CH. 3 Study Guide

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A long-term partnership between two or more companies, a ______________ is established to help each company build competitive market advantages.

Strategic alliance

A tax known as a ___________ is imposed on imports.


The practice of selling products in foreign countries at lower prices than you charge for the same products in the producing country is known as ___________________.


A country has a(n) ____________________when it has a monopoly on the production of a specific product or is able to produce it more efficiently than all other countries.

Absolute advantage

The difference between money coming into a country and money leaving the country plus money-flows from other factors such as tourism, foreign aid, military expenditures and foreign investment is the __________________________.

Balance of payments

A(n) _______________is a complete ban on the import or export of a certain product or when all trade with a particular country has been stopped.


When there is a limit on the number of products in certain categories that a nation can import, a(n) ________________has been established.

Import quota

An unfavorable balance of trade, or __________occurs when the value of a country’s imports exceeds that of its exports.

Trade deficit

A nation’s _________________is the total value of a nation’s exports compared to its imports measured over a period of time.

Balance of trade

The _____________________ is the value of one currency relative to the currencies of other countries.

Exchange rate

A country is involved in __________________ when it is buying products from another country.


In a ___________________ a partnership has been formed in which two or more companies, often from different countries, have joined to undertake a major project.

Joint venture

A global strategy known as _____________________ is one in which a firm allows a foreign company to produce its product in exchange for a fee (a royalty).


The European Union is an example of a ______________________, a regional group of countries that have no internal tariffs, a common external tariff and a coordination of laws to facilitate exchange between countries. It is also known as a trading bloc.

Common market

A company is involved in _________________when it is selling products to another country.


An organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management is a(n) _______________________.

Multinational corporation (MNC)

The theory of _________________states that a country should sell to other countries those products that it produces most effectively and efficiently, and buy from those other countries those products that it cannot produce as effectively and efficiently

Comparative advantage theory

___________________ occurs when a foreign country produces private-label goods to which a domestic company then attaches its brand name or trademark.

Contract manufacturing

Lowering the value of a nation’s currency relative to other currencies is known as ____________.


There is ______________ when the movement of goods and services among nations occurs without political or economic barriers.

Free trade

The use of government regulations to limit the import of goods and services is considered to be_______________________.

Trade protectionism

A complex form of bartering known as _________________________ occurs when several countries each trade goods for goods or services for services.


Many countries today are involved in ___________________, which is the buying of permanent property and businesses in foreign nations.

Foreign direct investment

A ______________________is a company that is owned in a foreign country by another company called the parent company.

Foreign subsidiary

This organization, known as the ________________, replaced the GATT agreement and was assigned the duty to mediate trade disputes among nations.

World Trade Organization (WTO)

The agreement known as the _________________created a free trade agreement between the United States, Canada, and Mexico.

North American Free Trade Agreement (NAFTA)

The agreement signed in 1948 called the _______________________established an international forum for negotiating mutual reductions in trade restrictions.

General Agreement on Tariffs and Trade (GATT)

What are three reasons why countries trade with each other?

a. No nation can produce all of the products its people need and want b. Even if a given country were self-sufficient, other nations would want to trade with that country to meet the needs of its people c. Some nations have many natural resources but limited technological know how, while other countries have sophisticated technology but few resources. Trade allows nations to produce what they are capable of producing and to buy what they need from others.

What are the pros and cons of free trade?

Pros Global market has over 6.7 billion customers Productivity grows with comparative advantage Global competition and lower-cost imports keep prices down Free trade encourages innovation Interest rates lower due to uninterrupted flow of capital Cons Domestic workers in manufacturing could lose jobs Workers face pay-cut demands from employers Competitive pressure makes some jobs vulnerable to operations moving overseas d. Domestic companies can lose comparative advantage when competitors build operations in low wage countries

List six strategies for reaching global markets

a. Licensing e. International joint ventures and strategic alliances b. Exporting f. Foreign direct investment c. Franchising d. Contract manufacturing

When they go global, franchisers must be careful to:

When going global, franchisers must be careful to adapt to the customs and tastes of the countries they serve.

