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IBP HONORS MIDTERM STUDY GUIDE I.

Basic Economic Concepts Command economya system in which the government regulates the amount, distribution, and price of everything produced (think China) Market economya system of supply and demand in which individual companies and consumers decide what, how, and for whom goods and services are to be produced (like the U.S.) Inflation (types) - An increase in the average prices of goods and services in a country - Demand-pull inflation: when demand exceeds supply, prices go up (concert tickets), possibly avoidable - Occurs in countries when a government tries to solve economic problems by printing more money, so increased demand comes from additional currency in circulation - Can also occur if people increase borrowing for spending - Cost-push inflation: when the expenses of a business (cost of salaries, raw materials, etc) increase, and operating costs result in higher price charged by company, unavoidable Scarcity (causes/effects) - The result of limited resources available to satisfy the unlimited wants and needs of a people - Cause: limited resources (amount of time and money available) - Effect: must make decisions/choices (opportunity cost) Opportunity costs (Guns vs. Butter)resources given up when a choice is made (ex: go to college or start working?) Productivitythe amount of work that is accomplished in a unit of time Supply/demand/price relationship - Supply: the amount of a good or service that businesses are willing and able to make available at a certain price - Demand: the amount of a good or service that consumers are willing and able to purchase at a certain price - Price: the monetary value of a product agreed on between a buyer and a seller - Relationship: see graph, where S = supply, D = demand, Q = quantity, and P = price Capital goodsany goods used by an organization to produce other goods (financial assets, etc) Consumer goodsgoods intended for direct use or consumption (food, clothing, etc) Factors of productions (land, labor, capital) - The elements necessary to make a product or service: natural, human, and capital resources - Natural resources (land): raw materials from the earth, water, and air (iron ore, gold, agricultural products, rivers, oxygen, etc) - Human resources (labor): people who work to create goods and services (technology has changed/eliminated certain tasks, but new types of work are constantly being created) - Capital resources (capital): buildings, money, equipment, and factories used in production process (expensive items that are used over several years by business organizations)

(c) Amy Ho 2010

II. International Trade Dumping - Selling exported goods at a lower price than that asked in the companys home country (think Japan with TVs in the U.S.) - Use this method to break into new international markets - Companies take a loss in the new markets by doing this, so raise prices in their home countries in order to make up for it Protectionism measures (embargo, tariffs, quotas) - Protectionism: a government policy of protecting local or domestic industries from foreign competition - Embargo: an order imposed against a foreign country to prohibit all import-export trade with that country (trade embargo) - Tariffs: taxes on imported goods (also called duties) - Quotas: limits on the total number, quantity, or monetary amount of a product that can be imported from a given country Free tradea trade policy that allows traders to act and transact without interference from the government Legal issuesquestions concerning the protections that laws or regulations should provide Taxes on sales (sales, VAT, excise) - Sales tax: a consumption tax charged at the point of purchase for certain goods and services, usually set as a percentage by the government charging the tax (there are some exemptions) - VAT: value added tax, a tax levied on the difference between a commoditys price before taxes and its cost of production, taxes on business to business transactions, slows down business (European, but being considered in U.S. on federal level) - Excise tax: a tax that is measured by the amount of business done (not on property or income from real estate), tax charged on goods produced within the country (on the production or sale of a good), product-specific, hurts retailers and kills jobs - Excise tax also known as sin tax (taxed on cigarettes and alcohol), usually on negativeconsequence products (Europe: excise taxes on junk food), charge $X for Y amount of product Z Customs regulations - Customs official: government official who is authorized to collect the duties levied on imports - Not allowed to take more than $10,000 in currency/securities without first telling IRS Import dutiestariffs, imposed on goods when they are moved across a political boundary Incorporation papers (types of corporations/partnerships/joint ventures) - Sole proprietorships (most common type of business in United States): business started and owned by one person - Advantages: ease of starting, freedom of making business decisions, owner keeps all profits, pride of ownership - Disadvantages: limited sources of funds, potential of long hours and hard work, unlimited risks, limited life of the business - Partnerships: businesses owned by two or more people but is not incorporated, partners usually share in both decision making and profits - Advantages: ease of creation, additional sources of funds, availability of different talents - Disadvantages: partners are liable for debts of the business, profits are shared among several owners, potential for disagreement among owners, business can dissolve suddenly (deaths)

