a whole? Because every transaction has two parties, a buyer and a seller. 10. Define gross domestic product (GDP). What does it measure? The market value of all final goods and services produced within a country in a given period of time. 1. Consumption, 2. Investment, 3. Government purchases, 4. Net exports