Exam 1 Flashcards
What is political economy?
The study of how governments affect economic relations and how economic performance affects politics. The belief that domestic and international economy affects politics at home and abroad
What is the international political economy?
A subfield in IR and political economy studying trade, the international monetary system, MNCs, and economic development
What is economics?
Rational behavior to satisfy one’s needs given limited resources
What are interests?
The goals pursued by political actors
What are institutions?
The definers of the rules of the game actors play
What is political process?
The result of the interaction between interests and institutions
When was the first wave of globalization?
1840s-1860s, at the repeal of the Corn Laws and the 1st PTAs and gold standard
When was the Bretton Woods regime?
WWII-1971
What is mercantilism?
A theory of economic power developed by Jean Baptiste Colbert, Louis XIV’s finance minister (1665-1683) that says economic power equals national power, exports increase national wealth and power, and some sectors of the economy are more important sources of national power than others
What is realism?
A theory of economic power that proposes an anarchical international system, with international politics as a zero-sum game
What is classical liberalism?
A political philosophy which believes in free markets and little government intervention in economic and private lives of the people; government is coercive, thus there should be as few rules as necessary; the role of the government is to ensure fair competition and proper functioning of the market
Who helped develop classical liberalism?
Adam Smith (Wealth of Nations, 1776), David Ricardo (Principles of Political Economy and Taxation, 1817), and John S. Mill (Principles of Political Economy, 1848)
What was Adam Smith’s economic theory?
The invisible hand was an idea that in order to satisfy their specific needs, people produce economic surplus and allocate goods in the most efficient way, collective good is the welfare of the nation, division of labor generates value, free exchange is fundamental for productive economic activity because it guarantees efficient distribution, the market self regulates: individual hardship will force inefficient agents to re-allocate productive force to alternative use, markets never fail, individuals do
What did Adam Smith believe was the state’s role in the economy?
Concept of natural liberty of an individual, three duties of a state: protection from violence, protection from injustice and oppression, public works and other public institutions which are in the interest of society
What is the Labor Theory of Value (Smith, Ricardo, Marx)?
Inputs and outputs are linked by labor process, because the division of total labor of society is allocated for the production of different goods, the price of goods is measured in its worth relative to other goods, and the price of goods equals the ratio of the amounts of labor used in their respective production, the price of labor is set by the cost of subsistence, and labor is a source of added value and accumulated profit
What is marxism?
Since in the Labor Theory of Value, profits are uncompensated labor, profits accumulate over time as capital, while labor is the source of economic value. Economic/political power, however, is concentrated in the hands of capitalists, leading to more intensive use of labor (exploitation). Unequal distribution of resources is perpetuated by the repressive state apparatus.
What is Marx’s socio-economic developmental stages?
Tribal-Slavery-Feudalism-Capitalism-Socialism-Communism (or skip socialism and go straight to communism)
What is Marx’s class conflict?
Surplus belongs ti the owners of the means of production, and any way of maximizing surplus are economically costly to labor (maximize labor productivity or minimize wages), meaning that production and labor are diametrically opposed
What is a market failure?
Conditions that prevent the free exchange and efficient resource distribution
What is the Pareto optimum?
A condition in which the distribution of resources at which no further exchange will increase overall social welfare, is indifferent to pattern of resource allocation, related to Rational Choice Theory
What are the types/sources of market failure?
Negative and positive externalities (overproduction/underproduction, due to lack of clear property rights), under-provision of public goods, monopolies and oligopolies (prevents free competition, due to natural tendency to eliminate failing competitors that leads to survival of few)
What are the implications of efficiency and market failures?
Market is the most efficient way to allocate resources, and governments ensure effective functioning of the market and correct market failures (externalities: fines and subsidies to increase efficient allocation, public goods: providing and enticing free riders to contribute, monopolies: government regulations to ensure markets don’t destroy themselves), overall REGULATORY government
Why does trade benefit all parties?
Because international trade is driven by mutually beneficial exchange, it improves welfare of all parties
What is PPF?
Production tradeoff between two goods under fixed technology and resources
What is comparative advantage?
