C211 Study Guide Questions 9-2022

C211 Study Guide Questions Do NOT copy/paste this document – click File (top left) and then Save As. Choose “download a copy”. The following questions are developed as a study aid for the C211 COS. They cover important concepts in each competency. The questions are designed to serve as an indicator of your preparedness to take the C211 assessment. You can use these to help you take notes as you go through the chapters. You may also use them to reinforce your understanding after covering the material. 1. What determines the success and failure of firms around the globe?  The success and failure of firms around the globe can be influenced by various factors, including their ability to adapt to different market conditions, effectively manage resources, implement competitive strategies, navigate legal and regulatory environments, and respond to shifts in consumer preferences and global economic trends. 2. List and briefly explain the two views (core perspectives) for global business.  The two core perspectives for global business are: An institution-based view suggests that the success and failure of firms are enabled and constrained by institutions (laws & Culture). the resource-based view focuses on a firm’s internal resources and capabilities. 3. What is globalization? Explain the three views on globalization. a new force sweeping through the world in recent times a long-run historical evolution since the dawn of human history a pendulum that swings from one extreme to another from time to time 4. What is FDI? Identify and define the key terms associated with FDI. Great! Let's continue with the next set of questions in the "Globalization" section: 5. What is the OLI advantage? (Explain)  The OLI advantage, also known as the Ownership, Location, and Internalization framework, is a theory developed by economist John Dunning. It provides a framework for understanding why firms engage in Foreign Direct Investment (FDI). The OLI advantage consists of three components: a. Ownership Advantage (O) : This refers to the unique assets, resources, or capabilities that a firm possesses and can use to gain a competitive advantage in a foreign market. These

advantages can include technology, brand reputation, managerial expertise, and specialized knowledge. b. Location Advantage (L) : This relates to the specific advantages offered by the host country where the investment is being made. These advantages can include access to raw materials, skilled labor, market size, proximity to key markets, and favorable regulatory environments. c. Internalization Advantage (I) : This pertains to the benefits a firm gains by internalizing its operations rather than relying on external partners or licensing arrangements. By directly controlling its foreign operations, a firm can protect its proprietary knowledge and maintain greater control over its value chain. 6. The OLI framework suggests that for FDI to be successful, a firm must possess a combination of Ownership, Location, and Internalization advantages. 7. What are the political views on FDI? (Explain)  There are various political views on Foreign Direct Investment (FDI), which can influence a country's stance on allowing or regulating foreign investment: a. Radical View : This perspective argues that FDI is an instrument of imperialism and serves the interests of multinational corporations at the expense of host countries. It often calls for strict controls and limitations on FDI. b. Free Market View : This view supports open markets and sees FDI as a positive force for economic growth and development. It believes that FDI can lead to increased competition, job creation, and technology transfer. c. Pragmatic Nationalism : This perspective takes a balanced approach, advocating for the careful consideration of both the benefits and potential risks of FDI. It suggests that governments should actively manage and regulate FDI to ensure it aligns with national interests. 8. What are the costs and benefits of FDI to the host country? (Explain)  Benefits of FDI to the host country may include:  Job Creation: FDI can lead to the creation of new jobs, reducing unemployment rates and improving the standard of living.  Technology Transfer: Multinational corporations often bring advanced technologies, skills, and knowledge that can benefit local industries.  Capital Inflow: FDI can stimulate economic growth by increasing investment, productivity, and competitiveness, and balance of payment

vehicle technology, may enjoy a competitive advantage due to resource dissimilarity. International Trade and Foreign Exchange Market (Peng Chapters 5, 7, 10): 1. What is a trade deficit, trade surplus, and balance of trade?  A trade deficit occurs when a country's imports (goods and services bought from other countries) exceed its exports (goods and services sold to other countries), leading to a negative balance. A trade surplus is the opposite, where a country's exports exceed its imports, resulting in a positive balance. The balance of trade is the overall difference between a country's exports and imports. 2. Why do nations trade?  Nations trade to benefit from comparative advantage , which allows each country to focus on producing goods or services where it has a lower opportunity cost. This leads to increased overall economic efficiency, higher levels of consumption, and greater specialization. 3. Describe classical and modern international trade theories (what differences exist?).  Classical trade theories (e.g., Mercantilism, Absolute Advantage, Comparative Advantage ) focus on explaining the benefits of trade based on differences in production costs and specialization. They emphasize the role of resources and productivity in trade.  Modern trade theories (e.g., Heckscher-Ohlin Theory, New Trade Theory, Porter's Diamond Model) expand on classical theories by considering factors like differences in factor endowments (e.g., labor, capital), economies of scale, product differentiation, and government policies. They provide a more nuanced understanding of trade patterns in the global economy. product life cycle theory A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles. strategic trade theory A theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success. theory of national competitive advantage of industries A theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond.”

