Exam 2

Question 1

Markets

Answer 1

Interaction between forces of supply and demand

Question 2

Property

Answer 2

Ownership of goods and services

Question 3

public goods

Answer 3

goods provided or secured by the state that are available for society and are indivisible (i.e., not privately owned )

Question 4

social expenditures

Answer 4

State provision of public benefits; •Redistributive power placed in hands of state (social expenditures provided by the state to those who find themselves in circumstances where they require greater care)

Question 5

monetary policy

Answer 5

one way a state can foster growth and stimulate economic transactions

Question 6

central banks

Answer 6

institutions that control money supply and the cost of borrowing money; lower interest rates to stimulate the economy

Question 7

Extra Info

Answer 7

•Money is a medium of exchange, a form of IOU; legitimacy backed by the state since modern money has no intrinsic value (person accepts $ because she knows that others will accept them in return)
•(increase borrowing and spending); will decrease savings (less interest earned) → increases the amount of money active in the economy
–An interest rate below inflation will discourage saving and promote investment, as the interest rate does not keep pace with inflation, meaning the value of the money on deposit is eroded.
•Increase interest rates (decrease borrowing and spending, increase savings; higher interest rates = more earnings on savings) → decreases the amount of money active in the economy, thereby slowing economic growth

Question 8

Inflation

Answer 8

Prices begin to rise and money loses value; too much money chasing too few goods (an imbalance of supply and demand)

Question 9

o Hyperinflation

Answer 9

inflation that is 50% a month for more than two months; typically occurs when governments are short of tax revenues and begin to simply print money to pay for its own expenditures. (slide 12/89)

Question 10

Deflation

Answer 10

when too many goods are chasing too little money; tight control of money supply (high interest rates) by the central bank may lead to high rates of unemployment and low rates of economic growth

Question 11

Stagflation

Answer 11

the inflation rate and the unemployment rate are persistently high.
Difficult economic condition for a country, because when inflation and economic stagnation (i.e.., slow economic growth) are occurring simultaneously, a policy dilemma results since central bank actions that are meant to assist with fighting inflation might worsen economic stagnation and vice versa.

Question 12

Regulations

Answer 12

rules or orders that set the boundaries of given procedure

Question 13

o Trade regulations (and specific types – tariffs, quotas, non-tariff regulatory barriers)

Answer 13

Can influence the degree of competition and access to goods within their own country by determining what foreign goods and services may enter the domestic market – Non-tariff regulatory barriers (NTBs) = health, safety, packaging, and other restrictions to protect domestic consumers

Question 14

Absolute advantage

Answer 14

a country has a higher (absolute) productivity or lower cost in producing a commodity compared to another country

Question 15

o Comparative advantage (the correct definition, as defined by David Ricardo-in the hand out; not the one O’Neil provides) -

Answer 15

free trade can benefit all countries as long as there were differences in relative advantage; Properly conceived, then, comparative advantage refers to an ability of a country to produce a product with the highest relative efficiency given all the other products that could be produced in that country; advantage helps explain how trade can create value for both parties even when one can produce all goods with fewer resources than the other.

Question 16

political economic systems

Answer 16

actual relationships between political and economic institutions in a particular country, and the outcomes these systems create; Classified into 4 broad types: liberalism, social democracy, communism, or mercantilism; Political-economic systems can be seen as the attempt to realize an abstract ideology in the form of real economic institutions and policies.

Question 17

liberalism/laissez-faire capitalism (focus on characteristics in bold and green); you should also be able to say something about the outcomes of development – see maps on GDP, PPP, Gini, etc.)

Answer 17

Weak state that intervenes only when crises arise; Limited public goods; located only in critical areas such as defense or education to limit “free riding” and to encourage individual responsibility.
o Inequality and unemployment should be accepted as an inevitable, even desirable, parts of market flexibility. •Low taxation and free trade should be encouraged to stimulate competition and innovation. •Limited regulations on domestic and foreign products; the “invisible hand” will sort it out. •Under these conditions, gross national economic growth will be maximized, people will enjoy the greatest amount of personal and political freedom
o social democracy (focus on characteristics in bold and green); you should also be able to say something about the outcomes of development – see maps on GDP, PPP, Gini, etc.) - •Attempts to balance individual freedom and collective equality; rejects Marxist belief in violent, revolutionary approach to create equality
Advocates a relatively strong state. A state is seen not as a threat to society or economy, but as a creator of social rights (“positive freedoms”), which would be otherwise lost in the vicissitudes of the market. •Accepts private property and markets but seeks to regulate. (System is participatory) •Taxes tend to be higher than in laissez-faire states in order to provide more social welfare and to redistribute wealth from the rich to the poor. Unemployment benefits more generous; jobs are highly regulated

