Economics 16-19 Flashcards
16-19
Geopolitics
Geopolitics refers to interactions among nations, including the actions of state actors (national governments) and nonstate actors (corporations, nongovernment organizations, and individuals).
Geopolitics also refers to the study of how geography affects interactions among nations and their citizens.
What are potential areas of cooperation between countries in geopolitics?
Potential areas of cooperation include diplomatic and military matters, economic and cultural interactions, freedom of movement for goods, services, and capital, harmonizing tariffs, international standardization of rules, and technology transfers.
How can a country’s national interests be analyzed in geopolitics?
National interests can be analyzed as a hierarchy, with top priorities ensuring the country’s survival, often influenced by its geophysical resource endowment.
How does a country’s resource endowment affect its cooperation priorities?
A country’s resource endowment, like having minerals but lacking arable land, can drive it to prioritize cooperation in international trade to exchange minerals for food
Why do nonstate actors often seek cross-border cooperation?
Nonstate actors, like individuals and firms, seek to direct their resources to their highest-valued uses, which may be in other countries, leading them to cooperate across borders.
What is an example of international standardization that facilitates cross-border cooperation?
To facilitate the flow of resources, state and nonstate actors may cooperate on standardization of regulations and processes. International Financial Reporting Standards (IFRS) are an example, as they standardize how firms present their accounting data to the public across countries.
What is ‘soft power’ in the context of international cooperation?
Soft power is the ability of a country to influence other countries without using or threatening force, often through cultural exchange and strong legal and ethical institutions.
How can cultural factors influence a country’s level of cooperation?
Cultural factors, such as historical emigration patterns or a shared language, can be another inf luence on a country’s level of cooperation. Among these cultural factors are a country’s formal and informal institutions, such as laws, public and private organizations, or distinct customs and habits. Strong and stable institutions can make cooperation easier for state and nonstate actors.
Globalisation
Globalization refers to the long-term trend toward worldwide integration of economic activity and cultures.
Nationalism
In contrast to globalisation, nationalism refers to a nation pursuing its own economic interests independently of, or in competition with, the economic interests of other countries.
Globalisation to Nationalism Spectrum
In general, countries that are closer to the globalisation end of the spectrum are those that more actively import and export goods and services, permit freer movement of capital across borders and exchange of currencies, and are more open to cultural interaction.
Autarky
Autarky (noncooperation and nationalism) refers to a goal of national self-reliance, including producing most or all necessary goods and services domestically. Autarky is often associated with a state-dominated society in general, with attributes such as government control of industry and media.
Hegemony
Hegemony (noncooperation and globalization) refers to countries that are open to globalization but have the size and scale to in fluence other countries without necessarily cooperating.
Bilateralism
Bilateralism (cooperation and nationalism) refers to cooperation between two countries. A country that engages in bilateralism may have many such relationships with other countries while tending not to involve itself in multicountry arrangements.
Multilateralism
Multilateralism (cooperation and globalisation) refers to countries that engage extensively in international trade and other forms of cooperation with many other countries.
Regionalism
Kind of multilateralism: Some countries may exhibit regionalism, cooperating multilaterally with nearby countries but less so with the world at large.
Portfolio Investment Flows
Nonstate actors buying and selling foreign securities
Foreign Direct Investment
Nonstate actors owning physical production capacity in other countries
Why might nonstate actors engage in globalisation even though their governments may not?
- Businesses may look outside their home country for opportunities to increase prof its, reduce costs, and sell to new markets.
- Investors may seek higher returns or diversi fication by investing outside their home country.
Goals of IMF
International Monetary Fund goals:
- Promoting international monetary cooperation
- Facilitating the expansion and balanced growth of international trade
- Promoting exchange stability
- Assisting in the establishment of a multilateral system of payments
- Making resources available (with adequate safeguards) to members experiencing balance of payments diff iculties
Goals of World Bank
- Fight Global Poverty: Focused on reducing poverty worldwide.
- Promote Sustainable Development: Aims to ensure long-term, inclusive growth.
- Provide Financial Assistance: Offers low-interest loans, interest-free credits, and grants to developing countries.
- Support Various Sectors: Invests in education, health, infrastructure, public administration, financial development, agriculture, and environmental management.
- Operate Through Two Institutions:
1. International Bank for Reconstruction and Development (IBRD): Assists middle-income and creditworthy poorer countries.
2. International Development Association (IDA): Targets the world’s poorest countries. - Facilitate Knowledge Sharing: Provides technical assistance and capacity building in both public and private sectors.
Goals of World Trade Organization
- Primary Role: Manages global trade rules to ensure trade flows smoothly, predictably, and freely.
- Dispute Settlement: Handles trade disputes by interpreting agreements and ensuring conformity with trade policies, reducing the risk of political or military conflict.
- Multilateral Trading System: Operates based on WTO agreements, which are negotiated, signed, and ratified by member countries.
- Legal Framework: Provides legal ground-rules for international commerce, ensuring important trade rights and binding governments to agreed trade policies.
Geopolitical Risk
Geopolitical risk is the possibility of events that interrupt peaceful international relations.