(c) Amy Ho 2010

Corporations (90% of sales in U.S.): business that operates as a legal entity separate from any of the owners - Stock certificates: documents that represent ownership in a corporations - Owners are known as stockholders or shareholders, can earn dividends (shares of company profits) and can vote on company policies - Advantages: more sources of funds, fixed financial liability of owners (limited liability), availability of specialized management, unlimited life of the company - Disadvantages: difficult creation process, owners are usually limited in their control, double taxation on corporate earnings (corporate income tax + personal income tax) Liability issues - Sole proprietorship and partnership: unlimited liability - Corporations: limited liability (only responsible for the debts of the corporation up to the amount they invested) MNCs/TNCs (multi-national corporations) - An organization that conducts business in several countries - Also called global companies, transnational companies, or worldwide companies - Usually consist of a parent company in a home country and divisions or separate companies in one of more host countries (like Mitsubishi of Japan) - Get involved in global activities to take advantage of business opportunities in other geographic areas, must consider and adapt to different societies - Benefits for host country: jobs, more products and services for consumers, improved roads created by MNC - Concerns: economic power of MNC can make host country dependent (workers for jobs, consumers for goods and services), or could start to influence or even control the political power of the country Financial issuesforeign currency conversion, government assistance programs, financing options Foreign currency conversion Government assistance programsFTZs, UEZs, tax incentives, port facilities, SBA Financing options - Commercial loans from banks - Small Business Administration - Home equity loans, credit cards, equipment leasing Transportation of goodsbill of lading, FEUs, TEUs, intermodal transport, FOB-destination, port facilities, customs inspections Bill of ladinga contract between the seller of goods and the transportation provider FEUs and TEUs - FEU = 40 foot container box (forty-foot equivalent unit) - TEU = 20 foot container box (twenty-foot equivalent unit) Intermodal transportthe use of two or more modes of transportation to move goods FOB-Destination - FOB-Destination: buyer doesnt own until it reaches buyers property, seller pays and is liable if it breaks - FOB-Shipping point: buyer owns as soon as it leave the port, is liable if it breaks - FOB = Freight on Board Port facilities - Port Authority of NY/NJ operates Newark/Elizabeth seaport, port facilities in Camden
(c) Amy Ho 2010

- Sea marshall will help boats get into port Customs inspections - Agricultural Department has right to go through agricultural products - Customs has right to destroy products at owners cost Exporting (direct/indirect) - Indirect exporting: a company sells its products in a foreign market without any special activity for that purpose, company was not looking for foreign business opportunities (accidental) - Direct exporting: company actively seeks and conducts exporting, requires higher costs than indirect exporting but company has more control over its foreign business activities Importing (licensing/franchising/wholly-owned subsidiary, direct investment) - Licensing: selling the right to use some intangible property (production process, trademark, or brand name) for a fee or royalty, low monetary investment, low potential financial return, low risk for the company - Franchising: the right to use a company name or business process in a specific way (similar to licensing), popular with fast-food companies to expand into foreign markets - Wholly owned subsidiary: an independent company owned by a parent company, many MNCs have wholly owned subsidiaries in various countries (result of foreign direct investment) - Foreign direct investment: when a company uses money to buy land or other resources in other countries, commonly real estate and existing companies III. Cultural Sensitivity How to great/address envelopes/business cards - Asia: present card at any time, hold card with both hands and boy and say your name, give first to highest ranked individual and then follow rank protocol - Present card before you ask for the others - When accepting, do not put card away immediately (Japan and China), express gratitude for opportunity of meeting them - Korea: thanks for opportunity of meeting them, but put away immediately, impolite/ignorant to look at card too long after receiving it What to say/what not to say - Singapore: knowledge of countrys social and political history, speak favorably - Handshakes: grip is light and lengthy, eyes avoid contact (Chinese, add bow) - Malay: let hand brush theirs, then place hand on heart - Indian: bow, then palms together - Calm, quiet tones, praise companys accomplishments but not your own Religious prohibitionsprohibitions on womens products in Islamic countries, pork products in Israel/Islamic countries Gender sensitivity - When man meets woman, let the woman lead - Absolutely NO TOUCHING Business formality/informality - Mexico: business is personal - Singapore: make business with a specific person (representative), not the whole company Dinner mannersDO NOT REFUSE DINNER WITH FAMILY IN MEXICO Product names/colors/packaging - Colorswrite symbolizes purity in U.S. but death in Turkey
(c) Amy Ho 2010

