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INB300 Exam 3 Material

Chapters 8, 9, and 10
What is communism, socialism, and capitalism?
Communism is Marx's theory of a classless society, developed by his successors into control of society by the Communist Party and the attempted worldwide spread of communism; govt should own all the major factors of production

Socialism is public, collective ownership of the basic means of production and distribution, operating for use rather than profit; govt ownership or control of the basic means of production, distribution, and exchange

Capitalism is an economic system in which the means of production are for the most part privately owned and operated for private profit; govt restricted to functions that private sector cannot perform
Does socialism vary as actually practiced?
Socialism does vary as practiced as many "socialist" governments go against normal socialist practices.

Example: The socialist governments of France and Spain have embarked on programs to privatize government-owned businesses; such programs do not conform to socialist doctrine.
What happens when communists or socialists take over in a capitalist country?
"Capitalist" countries do not exist. So-called capitalist countries use government to regulate privately owned businesses and also own businesses. Therefore, transition to communism or socialism is realtively easy because the "capitalist" countries are already leaning one way or another.
Why are firms nationalized? (5)
1. to extract more money from the firms - the govt suspects that the firms are concealing profits
2. profitability - the govt believes it could run the firms more efficiently and make more money
3. ideology - govts sometimes nationalize industries, as has occurred in Britain, France, and Canada
4. job preservation - save jobs by putting dying industries on life support systems
5. govt has pumped money into a firm or industry, and control usually follows
6. happenstance, as with the nationalization after WWII of German-owned firms in europe
What's the difference between expropriation and confiscation?
Expropriation: govt seizure of the property within its borders owned by foreigners, followed by prompt, adequate, and effective compensation paid to the former owners

Confiscation: govt seizure of the property within its borders owned by foreigners without payment to them
If your foreign property is confiscated, do you have any recourse? What is the USSR example?
To date, none of the communist govts has compensated the foreign former owners directly. A few of the owners have gotten some reimbursement indirectly, from assets of the communist govt seized abroad.

U.S. Govt seized assets of the Soviet Union in the U.S. after American property in the Soviet Union was confiscated. American firms or individuals whose property had been confiscated in the U.S.S.R could file claims with a U.S. govt agency, and if they could substantiate their loss, a pecentage of it was paid.
Why do private firms complain about competing against nationalized firms? (5)
1. Govt owned companies can cut prices unfairly because they do not make profits
2. they get cheaper financing
3. they get govt contracts
4. they get export assistance
5. they can hold down wages with govt assistance
Why don't we see more collaboration between private firms and public agencies?
The objectives of private firms and those of govt agencies and operations usually differ. They only share a service to the community (market).
What is a conservative or liberal in the US?
Conservative: a person, group, or party that wishes to minimize govt activity and maximize the activities of private business and individuals

Liberal: person, group, or party that urges greater govt participation in the economy and regulation or ownership of business
What is a liberal in Italy?
In Italy, a liberal means the same thing as a conservative in the U.S. - a person, group, or party that wishes to minimize govt activities and maximize private ownership and business
Other than selling off assets, how can governments privatize production and service provision?
Activities previously conducted by the state may be contracted out. Does not always have to involve ownership transfer from government to private entities.
Which country is an acknowledged leader in privatization and what happened when it privatized its water system?
England; with the privatized water system, water bills increased 22%, whereas Scotland with a non-privatized water system has seen a bill increase of 94%
How does the US compare in terms of the movement toward privatization?
The U.S. govt is not participating substantially in the privatization trend
Are international companies passive victims of nationalization or beneficiaries of privatization?
Solvency and stability are improved with privatization of industrial and commerical companies
What are the motivations for terrorism? (5)
Unlawful acts of violence committed for a wide variety of reasons, including for ransom, to overthrow a govt, to gain release of imprisioned colleagues, to exact revenge for real or imagined wrongs, and to punish nonbelievers of the terrorists' religion
What is the downside to paying ransoms?
When paying a ransom it makes the kidnappers stronger and they will kidnap more often because they know they will get money.
Other than the ability to remain in power, what characterizes stable governments?
Characteristic of a govt that maintains itself in power and whos fiscal, monetary, and political policies are predictable and not subject to sudden, radical changes
In a country risk analysis, what are the two most important factors to focus on?
Type of business and time?

CRA: an evaluation, conducted by a bank or business having an asset in or payable from a foreign country or considering a loan or an investment there, that assessed the country's economic situation and policies and its politics to determine how much risk exists of losing the asset or not being paid
What are five arguments and counter-arguments for trade restrictions?
National Defense: certain industries need protection from imports because they are vital to security and must be kept operating

Sanctions to Punish Offending Nations: inflict economic damage on other nations

Protect Infant/Dying Industry: gain comparative advantage in the long run

Protect Domestic Jobs from Cheap Foreign Labor: compare wage rates from foreign country to home country

Scientific Tariff or Fair Competition: cost of imported goods up to the cost of domestically produced article

Retaliation: industry with restrictions retaliates on the other country with restrictions of their own
What are dumping, predatory dumping, social dumping, environmental dumping, financial services dumping, and tax dumping?
Dumping: selling a product abroad for less tha the cost of production, the price in the home market, or the price to third countries

Predatory Dumping: manufactuer lowers export price to force the importing nation's domestic producers out of business, expecting to raise prices once that objective is accomplished

Social Dumping: unfair competition caused by firms, usually from developing nations with lower labor costs and poorer working conditions, which undermines social support systems including worker benefits

Environmental Dumping: unfair competition caused by a country's lax environmental standards.