Describe the benefits of contract manufacturing.

Through contract manufacturing: a. A company can experiment in a new market without heavy start-up costs, which reduces risk. b. A firm can also use contract manufacturing temporarily to meet an unexpected increase in orders.

What are the reasons companies enter into international joint ventures?

There are many business reasons that joint ventures are developed, such as the opportunity to expand low market share in participating countries.

Four forces affecting trading in global markets are:

a. Socio-cultural b. Economic and financial c. Legal and regulatory d. Physical and environmental

Why would a country devalue its currency?

A country may devalue its currency in order to increase the export potential of its products.

When a country has an especially weak currency the only possibility of trade is often through bartering, which is:

Bartering is the exchange of merchandise for merchandise or service for service with no money involved.

Forms of trade protectionism are:

a. Protective tariffs d. Embargoes b. Revenue tariffs e. Non-tariff barriers c. Import quotas

What was the purpose of the GATT? What two areas are covered by the Uruguay round of the GATT, passed in 1994?

The GATT established an international forum for negotiating mutual reductions in trade restrictions. Countries agreed to negotiate to create monetary and trade agreements that might facilitate the exchange of goods, services, ideas, and cultural programs. The Uruguay round of the GATT lowered tariffs by 38 percent worldwide and extended GATT rules to new areas such as agriculture, services and the protection of patents.

How was the World Trade Organization created, and what is the primary task of the WTO?

The World Trade Organization (WTO) was created by the Uruguay round of the GATT to assume the task of mediating trade disputes. The WTO acts as an independent entity that oversees key cross-border trade issues and global business practices.

Challenges faced by the WTO are:

a. the legal and regulatory problems which impede trade expansion. b. the wide gap which separates developing nations, 80% WTO membership, and industrialized nations such as the United States.

What is the EU?

The EU is a group of 27 nations in Europe that united economically and formed a common market. The euro is the currency commonly used in most member countries of the EU.

What countries are parts of the Mercosur?

The Mercosur consists of the countries of Brazil, Argentina, Paraguay, Uruguay and associate members Chile and Bolivia.

The counties that are part of ASEAN are:

a. Indonesia f. Brunei b. Malaysia g. Cambodia c. Philippines h. Lao PDR d. Singapore i. Myanmar e. Thailand j. Vietnam

What does NAFTA stand for? What three countries are parts of the NAFTA agreement?

NAFTA stands for the North American Free Trade Agreement. The three countries that are part of NAFTA are the United States, Canada and Mexico.

The objectives of NAFTA were to:

eliminate trade barriers and facilitate cross-border movement of goods and services between the three member countries. promote conditions of fair competition in the free trade area. increase investment opportunities. provide effective protection and enforcement of intellectual property rights. establish a framework for further regional trade cooperation. improve working conditions in North America.

Has NAFTA been successful?

NAFTA has had positive and negative consequences. The value of U.S. exports to NAFTA partners, and trade have increased significantly since the agreement was signed. On the down side, it is estimated that the U.S. has lost 500,000 job, and some believe the number is much higher. Per capita income in Mexico still lags behind the U.S. causing illegal immigration to be a continuing problem. Critics argue that working conditions in Mexico are less safe than before NAFTA.

Describe the CAFTA? What are the issues surrounding this agreement?

CAFTA is an agreement which created a free trade zone with the U.S. and several Central American nations – Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. Supporters claim that the agreement will open new markets, lower tariffs, and ease regulations. Critics argue that the agreement will cost American jobs in textiles and sugar industries.

What is meant by the term "China price"?

The term China price is used by manufacturer to mean the lowest price possible.

What are some concerns about entering the Chinese market?

Concerns remain about a. China’s one-party political system, b. its human rights policies, c. increasing urban population growth. d. product piracy and counterfeiting

One reason that companies trade is because no nation, not even a technologically advanced nation, can produce all the products it’s people need.


Many foreign firms find it hard to sell their products in the United States because most U.S. firms produce products more efficiently that most foreign firms.