Question 18

Neo-corporatism

Answer 18

common economic and political arrangement prevalent in social democratic states

Question 19

Communism

Answer 19

Emphasis on collective equality over individual freedom; State capacity and autonomy must be very high; in practice, communist states exhibit extremely high autonomy, but often lack needed capacity; Private property and unrestrained markets are viewed as instruments of exploitation. Supply and demand are both based on what the country sets out. Total state ownership of economic assets in return for extensive welfare; Market forces eliminated; economic decision making is entrusted entirely to the state bureaucracy (central planning)

Question 20

Central planning

Answer 20

Central planning of the economy is necessary to make it efficient
State makes all major decisions regarding the production and distribution of goods/services; Central planning is extremely complex for modern society → inefficiency, lack of comparative advantage, failure to innovate, poor work performance; Taxation takes an indirect form through fixed prices and wages; economic profits produced by firms go to the state to pay for public expenditures
•Regulations tend to be weaker, since the state would wind up regulating itself.
•International trade is highly restricted; the only imports are those the state deems necessary that cannot be produced domestically. Unemployment is eliminated and labor is allocated by the state

Question 21

Mercantilism/Statist (focus on characteristics in bold and green); you should also be able to say something about the outcomes of development – see maps on GDP, PPP, Gini, etc.)

Answer 21

De-linked from any particular ideology; predates modern ideologies; associated with earlier empires; Modern mercantilism sometimes associated with fascism; Can be found today in non-democratic and democratic settings; Japan, South Korea, Taiwan, India, and many other developing countries; State views market as a source of national power in the international affairs; little concern for individual rights or collective equality;Friedrich List is the “father” of the modern mercantilist theory; Argued that national economic power is an instrument to serve the needs of the state, not the public; Economic weakness, in List’s view, undermines national sovereignty.
–Mercantilists reject classical ideas of the invisible hand as the regulator of the marketplace. Self-interested individuals cannot be relied on to do what is best for the society or the state as a whole – self-interest does not support the national interest.
–Gives the government a central role in economic development through partial or full state ownership of industries that are considered critical.
–Directs the economy toward certain industries and away from others through the use of subsidies, selective taxation, import tariffs, and other regulations.
–Limits social expenditures and therefore keeps taxation to a minimum (i.e., small welfare state – benefits of economic development do not necessarily spread to the mass public).
–Promotes investment and borrowing with low interest rates
GDP- total production in a country, irrespective of who owns it.

Question 22

GDP nominal

Answer 22

l

Question 23

GDP power purchasing parity

Answer 23

l

Question 24

Gini coefficient

Answer 24

l

Question 25

Human Development Index

Answer 25

Emphasis on poverty/development over inequality; not focused on wealth, but rather on the outcome of that wealth; Includes per capita GNI (gross national income), literacy/educational attainment, and life expectancy at birth
–GNI = total value produced within a country (i.e. its GDP), together with its income received from other countries (notably interest and dividends), less similar payments made to other countries.

Question 26

Life satisfaction/Happiness Index

Answer 26

General satisfaction with one’s life; Current research suggests that Easterlin paradox is not borne out by the data

Question 27

Easterlin paradox

Answer 27

happiness stagnates or even declines above certain economic threshold (i.e., happiness is relative; once a certain threshold is reached, happiness levels off). Wealthy countries with lower Gini coefficients (lower inequality) show higher levels of happiness than those that are more unequal

Question 28

Daron Acemoglu

Root Causes: A Historical Approach to Assessing: the Role of Institutions in Economic Development

