International Political Economy Exam 2 || 100% Errorless
Answers.
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
United Nations Resolution on Permanent Sovereignty over Natural Resources (1962) correct
answers Recognized the right of host countries to exercise full control over their natural
resources/ foreign firms operating within their borders
Calvo Doctrine correct answers Argues that no government has the right to intervene in another
country to enforce its citizens' private claims
Answers.
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
United Nations Resolution on Permanent Sovereignty over Natural Resources (1962) correct
answers Recognized the right of host countries to exercise full control over their natural
resources/ foreign firms operating within their borders
Calvo Doctrine correct answers Argues that no government has the right to intervene in another
country to enforce its citizens' private claims