When the country of Monrovia is buying less from the United States than it is selling to the United States, a favorable balance of trade exists for Monrovia.


Even today, most large businesses are not involved in global trade.


Exporting does not provide a big boost to the U.S. economy, because we still have a balance of trade deficit.


An example of contract manufacturing is when Dell contracts with a computer company to manufacture PCs, on which Dell puts the Dell name.


One disadvantage of licensing is the cost to the company of licensing its product or trademark (the licensor) to the foreign firm (the licensee).


Export Assistance Centers serve the role of matching buyers and sellers from different countries and of providing other services to ease the process of exporting.


Religion is an important element of a society’s culture and should be considered in making many business decisions.


Economic differences between countries can affect purchasing patterns, such as quantity purchased at a given time.


A sound global philosophy is "always assume that what works in one country will work in another".


E-commerce in some developing nations is difficult because computer and Internet use is negligible.


Trade protectionism is based upon the idea that barriers will help domestic producers grow and create more jobs.


Non-tariff barriers can be just as detrimental to free trade as tariffs.


The WTO totally eliminated the internal national laws that impeded global trade expansion.


The official monetary unit of the EU is the euro.


Investment in China is still considered to be too risky to invest a great deal of money.


India and Russia are considered to be potentially lucrative markets for the future.


Buying products produced in another country is known as:


All of the following are reasons for countries to participate in foreign trade except:

it is just as easy to start a business overseas as it is in the U.S.

Many clothing items sold in the U. S. are imported from Asia because workers there can produce the items more efficiently than we can in the United States. This is an example of:

comparative advantage theory.

When the value of exports from a country exceeds the value of imports into that country, there is a:

favorable balance of trade.

The difference between money coming into a country from exports and money leaving a country due to imports, plus money flows from other factors, is known as the:

balance of payments.

The United States exports:

a greater volume than other countries, but a lower percentage of our products.

In global trade, the term "dumping" refers to:

the practice of selling products in a foreign country at lower prices than those charged in the producing country.

In recent years the Nestle Company has acquired several U.S. firms, such as Carnation. Carnation now operates in the U.S. as a(n):


Coke and Pepsi often enter foreign markets by allowing a foreign manufacturer to use their trademark and pay them (Coke or Pepsi) a royalty for that right. This is an example of:


In franchising to foreign markets, companies such McDonald’s and KFC have had to:

be careful to adapt to the countries they are attempting to enter.

Multinational corporations:

are typically extremely large corporations.

Americans are often been accused of ethnocentricity. This means that:

Americans feel their culture is superior to others.

Guillermo Martinez was concerned that his new boss Donald Darr didn’t know his job very well. Donald is continually asking Guillermo and the other workers in the company’s plant in Mexico City to give him their opinions before he makes a final decision. Guillermo’s concern stems from ___________differences between Donald and him.


The makers of Whirlpool washers and other electrical appliance manufacturers need to be concerned about the kind and availability of electricity in the global marketplace. If there were a compatibility problem, it would be the result of a _____________difference.


The law that specifically prohibits "questionable" or "dubious" payments to foreign officials in an effort to secure business contracts is called the:

Foreign Corrupt Practices Act

A low value of the dollar would mean:

a dollar could be traded for less foreign currency than normal.

When Mexico devalued the peso, the peso became ___________valuable relative to other currencies.


Using government regulations to limit the import of goods and services is called:

trade protectionism.

When the Vietnamese government imposes a tax on imported electronics products to help their relatively young electronics industry compete in the global marketplace, a(n) ____________ is being levied.

protective tariff

The EU is an example of a trading bloc, or a______________, which has a common external tariff, no internal tariffs and the coordination of laws to facilitate trade between member countries.

common market

The ___________ is assigned the task of mediating trade disputes.


NAFTA has:

greatly increased trade flows between the member nations.

There are those who hope that the ______ is a stepping stone to the creation of a Free Trade Area of the Americas. The agreement is between the United States and several Central American countries.


Which of the following is not considered to be a concern when evaluating trade with China?

A shrinking market

The term "China price" means:

the lowest price possible.

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