International Political Economy Exam 2
MNCs correct answers A company that has ownership and manages production
facilities in two or more countries
Locational Advantages correct answers Derive from specific country characteristics that
provide the economic rationale for a firm's decision to internationalize its activities
1. large reserve of natural resources
2. Large local market
3. Opportunities to enhance the efficiency of the firm's operations
Electoral Model of Monetary Policy correct answers Argues that exchange rate policy
reflects decisions that governments make concerning to monetary policy
*assumes governments care most about monetary policy autonomy and will use it to
maintain its' exchange rate
Specific Assets correct answers An investment dedicated to a particular economic use
or particular long term economic relationship
* cannot be shifted from one use to another without losing a substantial portion of its
value
Natural-Resource Industries correct answers Industries focusing on a specific natural
resource where there are large deposits of a natural resource
Obsolescing Bargain and Capital Mobility correct answers The government has
incentive to renege on promises once an investment has been made
Trilemma correct answers Highlights the trade offs that governments face when making
decisions about fixed exchange rates, monetary policy, and capital mobility
*Can only have 2 of the 3 at the same time
Interests Rates and Capital Flows correct answers If you increase the interest rate,
there will be a higher demand for the dollar therefore capital flows increase --
appreciation
If you decrease the interest rate foreign investment will decrease, decreasing the value
of the dollar-- depreciate
Horizontal Integration correct answers Occurs when a firm creates multiple production
facilities, each of which produces the same good(s)
Vertical Integration correct answers Instances in which firms internalize their
transactions for intermediate goods
, Phillips Curve correct answers Curve that posits trade off between inflation and
unemployment-- governments can reduce unemployment only by causing higher
inflation and can only reduce inflation by causing higher unemployment
*holds only in the short run
Sectoral Model of Exchange Rate Levels correct answers
Export-Processing Zones correct answers Industrial areas in which the government
provides land, utilities, a transportation infrastructure, and buildings to the investing
firms at usually subsidized rates
Foreign Direct Investment (FDI) correct answers Occurs when a firm based in one
country builds a new plant or factory OR purchases an existing in a second country
Natural-Resource Investments correct answers Arise from the presence of large
deposits of a particular natural resource in a foreign country
Market-Oriented Investments correct answers Arise from large consumer markets that
are expected to grow rapidly over time
Efficiency-Oriented Investments correct answers Arise from the availability at a lower
cost of the factors of production that are used intensively in the production of a specific
product
Intangible Asset correct answers Something whose value is derived from knowledge or
from a set of skills possessed by human inputs
Positive Externalities correct answers Arise when economic actors in the host country
that are not directly involved in the transfer of technology from an MNC to a local
affiliate that benefit from transactions
Nationalization correct answers occurs most often in the extractive industries and
public utilities (i.e. power generation and telecommunications)
Performance Requirements correct answers Promote specific economic objective
I.E. If a government was trying to promote export industries, it required the affiliate to
export a specific percentage of its output
Locational Incentives correct answers Packages host countries offer to MNCs that
either increase the return to their investment or reduce the cost/ risk of that investment
2 types of Locational Incentives correct answers 1. Offer tax incentives
2. Exemption from import duties
MNCs correct answers A company that has ownership and manages production
facilities in two or more countries
Locational Advantages correct answers Derive from specific country characteristics that
provide the economic rationale for a firm's decision to internationalize its activities
1. large reserve of natural resources
2. Large local market
3. Opportunities to enhance the efficiency of the firm's operations
Electoral Model of Monetary Policy correct answers Argues that exchange rate policy
reflects decisions that governments make concerning to monetary policy
*assumes governments care most about monetary policy autonomy and will use it to
maintain its' exchange rate
Specific Assets correct answers An investment dedicated to a particular economic use
or particular long term economic relationship
* cannot be shifted from one use to another without losing a substantial portion of its
value
Natural-Resource Industries correct answers Industries focusing on a specific natural
resource where there are large deposits of a natural resource
Obsolescing Bargain and Capital Mobility correct answers The government has
incentive to renege on promises once an investment has been made
Trilemma correct answers Highlights the trade offs that governments face when making
decisions about fixed exchange rates, monetary policy, and capital mobility
*Can only have 2 of the 3 at the same time
Interests Rates and Capital Flows correct answers If you increase the interest rate,
there will be a higher demand for the dollar therefore capital flows increase --
appreciation
If you decrease the interest rate foreign investment will decrease, decreasing the value
of the dollar-- depreciate
Horizontal Integration correct answers Occurs when a firm creates multiple production
facilities, each of which produces the same good(s)
Vertical Integration correct answers Instances in which firms internalize their
transactions for intermediate goods
, Phillips Curve correct answers Curve that posits trade off between inflation and
unemployment-- governments can reduce unemployment only by causing higher
inflation and can only reduce inflation by causing higher unemployment
*holds only in the short run
Sectoral Model of Exchange Rate Levels correct answers
Export-Processing Zones correct answers Industrial areas in which the government
provides land, utilities, a transportation infrastructure, and buildings to the investing
firms at usually subsidized rates
Foreign Direct Investment (FDI) correct answers Occurs when a firm based in one
country builds a new plant or factory OR purchases an existing in a second country
Natural-Resource Investments correct answers Arise from the presence of large
deposits of a particular natural resource in a foreign country
Market-Oriented Investments correct answers Arise from large consumer markets that
are expected to grow rapidly over time
Efficiency-Oriented Investments correct answers Arise from the availability at a lower
cost of the factors of production that are used intensively in the production of a specific
product
Intangible Asset correct answers Something whose value is derived from knowledge or
from a set of skills possessed by human inputs
Positive Externalities correct answers Arise when economic actors in the host country
that are not directly involved in the transfer of technology from an MNC to a local
affiliate that benefit from transactions
Nationalization correct answers occurs most often in the extractive industries and
public utilities (i.e. power generation and telecommunications)
Performance Requirements correct answers Promote specific economic objective
I.E. If a government was trying to promote export industries, it required the affiliate to
export a specific percentage of its output
Locational Incentives correct answers Packages host countries offer to MNCs that
either increase the return to their investment or reduce the cost/ risk of that investment
2 types of Locational Incentives correct answers 1. Offer tax incentives
2. Exemption from import duties