Relative cost advantage win producing a good vs any given alternative
What are factors of production?
Basic elements of production process. Land, labor, and capital.
What do factor endowments mean for a state?
Relative scarcity of some factors, contributing to a relative disadvantage in producing products that require extensive use of scarce resources. Abundant factors lead to comparative advantage in products that require extensive use of such factors.
What is the factor theory?
Social classes are defined by peoples’ relationship to the factors of production
Why does specialization happen and what does it do?
Comparative advantage and it leads to shifting production of abundant factor goods
Why does the factor theory say that there is class antagonism?
The owners of abundant factors benefit from trade and lower prices of the domestically scarce factor. Owners of the scarce factor are hurt, leading to factor conflict and class antagonism
What is factor mobility?
How much factors can be transferred to another use without cost. Specific factors cannot be employed for alternative production. Resources are rarely fully mobile or fully specific
What does the sector model say?
Resources are industry specific, meaning they cannot be redeployed to sectors that benefit from trade, reducing the gains from specialization.
What does the sector model imply about trade conflict?
Both workers and owners win from liberalization in sectors with comparative advantage and are disadvantaged by liberalization in scarce factor sectors.
What are interest groups?
People who share a common preference. Latent- when people share the preference but do not know/act upon it. Organized- pressure groups that try influencing public policy at different levels of government
What is the pluralist theory of political process?
Interest groups link societal interests to the realm of politics/government
What is the collective action problem?
It is irrational for self-interested actors to join common cause groups. It can be solved through group size/concentration, collective goods, free riding, selective incentives, external enforcement, and political entrepreneurship
What is an export oriented sector?
A sector that is in a state’s comparative advantage, a winner from free trade
What is an import competing sector?
A sector that is not in a state’s comparative advantage, a loser from free trade
What is the electoral system?
Rules that govern elections, often are responsible for the number and power of political parties
What is the difference between majoritarian systems and proportional systems?
Majoritarian systems promote sectoral interests while proportional systems promotes general interests
What are veto players?
Political actors whose support is necessary to change the status quo
What is the state-centered critique of free trade?
Firms and sectors are located in countries, and those states want to maximize revenue (taxes), which depends on profit, # of firms, #of employed workers. States that host world monopolies benefit from their rents (incomes based on market position, not efficiency).
How does the state fundamentally affect society?
States organize, suppress, or promote social coordination, cooperation, or conflict
What objectives does a state pursue?
The need to generate revenue, mobilize resources, and simplify administration (improve legibility)
What is industrial policy?
Government intervention (subsidies, tax incentives, loans, procurement, quotas, and tariffs) to promote specific national industries
What is an infant industry?
Newly created firms and sectors that might benefit from state protection against foreign competitors
What does infant industry case for protection rest on?
Economies of scale and experience
What are economies of scale?
Unit cost decreases with production volume
What are economies of experience?
Unit cost decrease overtime with greater experience
What are critiques of industrial policy?
Subsidies reduce incentives to succeed and promote risky business decisions, reduced consumer welfare, capital markets are there to take care of upfront investment, economies of experience do not exist in liquid labor markets, and loans should be used instead of subsidies
What is strategic trade theory?
Zero-sum competition between the states to host global oligopolistic firms, there is a first-mover advantage in winning the competition (economies of scale and experience), subsidies to induce the development of domestic industry in the face of established foreign competitor
What were Spanish and Portuguese colonies like?
Sociopolitical relations and agricultural economies transferred from the metropole, feudal-type land tenure: large haciendas employing forced labor, economic dependency of nominally free peasants, economic power vested in landed elites whose engagement in industry and manufacturing is tied to foreign trade, not to the development of domestic industry. Free trade is preferred by landed elites.
What was the economic dependency era in Latin America like?
Well integrated into world trade, supplying raw materials and importing manufactured goods. No significant middle class (just landed elites and marginalized poor), small manufacturing sector.
What is the comprador bourgeoisie?
Trading/industrial class that serves the interests of foreign business
What is the dependency theory?