- Sizes and shapes also not universally understood - Product names (ex: Chevy Nova exported to Latin America, didnt sell, No Va = doesnt go) Holidaysreligious holidays, cultural/national holidays Gifts (appropriate/inappropriate)do not get overly lavish gift, not usually exchanged at first meeting in China, nothing in groups of four for China, should always be nicely wrapped, refuse gift several times before accepting (all for China) Personal appearanceAsia: formal business attire, Israel: business casual Punctuality issuesdo not be late, but boss may be slightly late (Europe is more relaxed in general) IV. Government Influences Consumer protection lawsproduct safety laws Worker safety lawslabor (child labor, minimum wage, overtime, dangerous occupations, family leave time, criminal background checks) Pollution lawsenvironmental laws (noise, zoning) Trade barriers and other protectionism legislationtariffs, import duties, embargoes, quotas Encouraging international businessFTZs, UEZs, tax assistance, reduced licensing and regulations Free Trade Zones/Urban Enterprise Zone - FTZ: an enclosed area considered to be outside the area of US Customs jurisdiction in which duties on merchandise is deferred, reduced, or eliminated - FTZ benefits are strictly regulated, taxed when items are sold, not when theyre brought in - If decide not to use products, must destroy entirely (losses from shipping, stealing) - Benefits provided by government for business (breakage does not count) - Part of warehouse is not open to market, can modify FTZ benefits - Manufacturers without VAT, only taxed on basic products (buy the base car, then add stuff, better than to import car with everything because really high rate) - Can modify, re-label, repackage - UEZs encourage development in troubled areas by offering entrepreneurs and investors tax and regulatory relief if they start businesses in the area - Area where companies can locate free of certain local, state, and federal taxes and restrictions Tax assistanceUEZs, SBA Reduced licensing and regulationsin FTZ and UEZ areas MFN (Most Favored Nation status)countries that can export into the granting country under the lowest customs duty rate, products imported from countries without MFN status are charged higher rate (a way to encourage international trade) Sectors of business/countries we do business with - U.S. is a service-based economy, emphasizes individualism - Highly diversified and technologically advanced - Exports mostly capital goods, then consumer goods - Export partners: Canada, Mexico, China, Japan, Germany, UK - Imports mostly industrial supplies and consumer goods - Import partners: China, Canada, Mexico, Japan, Germany NJ business incentives/advantages - 23 Fortune 500 companies located here: more employees make more money to spend money - 5th ranked for college attainment, 4th ranked in venture capital investments - High-tech payroll of $18.46 billion, highest concentration of scientists and engineers - More than 60 million U.S. consumers within a 4-hour drive (NYC!)
(c) Amy Ho 2010