3 types:
- Event Risk
- Exogenous risk
- Thematic risk
Event risk
Event risk refers to events about which we know the timing but not the outcome, such as national elections.
Exogenous Risk
Exogenous risk refers to unanticipated events, such as outbreaks of war or rebellion.
Thematic risk
Thematic risk refers to known factors that have effects over long periods, such as human migration patterns or cyber risks.
Forecasting the effect on investments of a geopolitical risk
Geopolitical risk affects investment values by increasing or decreasing the risk premium investors require to hold assets in a country or region. To forecast the effect on investments of a geopolitical risk, we need to consider its probability (likelihood), the magnitude of its effects on investment outcomes (impact), and how quickly investment values would re lect these effects (velocity).
How does cooperation and globalization impact the likelihood of geopolitical risk?
Countries that are more cooperative and globalized tend to have a lower likelihood of risks like armed conflict but a higher likelihood of risks like supply chain disruptions.
What is the significance of high-velocity geopolitical risks?
High-velocity risks are short-term and can have rapid effects on financial markets and investment values, requiring quick responses, especially from investors with short time horizons.
What is Black Swan Risk?
Black Swan Risk refers to low-likelihood exogenous events that have substantial short-term effects, often unexpected and difficult to predict.
How do medium-velocity geopolitical risks affect companies?
Medium-velocity risks can increase costs or disrupt production processes, impacting specific companies or industries.
Why is analyzing low-velocity risks important for long-term investors?
Low-velocity risks often impact companies in the “environmental, social, and governance” (ESG) realm, which can have significant long-term effects on investments.
What are exogenous risks?
Exogenous risks are external factors that can cause high-velocity effects on financial markets and investments, often unexpected and outside the control of the impacted entities.
Tools of geopolitics
the means by which (primarily) state actors advance their interests in the world, as falling into three broad categories of national security, economic, and financial.
National security tools
may include armed con lict, espionage, or bilateral or multilateral agreements designed to reinforce or prevent armed con lict. We can say a national security tool is active if a country is currently using it or threatened if a country is not currently using it but appears likely to do so. Armed conf lict affects regions and economies by destroying productive capital and causing migration away from areas of conf lict.
Economic tools
Economic tools can be cooperative or noncooperative. Examples of cooperative economic tools include free trade areas, common markets, and economic and monetary unions (each of which we describe in our reading on international trade and capital lows). Examples of noncooperative economic tools include domestic content requirements, voluntary export restraints, and nationalization (i.e., the state taking control) of companies or industries.
Financial tools
Financial tools include foreign investment and the exchange of currencies. We can view countries as using these tools cooperatively if they allow foreign investment and the free exchange of currencies, or noncooperatively when they restrict these activities.
Sanctions
Sanctions, or restrictions on a specific geopolitical actor’s financial interests, are a financial tool that state actors may use alongside national security tools.
impact of geopolitical risk on investments.
- Because analyzing geopolitical risks requires effort, time, and resources, investors should consider whether the impact of geopolitical risk is likely to be high or low, and focus their analysis on risks that could have a high impact. - With regard to those risks, investors should determine whether they are likely to have discrete impacts on a company or industry or broad impacts on a country, a region, or the world.
- Business cycles can affect the impact of geopolitical risk, in that these risks may have greater impacts on investment values when an economy is in recession than they would have during an expansion.
How to gauge the potential effects of geopolitical risks?
Investors can use qualitative or quantitative scenario analysis to gauge the potential effects of geopolitical risks on their portfolios. To help identify geopolitical risks over time, investors may identify signposts, or data that can signal when the likelihood of an event is increasing or decreasing, such as volatility indicators in inancial markets.
What is the focus of traditional economic models of trade?
Traditional models focus on gains from countries specializing in producing goods where they have a comparative advantage and trading them, which increases total output and wealth for both countries.
What factors create comparative advantage in trade?
Comparative advantage results from differences in technology and resource endowments across countries.
What do newer models of trade emphasize?
Newer models emphasize gains from economies of scale, increased variety of goods, improved competition, reduced costs, and more efficient allocation of resources.
How does free trade benefit consumers in the context of monopolies?
Free trade reduces the pricing power of domestic monopolies by increasing competition, which can lower prices for consumers.
How can free trade impact wages and employment in a country with higher labor costs?
Free trade can decrease wages and employment in domestic industries, especially in labor-intensive sectors, potentially increasing income inequality.
How can international trade affect consumers in monopolistic competition markets?
International trade can provide consumers with a greater variety of goods and lower costs through specialization, even in markets with differentiated products like automobiles.
What are some costs associated with free trade?
The costs include job losses in importing industries, increased economic inequality, and potential price increases in exporting countries.
What is the general economic argument for the gains from trade?
The overall gains from trade are considered greater than the losses, especially in the long run, where gainers could theoretically compensate the losers, benefiting both importing and exporting countries.
Arguments for Trade Restrictions
- Infant Industry
- National Security
- Protecting Domestic Jobs
- Protecting Domestic Industries
- Retaliation for foreign trade restrictions
- Government collection of tariffs (taxes on imported goods
- Countering effects of government subsidies paid to foreign producers
- Preventing foreign exports at less than their costs of production (Dumping)