Theory of economic development that was advanced in the 50s-70s to explain the lack of industrial development in Latin America and other developing nations
What is the Singer-Prebisch thesis?
Core-periphery relations handicap industrialization. Resource flows benefit disproportionally the core, but are favored by the periphery’s dominant economic groups, has roots in Marxism and its critiques of economic imperialism of advanced capitalist societies
What is the less radical, more structuralist variant of Singer-Prebisch?
The lack of supplementary demand and external pecuniary economies necessitates a big push led by states
What are the political aspects of dependency?
Failure of democracy, social inequality, weakness of labor movement
What is the dependency trap?
Developing countries cannot follow in the footsteps of advanced industrialized countries because of the declining terms of trade, so the state is the only force in society that can push for industrialization and end the dependency
What is import substitution industrialization?
A method of industrialization popular in Latin America in the 1930s-60s, where the states would replace foreign manufactured goods with domestically produced manufacturing
What were the methods of ISI?
Tariffs and quotas, capital controls, domestic investment, nationalization of extractive industries, and land reform in a small number of cases
What were the results of ISI?
Industrial development, accelerated urbanization, business dependency on state, lack of international competitiveness of manufactured products, loss of foreign investment
What was the success of ISI?
Creating small industry serving domestic customers, which created a small middle class
Why did secondary ISI fail at building internationally competitive large industry?
Scarcity of investment, resistance by landed elites, state capture, institutional logic on the part of the state
What was the political dimension of Latin American economic development?
Preconditions were made for modern government, and leftist ideals became popular among the masses, but the US felt threatened by democratically elected left wing governments, and removed many of them. Military regimes were supported by the US
How do military regimes come to power?
By forcefully overthrowing legitimate government, replaced by a junta, with a charismatic leader as the head of state
Whose policies do military juntas often support?
Landed elites and big business
Why did states start to adopt the Washington consensus?
After oil shocks and balance of payment crises, developing countries adopted
What were the consequences of neoliberal reforms?
Positive: Reduction of inflation, removal of wasteful subsidies, currency stability, more sustainable government finance
Negative: Unemployment, capital flight, exasperated social inequality, macroeconomic destabilization
What was the catalyst for Japanese and US increased influence?
WWI and WWII diminishing European influence
What countries did the US commit to assisting economically and having close relations with following WWII to balance China, N. Korea, and Vietnam?
Japan, S. Korea, Taiwan, Singapore, and Hong Kong
What was the wisdom of the time after the economies of Japan, Taiwan, S. Korea, Singapore and Hong Kong all grew by 10% in the 50s-70s?
Liberal economies, autocratic political regimes, and reliance on trade and open investment policies
What was the role of industrial policy in East Asian development model?
Progressive product cycle (replacing low-tech industries with high-tech industries), high domestic savings and suppression of consumption, and close relationship between the industry and the state
Why can’t other countries easily learn from E. Asian economic success?
Institutions and culture are different and cannot be replicated elsewhere, growth was time and location specific, export led growth cannot be successfully pursued by multiple countries simultaneously
What is export oriented growth?
When a state specializes in its comparative advantage in order to develop economically, while often protecting infant industries and government support of exporting industries
What are the political implications of the E. Asian economic development?
Providing evidence for “authoritarian advantage” thesis, but democratization after industrial development drastically transformed society
What is monetary policy?
Control over the supply of money
What is fiscal policy?
Control over governments budget
Why is the exchange rate system necessary?
Most countries have national currencies that are generally not accepted as legal payment outside their borders, so international trade would be impossible without it.
What is the exchange rate system?
Rules governing how much currencies can appreciate/depreciate in foreign exchange markets. Exchange is controlled by governments acting unilaterally or by international agreements/institutions
What is a fixed exchange rate system?
Governments establish and guarantee the fixed value for their currency
What is a floating exchange rate system?
Letting the market establish the values for currencies
Why is exchange rate stability important?
It guarantees price stability, though more open economies are more vulnerable to exchange rate fluctuations
What is the advantage/disadvantage of fixed exchange rates?