Financial Services Dumping: unfair competition caused by a nation's low requirements for bank capital-asset ratios

Cultural Dumping: unfair competition caused by cultural barriers aiding local firms

Tax Dumping: unfair competition caused by differences in corporate tax rates or related special breaks
What are tariffs and how can they be structured? What is the purpose of a tariff?
Tariff: taxes on imported goods for the purpose of raising their price to reduce competition for local producers or stimulate local production

Ad valorem duty: an import duty levied as a percentage of the invoice value of imported goods

Specific Duty: a fixed sum levied on a physical unit of an imported good

Compound Duty: a combination of specific and ad velorem duties
What is a quota? What is it's purpose?
Quota: numerical limits placed on specific classes of imports

used as a discrimination against imports other than the import duties examined.. additional costs imposed on producers and exporters help to discourage trade
What is a voluntary export restraint? Why might a country agree to a VER?
VER: export quotas imposed by the exporting nation

might be able to make money off of the importing country if they really need the product
What is extraterritoriality and how does it affect income earned abroad? (hint, taxed here too)
A country's attempt to apply it's laws to foreigners or non-residents and to acts and activities that take place outside its borders

Income that is earned abroad is still subject to taxation.
How consistent are tax laws across countries?
Compliance with tax laws and their enforcement varies from country to country
How strict is enforcement of tax laws in the US and Germany? Spain and Italy?
U.S. and Germany are very strict. (No room for discussion)

Spain and Italy are very lax. (Can claim very low taxable income, room for discussion)
How do companies respond to changes in tax laws?
Mobile companies avoid taxes when possible by moving their production and business activities to avoid taxes. This leaves a non-mobile business and people to shoulder a larger burden.
What does international law govern? What is the difference between private and public international law?
Public Intl Law: includes legal relations btwn govts, including laws concerning diplomatic relations btwn nations and all matters involving the rights and obligations of sovereign nations

Private Intl Law: includes laws governing the transactions of individuals and companies crossing intl borders. (would cover a contract of a company that was located in 2 diff countries)
What is CISG? How effective is it?
Convention of International Sale of Goods: established uniform legal rules to govern int'l sales contracts and the rights and obligations of the buyer and seller --- one of the most successful int'l uniform laws
Thinking about private solutions as an alternative or possibly even a complement to the CISG, what two clauses should we include in contracts and what do they specify?
Contracts: choice of law clause to specify which laws govern and chice of forum clause where settled
What is arbitration and what are its advantages over litigation?
Arbitration: a process, agreed to by parties to a dispute in lieu of going to court - a neutral person or body makes a binding decision --- this is faster, informal, confidential, and inexpensive
Why are both private firms and countries concerned about protection of intellectual property rights?
private firms are concerned with things like trademarks and countries are concerned with patents which tend to deal with inventions
How consistent is enforcement of agreements regarding intellectual property rights? Are there differences depending on the kind of intellectual property?
attempts to standardize laws are not yet sucessful; Europe - legislation rarely amended and regulations rarely revised; U.S. lawns and regulations are constantly being amended
What is the foreign corrupt practices act? How does US enforcement of the FCPA compare to other similar acts around the world?
FCPA: U.S. law against making payments to foreign govt officials for special treatment

Congress passed FCPA outlawing bribery, but not "grease" payments - other countries encourage and expect bribes
What is the gold standard? What is the advantage of a gold standard over actually using gold?
Gold Standard: the use of gold at an established number of units per currency unit

Under the gold standard, a gov't cannot create money that is not backed by gold. Therefore, no matter how great the temptation to create more money for political advantage, a gov't cannot do so without the correct amount of gold.
Why did the Bretton Woods System fall apart?
Foreign countries sitting on dollars as reserves, US printed more dollars, eventually too many dollars had been printed, threat of redemption lead to the suspension of redemption and Bretton Woods System broke down.
What is an SDR and what is it used for?
Special Drawing Rights: an international reserve asset established by the IMF; the unit of account for the IMF and other international organizations

Today, the SDR has limited use as a reserve asset and its ability to serve as a safety net should the international monetary system run into serious difficulty has yet to be tested.
What are the three main current systems of exchange rates?
Free (Clean) Float: no intervention and large number of buyers & sellers trade determine exchange rates

Managed (Dirty) Float: mostly floating but with intervention as national interest may require

Fixed Peg: country pegs currency to value of another
What is the upside and what is the downside of floating exchange rates compared to the Bretton Woods System?
Freely floating currencies fluctuate against each other, values determined by market forces

Fluctuations might be quite large; jamaica agreement allows for central bank operations to smooth over volitile periods
What is the Bank of International Settlements?
Basel, Switzerland; Int'l Org of Central Banks; cooperation among central banks; Basel 3 = Int'l Guidelines
What is a spot rate, bid price, ask price, and forward rate? What does the bid-ask spread represent?
Spot Rate: the exchange rates between two currencies for delivery within two business days

Bid Price: price offered to buy

Ask Price: sales price

Bid-Ask Spread: provides a margin for the bank or agency
See slides for explanation of how to convert currency values. How many dollars can you get for 300 euros?
What are fiscal and monetary policy?
Fiscal Policy: policy that addresses the collecting and spending of money by the government

Monetary Policy: government policy that controls the amount of money in circulation and its growth rate
What is the law of one price?
concept that in an efficient market, like products will have like prices
What is inflation? What are some concerns about inflation from an international business perspective?
Inflation is a trend of raising prices

Concerns: encourage borrowing (debt), high inflation = high interest rates
What is the fisher effect?
The relationship between real and nominal interest rates: the real interest rate will be the nominal interest rate minus the expected rate of inflation
What are the three main approaches to forecasting exchange rates?
Efficient Market Approach: assumption that current market prices fully reflect all available relevant information

Random Walk Hypothesis: assumption that the unpredictability of factors suggests that the best predictor or tomorrow's prices is today's prices

Fundamental Approach: exchange rate prediction based on econometric models that attempt to capture the variables and their correct relationships