Reduced regulations, has the lowest corporate income tax in the Northeast Tax credits available for investments in new jobs and facilities Port facilities in Camden, Newark Liberty airport, Newark/Elizabeth seaport Potential consumers are upper or high end demographic consumers Educated workforce: 55 colleges and universities, highest concentration of scientists employed Produces over 25% of nations pharmaceuticals and healthcare, research and development and technology leadership in many areas Privatizationthe process of selling government-owned companies to private citizens Reasons to privatize/sectors to privatize (key on TELEBRAS, government services) - Cost-efficient, cost-saving - Ability to meet deadlines, short-term nature of projects - Government workers should be held responsible, private employees have standards - Public sector workers can be hired by private firms - Generating tax revenues to provide services - Government services are costly and poor (monopoly is inferior to competition providing highquality, low-cost goods and services) - Privatize transportation, telecommunications and utilities sectors, human services, corrections (prison management), education, support services (custodial services, maintenance, trash and snow removal, grounds maintenance) Opposition to privatization (organized labor) - Service quality, social equity, employment conditions - Contracting entails hidden costs, lack of information, a need for monitoring - Concerned about layoffs, erosion of wages and benefits, decreased union membership - Significant effect on labor relations (minimal on wages and working conditions) - Expertise of many government employees makes them better at providing government services, techniques are making the public sector more efficient - Monitoring and transactions costs outweigh benefits Factors affecting competitionthe number of companies, business costs, and product differences Oligopolya market situation in which a few large sellers, offering slightly different products, control the industry (manufacturers divide the turf yet compete a little, such as Westinghouse, GTE) Monopolya market situation in which one seller controls the entire market (holds the entire supply) for a product or service (usually government-regulated) Pure competitiona market situation with many sellers each offering a nearly identical product Government granting a monopolycable TV Regulation/divestiture ofgovernments can regulate competition to death, too many regulations make companies drop out of competition and go bankrupt Horizontal/vertical integration - Horizontal integration: absorption into a single firm of several firms involved in the same level of production and sharing resources at that level - Vertical integration: absorption into a single firm of several firms involved in all aspects of a products manufacture from raw materials to distribution V. Foreign Currencies Devaluationan official lowering of a nations currency, a decrease in the value of a currency with respect to other monetary units

(c) Amy Ho 2010

Exchange rates1 USD = $1.2 Canadian dollar = 0.65 British pounds = 6.8 Chinese yuan = 0.7 Euro = 94.5 Japanese Yen, 1 SDR = $1.6 USD The EURO (who is in/who is not)official currency of the European Union, 16 of 27 member states currently use it (Eurozone): Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovak Republic, Slovenia, and Spain Effects on European trade/EU - EU has developed single market through standardized system of laws, ensures free movement of people, goods, services, and capital - Euro has caused increased trade in area, increased investment, decreased interest rates, increased tourism rates - Benefits of euro: security of purchasing power, removal of transaction costs, price transparency, elimination of exchange rate risks, borders break down (near pure competition state) - 27 member states: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, UK - Bulgaria most recently admitted (2007) Problems abroad (Yen/Japan, Russia/Ruble) - Japan: investors borrow yen and invest in better-paying currencies, further devalues yen - Russia: Russian financial crisis of 1998 left country vulnerable to swings in world prices, so currency was devalued VI. Copyrights, Patents Intellectual propertythe technical knowledge or creative work developed by a person or business Copyrights on artistic works - Copyrights on literary works, databases, firms, music, artistic works, architecture, advertisements, maps, and technical drawings - Valid for life of creator + 70 years - Exception: corporate authors (an employee or contracted creator who makes something for a company and will not own the rights), 95 or 120 years (law was changed) - Cannot reuse the material - Creative intellectual property rights in the U.S.: power to reproduce the work, to prepare derivative works, to distribute copies, to publicly perform the work, and the publicly display the work Industrial designs - PATENTS: pharmaceuticals 17 years before June 1995, 20 years after (international standard) - Circuits and designs 14 years, methods, processes, and machinery 20 years - Nonrenewable patents Black marketing/pirating/theft - Bootleg: distributed or sold illicitly - Pirating: copyright infringement/violation, unauthorized use of material - Big problem in Russia with entertainment industry Patentsthe exclusive right of an inventor to make, sell, and use a product or process (can be expropriated, national security issue) Protects investors/encourages inventions
(c) Amy Ho 2010