Exchange rate stability, but they prevent monetary policy to manage domestic economic activity
What are the advantages of floating exchange rates?
Governments can run current account deficits (borrowing more capital than they generate) and borrowed capital can help sustain high rates of consumption and growth
What is balance of payments?
National accounting device for all private and government transactions with the outside world. Consists of current account and capital account.
What does current account consist of?
Trade in goods (imports and exports), service account (imports and exports of activities like banking, insurance, transportation, and tourism), income, and unilateral transfers
What does capital account consist of?
Countries assets abroad and foreign owned assets in a country
What is balance of payment adjustments?
The process by which a country balances its current and capital accounts
How does fixed exchange rate systems achieve balance of payments adjustments?
Buying/selling currency from its own reserves
How does a floating exchange rate system maintain balance of payment adjustments?
Natural exchange rate movement in the market, depreciated currency rewards exports, and appreciated currency makes exports less competitive
What is the Unholy Trinity?
A government may only have two of the following: 1. fixed exchange rate, 2. control over its monetary policy, 3. capital mobility
What is the Gold Standard?
The system of exchange rates dominant from 1880-1913, where stabilized exchange rates existed at the price of domestic price instability. National currencies were pegged to gold. Eventually, during WWI, states emitted more money without adjusting the exchange rate, leading to the system’s downfall
What was the Bretton Woods system?
The 1959 through 1973 post-war attempt to stimulate trade and prevent destabilizing exchange rate fluctuations. The US exchange rate was placed at $35/ounce of gold, and other states exchange rates were based on USD. Members also contributed a quota to the stabilization fund of the IMF, based on the size of the economy, 25% in gold.
Why did the Bretton Woods system collapse?
The US was unable to stay on the gold standard, liquidity problems, unfair advantage to the dollar as reserve currency, speculative attacks on weak currencies, governments’ unwilling to accept domestic costs of balance of payments adjustments
What is the WTO?
The principle international trade organization today that began operation in 1995 as the successor of GATT. The organization provides a forum for trade negotiation, helping settle trade disputes and renewing national trade policies
What is a custom union?
A regional trading agreement where members eliminate all tariffs on trade between members of the union and create a common tariff that is imposed on goods entering any member country from countries outside the union
What was GATT?
An international agreement made in 1947 establishing rules that regulate national trade policies. Before the creation of the WTO, GATT provided a forum for trade negotiations, administered trade agreements, helped governments settle trade disputes
What is generalized system of preferences (GSP)?
Part of GATT where advanced industrialized countries could allow manufactured exports from developing countries enter their markets at a preferential tariff rate. An exception to the nondiscrimination principle.
What is the free riding problem?
A number of individuals is required to achieve a goal, but as people will not voluntarily invest time, energy, or money to achieving a goal, they will allow others to bear the costs. Since all members of the group act in the same way, there are insufficient resources towards the common goal
What is the nondiscrimination principle?
A principle of the WTO that ensures each member country faces identical opportunities in trade with other WTO members.
What is a non tariff barrier?
Any policy or structural impediment to trade other than a tariff. Include health and safety regulations and government purchasing. As quotas have been eliminated and tariffs removed, NTBs have become one of the top barriers to free trade
What is a tariff?
A tax imposed on foreign goods coming into a country, raising the price of the foreign good in the domestic economy of the state imposing the tariff.
What is the Stolper-Samuelson Theorem/Factor Price Equalization?
In open economies, international trade will cause the price of the factors of production to equalize. The price of each countries abundant factor will rise (as there is more demand for it when each country specializes) and the price for the scarce factor will fall. Eventually, the price of labor and capital will be the same across the two countries (in a two country system).
What is Reciprocal Trade Agreement Act?
US legislation passed in 1934 where the executive is allowed to reduce tariffs by up to 50% for equivalent concessions from the foreign government.
What is terms of trade?
Price of countries exports/price of imports
What was the Smoot Hawley Tariff Act?
Trade legislation passed in the US in 1930 that raised the average American tariff to almost 60% due to competing interests. Contributed to the collapse of world trade and monetary systems and deepened the Great Depression.