4. Explain the three types of classical international trade theories.  Mercantilism emphasizes accumulating wealth by maximizing exports and minimizing imports. It advocates policies such as tariffs, subsidies, and strict government control over trade.  Absolute Advantage , proposed by Adam Smith, argues that countries should specialize in producing goods or services where they have an absolute advantage (i.e., can produce more efficiently with fewer resources) and engage in trade for mutual benefit.  Comparative Advantage , developed by David Ricardo, states that even if one country has an absolute advantage in producing all goods, it can still benefit from trade if it specializes in producing the goods it can produce with the lowest opportunity cost. 5. Who came up with the invisible hand and absolute advantage theories?  The concept of the invisible hand was introduced by economist Adam Smith in his book "The Wealth of Nations." It describes how individual self-interest in a free market economy can lead to overall economic well-being.  Adam Smith also proposed the theory of Absolute Advantage , which argues that countries should specialize in producing goods or services where they have an absolute advantage in efficiency.

terms of another. Exchange rates are determined by the forces of supply and demand in the foreign exchange market.  If there is a high demand for a particular currency (e.g., due to strong economic performance), its value will increase relative to other currencies. Conversely, if there is a lower demand for a currency, its value will decrease. Changes in economic conditions, interest rates, inflation rates, and government policies can influence supply and demand, leading to fluctuations in exchange rates. 10. What are fixed, pegged, floating, managed float exchange rates?  Fixed Exchange Rate : In a fixed exchange rate system, the value of a country's currency is tied to another currency or a basket of currencies, and the exchange rate is held constant by a central bank. The central bank intervenes in the foreign exchange market to maintain the fixed rate.  Pegged Exchange Rate : Similar to a fixed exchange rate, a pegged exchange rate system involves tying a currency's value to another currency or a basket of currencies. However, the pegged rate can be adjusted periodically by the central bank to account for economic changes.  Floating Exchange Rate : In a floating exchange rate system, the value of a country's currency is determined by market forces (supply and demand) without government intervention. The exchange rate fluctuates based on market conditions.  Managed Float Exchange Rate : This is a hybrid system where exchange rates are allowed to float, but central banks occasionally intervene to stabilize or guide the exchange rate within a certain range. 11. Explain the concept of “hedging” as it relates to reducing various types of risk.  Hedging is a risk management strategy used by businesses to reduce or mitigate the impact of potential losses from fluctuations in currency exchange rates, interest rates, commodity prices, or other financial variables. It involves taking a position in a financial instrument (like a derivative) that offsets the risk associated with another financial position.  For example, if a company knows it will receive a payment in a foreign currency in the future, it can use a currency hedge to protect against potential losses due to unfavorable exchange rate movements. 12. What is the difference between currency hedging and strategic hedging?  Currency Hedging : Currency hedging specifically focuses on managing the risk associated with foreign exchange rate fluctuations. It involves using financial instruments like forward contracts or options to offset potential losses or gains due to changes in exchange rates.

Book Definition: a transaction that protects traders and investors from exposure to the fluctuations of the spot rate.  Strategic Hedging : Strategic hedging is a broader concept that encompasses various forms of risk management. It involves identifying and managing risks that could affect a company's strategic objectives, which may include financial risks, operational risks, market risks, and more. Book Definition: means spreading out activities in different currency zones in order to offset the currency losses in certain regions through gains in other regions. 13. If a company seeks to limit foreign exchange rate exposure in the forward direction, what is the most effective way to do this?  The most effective way to limit foreign exchange rate exposure in the forward direction is by using a forward contract . A forward contract is an agreement between two parties to exchange a specific amount of one currency for another at a future date and at a predetermined exchange rate. By entering into a forward contract, a company can lock in a specific exchange rate, reducing the risk of adverse movements in exchange rates. Or hedging. 14. Give an example of first and late movers and list each mover’s advantages.  First Mover : A first mover is a company that enters a market before competitors. Advantages of being a first mover can include:  First movers may gain advantage through proprietary technology  Establishment of Brand and Reputation or First movers may erect significant entry barriers for late entrants : Being the first in a market allows a company to establish brand recognition and build a strong reputation, which can create a competitive advantage.  Capture Market Share or First movers may also make pre- emptive investments and develop relationship with key stakeholders . : First movers have the opportunity to capture a significant portion of the market share early on, making it more challenging for later entrants to gain a foothold.  Learning Curve Benefits : First movers have the advantage of gaining experience and knowledge about the market, consumer preferences, and operational challenges.  Late Mover : A late mover is a company that enters a market after competitors. Advantages of being a late mover can include:  Learning from First Movers' Mistakes : Late movers can observe the strategies and mistakes of first movers, allowing them to make more informed decisions and potentially avoid costly errors.