International protection What cannot be patentedCANNOT PATENT IDEAS, must actually create and show that it works Servicemarks/trademarks - Trademark: a word, name, symbol, or device which is used in trade with goods to indicate the source of the goods and to distinguish them from the goods of others - Servicemark: identifies and distinguishes the source of a service rather than a product, but otherwise same as a trademark - Can expire if not used Application of symbols/phrases - Copyright protects form of expression, not subject matter of writing - (R) : Registered throughout the US (protected) - TM: common law (not registered, protection is limited to geographic area where used) Unfair competition/legal hassles over useparodies! VII. World Trade Organization GATT (General Agreement on Tariffs and Trade)defined most favored nation status, later replaced by the WTO after the Uruguay Round of 1986-1994 Transparency and consensus - Transparency: economic decisions for economic reasons, no secret agendas - Consensus: agreement in the judgment or opinion reached by a group as a whole, general agreement Dispute Settlement body (consensus building)the entity within the WTO that formally deals with disputes between members, consists of all WTO members meeting together to consider reports of panels and the Appellate Body Benefits of free trade/fair trade (quality vs. process) - Promotes innovation and competition - Generates economic growth - Fosters economic freedom Case studies (Tuna, Gasoline) - Tuna: EC had been unfairly using tariffs to impair tuna trade of Thailand and Philippines, ruled in favor of Thailand and Philippines - Gasoline: U.S. applied stricter standards on chemical characteristics of imported gasoline than it did domestically, unfair because violated national treatment principle, ruled in favor of Venezuela and Brazil Misunderstandings of how WTO operates - The WTO dictates policy - The WTO is for free trade at any cost - Commercial interests take priority over development - and over the environment - and over health and safety - The WTO destroys jobs, worsens poverty - Small countries are powerless in the WTO - The WTO is the tool of powerful lobbies - Weaker countries were forced to join the WTO - The WTO is undemocratic WTO meeting in Seattlelots of protests due to anti-globalization movement in the U.S.
(c) Amy Ho 2010

Admission of Peoples Republic of China (?)admitted in 2001, opens China to foreign investment and subjects Chinese trade to international rules, provides means for China to argue its case in bilateral trading issues, countries will benefit from opening of new Chinese markets VIII. International Monetary Fund (IMF) Creation (Bretton Woods/Post WWII chaos)located in Bretton Woods, New Hampshire, U.S., helped the world stabilize the economic system Purposeworks to improve the economies of its member nations, foster global monetary cooperation, secure financial security, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty Membership quota25% in SDRs, 75% in own currency SDRsan electronic currency of the USD, Euro, British pound, and Yen (currently about $1.61) Organization (voting is weighted)U.S. is largest contributor, so has the most number of votes, number of votes given by how much each counter contributes to funds Where the money is going/what it is used forlow interest loans, provides technical assistance, surveillance, like a credit union Case studies examples/largest recent borrowers (Gambia/Russia) - After the Russian crisis of 1998: budget deficit, structural reforms, exchange rate policy - Gambia: demanded broad money for January 1988-June 2007, but not stable due to inadequate data quality, financial innovation, exogenous output shocks, etc Recommendations for changes (structural, fiscal, social) - Monetary: financial structural issues, banking system, foreign currency reserves, etc - Fiscal: budget expenditures, tax revenue, tax code and collection (contributes to social) - Social: education, health care Argentinas meltdownhuge defaulted debt, rapid economic growth on very weak foundations, revaluation of currency messed things up, IMF had to keep sending money in IX. Social Issues in Sustainable Development Labor (ILO, organized-unions, child and slave labor) - ILO: International Labor Organization - Children become slaves/prostitutes - Convention on the Rights of the Child: protection rights, provision rights, participation rights - Africa has highest incidence of child labor (percentage), Asia has largest number - PUSH factor: poverty, ignorance, illiteracy - PULL factor: opportunity for pay Indigenous peoples - Definitions vary, but culturally bound to land that may be used in large development projects - Concepts of land ownership differ, religious significance of certain lands - Rural areas, isolation, and relocation = reservations Respect for cultural heritage - Development projects could destroy economic way of life, but compensation? - Integration into main society through education/training means loss of identity - Incorporation of people into project could still damage environment and culture - Example: Three Gorges Dam in China Providing access to moneycompensation issues, integration into main society means loss of identity Proper payment for landsdifferent concepts of land ownership, compensation
(c) Amy Ho 2010

