Final answer:
The scenario with Gift Group Inc. is an example of parallel importing, which can impact a company's revenue and market share in the importing country. It also relates to the foreign price effect and the competitive landscape for domestic firms, potentially influencing net export expenditures.
Step-by-step explanation:
The concept demonstrated by Gift Group Inc., an importing organization in New York buying perfume at a lower price from a company in France and selling it at a higher price in the United States, is known as parallel importing. Parallel importing is when unauthorized distributors import and sell products in a country without the consent of the official or licensed importer. In this case, since the French company is unaware of Gift Group's activities, they are missing out on potential revenue in the US market, where they sell the same product at a higher price of $22. This kind of market activity might lead to a loss of market share and revenue for the French company, as the lower-priced imports could reduce their sales in a competitive market.
From an economic perspective, if the imported goods are sold at extremely low prices, domestic firms would have to match those prices to remain competitive, which could potentially lead to operating at a loss and, eventually, to their exit from the market. The foreign price effect also plays a role, highlighting that if prices rise in the US but remain fixed in other countries, US exports will become more expensive and less competitive, which could lead to a rise in the quantity of imports as they are relatively cheaper. This scenario can reduce net export expenditures as domestic price levels increase relative to price levels in other countries.