 Cognitive Pillar : The cognitive pillar involves shared mental models, beliefs, and understandings that guide decision-making. It includes the way people perceive and interpret the world around them, influencing their attitudes towards economic activities. Book Answer: The internalized (or taken-for granted) values and beliefs that guide individual and firm behavior. 3. Compare formal and informal institutions.  Formal Institutions : These are codified rules and laws established by governments and regulatory authorities. They are typically written down and enforceable through legal mechanisms. Examples include constitutions, property rights, contracts, and regulatory frameworks. Book Answer: Institutions represented by laws, regulations, and rules.  Informal Institutions : Informal institutions are unwritten rules, norms, and practices that guide behavior in a society. They may include customs, traditions, social norms, and cultural beliefs. While not legally binding, they play a crucial role in shaping economic behavior. Book Answer: Institutions represented by cultures, ethics, and norms. 4. On what is the institution-based view of global business grounded? A leading perspective in global business that suggests that the success and failure of firms are enabled and constrained by institutions. What core propositions lie at the root of this view? Core 1: Managers and firms rationally pursue their interests and make choices within the formal and informal constraints in a given institutional framework Core 2: While formal and informal institutions combine to govern firm behavior, in situations where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty and providing constancy to managers and firms 5. Describe the political system of Totalitarianism, including the distinct types of totalitarian regimes.  Totalitarianism A political system in which one person or party exercises absolute political control over the population. There are distinct types of totalitarian regimes: Communist totalitarianism centers on a communist party. Right-wing totalitarianism is characterized by its intense hatred against communism. One party, typically backed by the military, restricts political freedom, arguing that such freedom would lead to communism.

Theocratic totalitarianism refers to the monopolization of political power in the hands of one religious party or group. Iran and Saudi Arabia are leading examples. Tribal totalitarianism refers to one tribe or ethnic group (which may or may not be the majority of the population) monopolizing political power and oppressing other tribes or ethnic groups. Describe the political system of Democracy.  Democracy is a political system where power is vested in the people, who exercise it through free and fair elections. It emphasizes individual rights, rule of law, and a system of checks and balances. In a democratic system, citizens have the right to participate in political processes, express their views, and hold their leaders accountable. Book Answer: A political system in which citizens elect representatives to govern the country on their behalf. 6. Compare and contrast the different legal systems.  Civil law A legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments.  Common law A legal tradition that is shaped by precedents and traditions from previous judicial decisions. Theocratic law A legal system based on religious teachings. 7. Compare and contrast Market Economy, Command Economy, and Mixed Economy. Market Economy: An economy that is characterized by the “invisible hand” of market forces Government hands off Command Economy: An economy that is characterized by government ownership and control of factors of production. Mixed Economy: An economy that has elements of both a market economy and a command economy. 8. What are the business implications for conducting international business in countries with different political and economic systems? Firms take on political risks that the host institutions can seize assets or shut down FDI for huge losses. Additionally, higher chance of war occurring. 9. What is Political Risk? Describe and provide examples. Risk associated with political changes that may negatively impact domestic and foreign firms. 10. What are property rights and how are they protected? property rights: The legal right to use an economic property (resource) and to derive income and benefits from it. The formal institutions or government protect them. 11. How is intellectual Property protected? Intangible product that is protected by patents, copyrights, and trademarks. 12. What are the reasons why intellectual property protections are critical in today’s global business environment? If the institutions of country cannot protect the IP of firms then FDI is discouraged from other firms outside the host country. When IP is protected the sharing of ideas, capital inflow, and job creation can occur through FDI.