Pollution and development issues/greenhouse gases/industrial waste X. World Bank and Sustainable Development Formation and purpose - Provides leveraged loans to developing countries for capital programs - Created also at the Bretton Woods Conference along with IMF (sister institution of IMF) Cooperation with other NGOscooperates with NGOs in lending in order to mitigate effects Projects (health/education/infrastructure)green concerns, involvement with indigenous peoples, issues with health, education, and infrastructure in member states Dealings with indigenous peoples (resettlement, disruption, biodiversity, integration into project, operational directives) - Resettlement = reservations - Disruption: projects disrupt their way of life and the environment - Integrate into project to make them self-sufficient, but will still damage culture XI. Essays Introducing the Euro - Positive effects on tourism, increased - Some studies have found price convergence, some havent - Decreased interest rates for most member countries, in particular those with a weak currency - Market value of firms from countries with previously-weak currencies has increased - Benefited most from decreased interest rate: Greece, Ireland, Portugal, Spain, and Italy - Decreased cost of trade in bonds, equity, and banking assets within the Eurozone - Global integration in terms of investment in bond portfolios - Reduced market risk, but very small change and mostly centered in Europe - No real inflation, studies disagree - Physical investment has increased along with investment rates - Increased trade in Euro area September 11ths affect on global business (Economic Terrorism) - Immediate impact: disruptions that occur right at the time - All air traffic stopped: post, work, vacations - Secondary impacts: travel agents, tourist destinations, businesses suffered because everyone afraid to travel, had to layoff - Layoffs in proliferal industries of the airport: oil refineries because less demand for gasoline - Not permanent impacts China as the emerging economic power - Largest Communist giant, finally getting a taste of capitalism - Largest standing army, nuclear weapons, fastest growing economy - 70% of worlds heavy construction machines were in China (buildings, dams, etc) - Continued political oppression, contradictions: rich and poor, Communist and capitalist - Graduating classes of 66-68: lao san jie, sent to countryside during Cultural Revolution but farmers didnt want because not enough food or land - Cultural Revolution gave people willpower and endurance for business - Economic expansion led to closing of traditional markets (food vendors, etc) - Huge new commodity exchange and highest savings rate (33%) - Factories and companies take care of every aspect of their workers lives (provide day care, etc)
(c) Amy Ho 2010

Globalization (the Evil Empire/imperialism) - Provides raw materials, new markets, and investment opportunities - Improves political relations - Global dependency, though: cannot survive if cut off from raw materials - Also, MNCs can start to influence and take over political systems (British East India Company!) - Steady cash flow into developing nations, encourages peace - More outsourcing, so Europeans are losing jobs - Corporations gain too much power, TAKE OVER THE WORLD, or new colonialism! Outsourcing - Cost savings, quality services, access to specialized skills, contractual obligation, staffing issues, risk mitigation, capacity management - Linguistic barriers, social responsibility, company knowledge, staff turnover, Eco-tourism - Less impact on environment than industrialization, builds awareness and respect for local culture and environment, employs local people, money from tourists goes back to conservation of the area, area is protected (wildlife habitat, etc) - Overcrowding constructions, pollution of habitat, unlimited numbers of tourists, over-visited, traffic congestion, erosion, tourists dont really understand nor care, environment is bait, displaces local people, no sustainable development Indigenous people - Definitions vary, but culturally bound to land that may be used in large development projects - Concepts of land ownership differ, religious significance of certain lands - Rural areas, isolation, and relocation = reservations - Development projects could destroy economic way of life, but compensation? - Integration into main society through education/training means loss of identity - Incorporation of people into project could still damage environment and culture - Example: Three Gorges Dam in China

(c) Amy Ho 2010