Answer 28

•“The two main candidates to explain the fundamental causes of differences in prosperity between countries are geography and institutions.”
•“Good institutions have three key characteristics: [1] enforcement of property rights for a broad section of society, so that a variety of individuals have incentives to invest and take part in economic life; [2] constraints on the actions of elites, politicians, and other powerful groups, so that these people cannot expropriate the incomes and investments of others or create a highly uneven playing field; and [3] some degree of equal opportunity for broad segments of society, so that individuals can make investments, especially in human capital, and participate in productive economic activities.”
•“The former European colonies that are relatively rich today are those that were poor before the Europeans arrived.”
•What explains this? Institutions! “Historical evidence suggests that Europeans indeed pursued very difference colonization strategies, with very different associated institutions, in various colonies.”
At one extreme, Europeans set up exclusively extractive institutions -> These institutions neither protected the property rights of regular citizens nor constrained the power of elites
•“At the other extreme, Europeans founded a number of colonies where they created settler societies, replicating – and often improving – the European form of institutions protecting private property… The settlers in these societies also managed to place significant constraints on elites and politicians, even if they had to fight to achieve this objective.”
What the evidence shows instead is that geography neither condemns a nation to poverty nor guarantees its economic success. There is no reason to think that societies will naturally gravitate toward good institutions.
•“This perspective implies that a potential change from dysfunctional and bad institutions toward better ones that will increase the size of the social pie may nonetheless be blocked when such a change significantly reduces the slice that powerful groups receive from the pie and when they cannot be credibly compensated for this loss.” (path dependence)
•“European colonists… chose good institutions when it was in their interests to do so, when they would be the ones living under the umbrella of these institutions.” In almost all cases, we can link the persistence of extractive institutions to the fact that, even after independence, the elites in these societies had a lot to lose from institutional reform (universally applicable)
•“Institutional change will happen either when groups that favor change become powerful enough to impose it on the potential losers, or when societies can strike a bargain with potential losers so as to credibly compensate them after the change takes place or, perhaps, shield them from the most adverse consequences of these changes.”(in the real world, this is what happens)

Question 29

liberal democracy

Answer 29

When individual freedom is favored over collective equality

Question 30

o Robert Dahl’s 8 criteria for democracy (know what each criterion means; this may also be a list-style SE question)

Answer 30

1. Inclusive citizenship- citizenship is open to all residents in the country
   
   2. Rule of Law – a condition in which the public and those in power respect and abide by the rules and norms of the democratic regime
   3. Freedom of Expression –
   4. Equality in Voting –
   5. Free and Fair Elections- all citizens have the right to compete for elective office and government officials are chosen in frequent and fair elections; i.e., electoral democracy
   6. Citizen Control of the Agenda – citizens ultimately decide the policies of the country
   7. Freedom of Association - citizens have the right to form and join organizations, including political parties and interest groups
   8. Civilian Control over the Military - armed forces and police must be politically neutral and controlled by a civilian authority

Question 31

Origins can be traced back to 1215 in England and the signing of Magna Carta. Why England?

Answer 31

1. England enjoyed relatively early unification and the defensive benefits of being an island. The need to maintain a large army to defend and unify the country was much lower than for land-locked European states. 2. –This lower need for an army meant that the state did not have to extract great amounts of revenue from the people in the form of high taxes, which further reduced the need for a strong coercive force. 3. –England’s position as an island also meant that economic development was strongly linked to international trade, which helped generate a larger middle class and provided for state revenues through port taxes. 
–Trade provided an easier means for the state to gain income and lessened the need to forcibly extract taxes from the people. –This relative weakness of the English state helped foster individual freedom through the assertion of civil liberties and economic rights.
	The rise of a middle class played a critical role in developing a public with desire and motivation to rule itself.

Question 32

Resource curse

Answer 32

Oil wealth that impedes democratization (oil rents fund repression and cooperation of society; impede industrialization and the rise of a democratically-minded middle class)
Slides 16-19(Chapter 5)

Question 33

Civil society

Answer 33

organized life outside the state

Question 34

Political Culture

Answer 34

: norms and values that shape the landscape of political activity

Question 35

Social capital

Answer 35

features of social life that enable various groups to act together more effectively to pursue shared democratic objectives

Question 36

Dual executive

Answer 36

separate heads of state and government (symbolic figurehead and head of government, ex. Constitutional monarchy)

Question 37

In federal states, bicameralism reflects the split-government nature of the state; in unitary states, bicameralism provides a “revising” chamber for legislation; •Finally, a new political system might adopt a bicameral legislative structure b/c it is the structure that its colonial “parent” had, and that structure seemed the most “normal” alternative after independence was achieved (imitation); •Typically, upper house tends to be weaker than the lower house.

Answer 37

l

Question 38

fused executive

Answer 38

the President (in a democratic government) serves as both head of state and head of government