What information is being represented by the constraint? The prices of products being sold and the max amount of good able to be bought. 4. How would a budget constraint be impacted by the following: a. an increase in income: The budget constraint would shift the right or outward b. if the price of one of the goods increased: The budget constraint would shift inward but only on the side of the product that increased. c. if the prices of both goods decreased by 10%: The budget constraint would shift outward. Firm Behavior Under Different Market Structures (Mankiw Chapters 13-17) 1. Describe Marginal Cost in your own words: : the increase in total cost that arises from an extra unit of production 2. Explain why Marginal Cost must be rising if Marginal Product is falling. As Marginal Product falls, it indicates that the firm is experiencing decreasing efficiency in production. When Marginal Cost is rising, it means that producing each additional unit of output is becoming more expensive. This aligns with the concept of diminishing returns, as the additional input leads to proportionally less output, increasing the overall cost per unit. Example: to many chefs in the kitchen 3. Using the image below, explain why average total cost must be rising if marginal cost is above average total cost. The marginal cost is attributing the the total cost because it takes more average variable cost to increase the marginal cost and thus increasing the average total cost. 4. If Dave’s company has a total cost of $100 when quantity output is 5, and a total cost of $115 when quantity output is 6, a. What is the marginal cost of producing the 6th unit? $15 b. Explain why Dave’s company would not want to accept a price below the Marginal Cost? If dave was to accept a price below marginal cost then he would be losing money.

5. Total cost is made of two types of costs; what are they? Fixed and Variable Costs Give an example of both types of costs. PPE and components and ingredients 6. Explain why the supply curve for a perfectly competitive firm is the marginal cost curve above average variable cost? In a perfectly competitive market, firms are price takers, meaning they cannot influence the market price and must accept it as given. For an individual firm, the price is constant. The profit-maximizing rule for a perfectly competitive firm is to produce where Marginal Cost (MC) equals Price (P). This is because the firm's additional revenue from producing one more unit (Price) is equal to the additional cost (Marginal Cost). The supply curve for a perfectly competitive firm is equivalent to the marginal cost curve above the average variable cost because as long as the market price is above the average variable cost, the firm will continue to produce in the short run. In the long run, firms that cannot cover their total costs will exit the market. 7. How does a firm determine whether to shut down in the short run? That is, a firm chooses to shut down if the price of the good is less than the average variable cost of production. What about the long run? That is, a firm chooses to exit if the price of its good is less than the average total cost of production. 8. Give an example of a firm shutting down in the short run from the real world. The example can be hypothetical. A ski resort might shut down short run during the summer months because no customers equal no revenue. Or a baker is shutting down because their variable prices of ingredients exceed the market price of baked goods. 9. What is the Nash Equilibrium of the prisoner’s dilemma below? Explain in your own words why this is the Nash Equilibrium: Nash equilibrium a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen. Each prisoners will chose if to confess or stay silent based off what the outcome of what the other prisoners will say and will chose what they feel is best chance for them.

Profit Maximization? Price is not set above MC Price is set above MC Price can be and not be set above MC Price is set above MC Are firms price- takers or price- makers? Price Taker Price Maker Both Price Maker Are there any barriers to Entry? No Barriers, Easy entry, free No barriers, easy entry, free High barriers, hard to enter Highest or impossible barriers Can firms make Long-run economic profits? No No Yes/No Yes, always Are firms likely to advertise? No Yes Yes/No No Do firms produce the Socially Efficient level of Output? Yes No No No Are firms likely to collude? NO No Yes No Com petency 4: Microeconomics and Macroeconomic Principles Macroeconomic Principles (Mankiw Chapters 29 & 34) 1. What is the discount rate? Discount Rate: the interest rate on the loans that the Fed makes to banks 2. What is the Federal Funds rate? Federal Funds Rate; the interest rate at which banks make overnight loans to one another 3. What is the required reserve ratio? The required amount of money that a bank needs to hold for their depositors 4. What tools does the Federal Reserve have to change the money supply? open-market operations when it buys or sells government bonds, The discount window rate, and reserve requirement ratio. 5. What three actions could the Federal Reserve take to DECREASE the money supply? Raise interest rates, sell bonds to the banks, increase reserve requirement. a. What impact will the decrease in the money supply have on the interest rate? A decrease in money will lead to greater demand because of scarcity and will lead to higher interest rates which slow down spending among consumers among interest sensitive items such as homes and cars. b. What impact with the change in interest rate have on aggregate demand?

