Exam 2 study guide

Question 1

Comparative Advantage

Answer 1

when states specialize in producing goods which they are the best at producing (cheapest) and trading with other states for what they produce the best

Question 2

Import Substitution

Answer 2

trade and economic policy which prioritizes domestic productions and reduces foreign dependency/imports
placed trade barriers to reduce foreign imports and then focus on domestic production which was subsidized by the government
Lat. Amer. Countries adapted ISI policies in the 1930s
can lead to loss in Total Factor Productivity (TFP) through misallocation of resources

Question 3

ISI was implemented in these 5 economic areas:

Answer 3

1. trade policy
2. exchange rate policy
3. financial repression/ targeted lending
4. state-owned enterprises
5. multinational corporations

Question 4

Protectionism

Answer 4

policy of protecting domestic industries against foreign competition
ex: trade tariffs, subsidies, import quotas

Question 5

Washington Consensus/Neoliberalism

Answer 5

A strategy for economic development that calls for free trade/markets, balanced budgets, privatization, free trade, and minimal government intervention in the economy
Neoliberalism: Economic principle that places high importance on free markets, defends the concentration of wealth and unequal distribution of property, and natural resources, and rejects the welfare state. Basically it’s the opposite of liberalism. Derived from classical liberalism.

Question 6

Tariffs/Non-Tariff Barriers

Answer 6

Taxes on imports
NTBs:
-Voluntary Export Restraints
-Administrative requirements, such as customs procedures

Question 7

Loan Conditionality

Answer 7

often applied to bail-out loans and debt relief
IMF has conditionality on its loans (mainly to LDCs)
sometimes includes that a country:
1) accept a high interest rate
2) accept lower prices for labor
3) devalues their currency

Question 8

Free trade

Answer 8

international trade with no tariffs or barriers
Keynes said 3 things about free market:
1) inherently volatile
2) large scale unemployment can develop
3) gov. intervention required (thru aggregate demand) to fix unemployment rate

Question 9

World Bank

Answer 9

focuses on ending extreme poverty and promoting economic development through loans, interest-free credits, grants, and advice to govs. and businesses in developing countries
uses loan conditionality, often promoting free market reforms

Question 10

International Monetary Fund

Answer 10

Created by Keynes as a last resort lender to bail out member countries- 189 members
uses loan conditionality= “structural adjustment programs” such as:
trade liberalization, privatization of state-owned businesses, & budget cuts thru tight fiscal policies

Question 11

GATT/WTO

Answer 11

The General Agreement on Tariffs and Trade: the predecessor to the World Trade Organization (WTO), was active under that name from 1947 until 1994, when WTO was founded
The only global international organization dealing with the rules of trade between nations
1. It administers WTO agreements
2. It provides a forum for trade negotiations
3. It handles trade disputes
4. It monitors national trade policies
5. It provides technical assistance and training for developing countries
6. It facilitates co-operation with other international organisations

Question 12

Effects of Cold War on Economic Development

Answer 12

• In the 1990s the United States pushed Latin American nations to introduce neo-liberal reforms that opened economies to greater foreign investment
• Two systems that were involved were the socialist/communist system and the free market (or mixed). AKA The US against USSR
• Due to the competition it led to wars that caused real economic development to come to a standstill
• The strategies that the Marshall Plan had brought were linked to containment as it gave the incentive to go against communism and the USSR.

Question 13

Marxism/Communism

Answer 13

a political theory derived from Karl Marx, advocating class war and leading to a society in which all property is publicly owned and each person works and is paid according to their abilities and needs

Question 14

Socialism

Answer 14

Economy based on government controlling what can be sold and distributed (aka seizing the means of production).

Question 15

Free Market

Answer 15

the prices for goods and services are determined by the open market and consumers and is free from any intervention by a government, price-setting monopoly, or other authority

Question 16

Liberalism

Answer 16

Classical Liberalism: Political ideology based on the importance of liberty and freedom. Promotes equality and upholds the democratic process and the welfare state.

Question 17

Capitalism

Answer 17

• economic system driven by profit

- based on completely free market and no government control

Question 18

Colonialism

Answer 18

Colonialism is the practice of exploiting LDCs for profit which has these countries producing mass volumes of resources yet no income flow through which does not allow for suitable economic development

Question 19

Keynesianism/Mixed-economy

Answer 19

• Economy based on the mixture of free market and government control this is the most common, and successful, type of economy.
• most common economic system around the world

Question 20

Mercantilism

Answer 20

States controlling trade, often protecting home markets while seeking to sell products abroad, so as to gain as much profit and power as possible

Question 21

Trade

Answer 21

Trade is the export and import of resources and products. Economies trade with each other to encourage economic development. Imports are products that are purchased and brought in from a foreign economy while exports are products that are sold and sent to other economies.

Question 22

Export Promotion

Answer 22

Direct export subsidies, or paying local producers for their exports
usually connected to Protectionism which emphasizes minimizing imports

Question 23

Foreign aid

What is it? Why? WHO gives HOW much?

Answer 23

economic assistance- any form of aid related to such areas as health, education, economic development, or disaster relief
security assistance- weapons procurement, counterterrorism, battling the drug trade, or ongoing military operations

Question 24

Subsidies

Answer 24

direct government payments to domestic producers, often to increase their competitiveness in the global market

Question 25

characteristics of LDCs

Answer 25

• Almost all the world’s LDCs are in these regions and the legacies of racism, slavery, conquest, mercantilism, and colonialism clearly played a major role in how each developed—politically, economically, and socially.
• Most developing states have used a form of mercantilism (protectionism) in that pursuit
• Poverty, inequality, corruption, disease, discrimination, pollution, and other challenges are often highly prevalent in LDCs

Question 26

SAPs (structural adjustment policies)

Answer 26

-Requirements the WB and IMF use to let countries borrow
-including trade liberalization, fiscal responsibility, and privatization, de-regulation
Consequences:
-developing countries lost their economic sovereignty
-often leave loans extremely hard to pay back keeping LDCs in a cycle of debt

Question 27

Microlending and its effects

Answer 27

-lending to poor people, particularly women, who were ignored by the commercial banking system because they lacked any sort of collateral
-empowers poor by giving them access to capital
Critiques:
-recipients often cannot make the most out of their loans because they lack basic business skills
-Others hold that the loans are so small that they trap women into trading petty goods
-local borrowers sometimes sell similar products, leading to redundant local enterprises that drive down everyone’s profits.

Question 28

Economic Indicators that measure Development

Answer 28

GDP Growth- The annual rate of change in nominal Gross Domestic Product (Constant Prices)

Question 29

ISI was implemented in these 5 economic areas:

Answer 29

1. trade policy
2. exchange rate policy
3. financial repression/ targeted lending
4. state-owned enterprises
5. multinational corporations

Question 30

Foreign Portfolio Investment (FPI)

Answer 30

when people move their money to other countries (investing through stocks and bonds)

Question 31

Foreign Direct Investment

Answer 31

the purchase of productive assets (ex: oil fields, hotels, etc)

Question 32

Fair Trade

Answer 32

organized social movement, market based approach, helps producers in developing countries make better trading conditions, promotes sustainability, higher prices too producers and improved social and environmental standards