Decrease in investment spending decreases aggregate demand 6. How can the Federal Reserve DECREASE the interest rate? The federal reserve can decrease the interest rate by buying securities from the banks. What impact will that have on the aggregate demand? Explain briefly. The decrease in interest rates will cause people to take out more loans and create more money. More money among people will lead to higher aggregate demand. 7. What is the crowding out effect and how might it affect interest rates? The reduction in aggregate demand that results when a fiscal expansion raises the interest rate is called the crowding-out effect : t he offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending 8. What is the expenditure multiplier effect? the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending. 9. If government spending increases, using the multiplier effect, is the effect on aggregate demand (AD) larger or smaller than the increase in government spending? Larger 10. If the government uses fiscal policy to increase government spending, what impact will this have on aggregate demand? Increase in aggregate demand 11. If the government uses fiscal policy and increases taxes, what effect will this have on aggregate demand? Lower aggregate demand 12. What are automatic stabilizers? Give two examples. Taxes, welfare benefits, and unemployment Microeconomic Principles (Mankiw Chapters 4 & 5) 1. What is the difference between Microeconomics and Macroeconomics? Micro focuses on individuals households, consumers, markets, industries. Macro focuses on the larger economic picture including unemployment, interest rates, and GDP. 2. What is the law of demand? the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises How does this relate to the shape of the market demand curve? The greater demand the curve shifts to the right but with less demand the curve shifts to the left. 3. What is the difference between a change in demand and a change in quantity demanded? A change in quantity demanded refers to a movement along a given demand curve in response to a change in the price of the good or service. A change in demand refers to a shift in the entire demand curve for a particular good or service. This shift is caused by factors other than the price of the good itself. 4. What are the factors that shift the demand curve? Price, number of buyers, taste, income, and expectations. 5. If a person’s income increases, what happens to the person’s demand? The demand for a normal good shifts to the right.

When two goods are substitutes for each other in consumption, the increase in the price of one will lead to an increase in the demand for the other as consumers substitute into the now cheaper good. When two goods are complements for each other in consumption, the increase in the price for one will lead to a decrease in the price for the other as consumers forgo consumption of one there is no need for the other as they are always consume together. 11. If demand and supply both increase, how does equilibrium price (P) and quantity (Q) change? Quantity rises but the price is ambiguous (demand how much is shifts) Com petency 5: Assessing Global Economic Performance and International Trade Measuring Economic Performance (Mankiw Chapters 7 & 23) 1. Explain why national income must be equal to national expenditure in the economy as a whole? Because every seller has a buyer a. Why are transfer payments such as social security not counted in government expenditures? Transfer payments are not used in the purchase of goods or services and thus do not add to aggregate demand directly. The money, when transferred, will be used by the recipient in either the consumption or investment categories. 2. Describe consumer surplus in relation to the price and willingness to pay. the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. So if the consumer is willing to pay $100 but pays $80 for the product the there is a consumer surplus of $20. a. Which area(s) represent consumer surplus on the following graph. B 3. Describe producer surplus in relation to the price and producer costs Producer surplus is the amount a seller is paid minus his cost of production. Producer surplus measures the benefit sellers receive from participating in a market. If a

person sells their product at 600 but it only cost them 400 to make then they have a 200 producer surplus. a. Which area(s) represent producer surplus on the following graph? C 4. What is total surplus? sum of consumer and producer surplus or Total surplus= value to buyers – cost to sellers a. What can it tell us about market efficiency? Free markets allocate the supply of goods to the buyers who value them most, as measured by their willingness to pay. Free markets allocate the demand for goods to the sellers who can produce them at the lowest cost. b. In what ways might surplus measures be used in developing government policy? Tax and subsidy, price ceilings, and market regulation. 5. Define gross domestic product (GDP). Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time 6. Given the following items, state whether or not they would be included in calculating GDP for a country for 2021. a. A car produced in March 2021 yes b. Flour produced that is used by a bakery to make bread No c. A parent staying home to take care of their children No d. Vegetables sold by a grocery store to a customer Yes e. A house built in 2004 and sold in August 2021 No 7. Describe the four components of GDP and explain how they affect aggregate demand. Aggregate Demand= C+I+G+NX