Exam 5 Review Flashcards
globalization
the development of an icnreasingly integrated world economy marked especially by increased trade of goods and services, and increased flow of labor and capital
what 3 main things accompany globalization?
- supply and demand of goods and services
- supply and demand of factors of production: labor and capital
- growth of MNCs
Multinational Corporation
a corporation that has facilities and assets in at least one other country other than it’s home country
-other countries are often referred to as host countries
The parent operations of US MNCs accounted for what percent of GDP in 2012?
25%
American MNCs employed how much of all US workers in 2012?
1/5 or 20%
MNCs decreased domestic employment by how many million workers while adding how many million jobs overseas?
MNCs decreased domestic employment by 2.9 million workers while adding 2.4 million jobs overseas
Foreign Direct Investment
the purchase (or building) of a facility by a domestic firm in a foreign country
What reasons do MNCs have for putting factories in another country?
- it’s cheaper to make the product there and ship it back here
- you’re selling products or services or there
6 reasons for undertaking Foreign Direct Investment
- serve a foreign market
- avoid tariffs
- gain access to raw materials
- gain access to low-cost labor
- to reduce exchange rate risk
- respond to industry competition
argument for MNC’s being a race to the bottom
- countries and governments try to attract MNCs
- they say: MNCs increase employment, increase economic activity
- ergo, governments often offer tax breaks to MNCs that will locate there
- this means individuals will make up the difference in lost tax revenue
- governments might also offer MNCs relaxed environmental standards, realxed labor regulations
argument for MNCs being a race to the top
- MNCs often maximize operational efficiency often through standardization
- In countries with low environmental standards and no labor regulations, standard of MNCs may exceed required standards
- pay a lower wage than would be paid in home country, but paying a higher wage than other employment options in host country
three effects of globalization
- convergence effect
- labor effect
- mobility effect
convergence effect
increased globalization allows emerging economies to leap frog technologies
labor effect
reduced transportation and communication costs have brought hundreds of millions of lower-skilled workers into global labor pool
mobility effect
capital–tools, equipment, factories,–is much mroe mobile than labor
define “balance of payments”
a measure of our trade with other countries
what is included in the balance of payments?
goods, services, assets
who maintains the records of the balance of payments?
Bureau of Economic Analysis
what are the 3 types of accounts for balance of payments?
- current account
- financial account
- capital account
what things are included in the current account?
goods, services, income received on investments
America’s current account deficit
$475 billion
we sell McCormick vodka to Russia…what account and negative or positive?
current account, positive for US
we buy Svedka vodka from Sweden…what account and negative or positive?
current account, negative for US
US marketing firm does a research study for Mitsubishi for $1000….what account and negative or positive?
current account, positive for US
an American citizens owns a Japanese bond which pays 5% annually and costs $1000 to buy…what accounts and negative or positive?
- when he bought the bond, that transaction goes into the financial account and is a negative entry for US
- when he receives interest yearly on that bond, this goes into the current account and is a positive entry for US
financial account
purchase of assets (both hard assets and financial assets)
hard assets
foreign direct investment
financial assets
buying of bonds
US company buys a building in Tokyo…what account and positive/negative?
financial account and is a negative entry for US
Korean firm builds factory in US…what account and positive/negative for US?
financial account, positive entry for US
capital account
records of relatively minor transactions, such as migrants’ transfers and sales and purchases of nonproduced nonfinancial assets
exchange rates
the value at which one currency trades for another–can effect any country’s volume of imports and exports
nominal exchange rate
what you see in the paper
real exchange rate
adjusted for price level
currency appreciation
an increase in the market value of one currency relative to another currency
currency depreciation
a decease in the market value of one currency relative to another currency
what is on the x axis and y axis of the market for foreign exchange?
x axis: quantity of currency traded
y axis: exchange rate of other currency
what is indicated by both the demand and the supply line in the market for foreign exchange? (assume we are exchanging dollars for Yens)
supply line: supply of dollars in exchange for yen
demand line: demand for dollars in exchange for yen
what does the demand for a country’s currency depend on?
- demand for country’s goods and services
2. the demand to invest in that country (FDI or purchase of financial assets)
what four factors shift demand in the market for foreign exchange?
- tastes and preferences
- income
- prices
- interest rates
explain how income levels effect foreign exchange rates
- when income is high, we demand lots of foreign stuff
- when we demand more foreign stuff, we demand more foreign currencies
- the foreign currency gets stronger, our currency gets weaker
- when our income rises, the dollar gets weaker
when US incomes rise, the dollar gets …….
weaker
-in a recession, the dollar actually gets stronger
explain how price levels effect foreign exchange rates
- if we have inflation here at home, our own stuff is more expensive and foreign goods are relatively cheaper
- US demand for foreign currencies–like the Yen–will increase
- this strengthens the price of the demanded currency, in terms of the dollar
- inflation at home makes the dollar weaker
inflation in the US makes the dollar….
weaker
explain how interest rates effect foreign exchange rates
- if interest rates increase in England, British government bonds are paying more than US treasury bonds…bond-buyers want the best return
- the demand for British pound will increase because the demand for British bonds is higher
- as interest rates rise in the US, the dollar gets stronger
as the interest rates rise in the US, the dollar gets….
STRONGER
when the dollar gets stronger, oil prices…
go down
when the dollar gets weaker, oil prices…
go up
why do we care about exchange rates?
exchange rates can affect international trade in goods and services and international investing
when our income is high, we demand ….of other countrie’s stuff
more
when our prices are high, we demand ______ of other countries stuff
more
when our interest rates are low, we demand ______ of other countries’ investments
more
Ba-China in 6 steps.
- for a long time, exchange rate between dollar and yuan was fixed
- normally, when we demand a lot of a country’s stuff, their currency gets stronger-appreciates
- we demand a lot of China’s stuff, but China didn’t let it appreciate
- result #1: exports from China were kept artificially low-priced
- Result #2: China’s GDP grew like crazy (remember increased exports increases GDP)
- Result #3: prices were kept very low in US (inflation well under 2% annually for 20+ years)
managed float
exchange rates move within a range; government steps in to maintain range
in 2005, what did China do with its currency?
it unpegged it’s currency into something called a managed float
from 2008-2010, what did China do with it’s currency?
it re-pegged it’s currency during the financial crisis
in 2010, what did China do with it’s currency?
it unpegged it again
prices, income, interest rates are all ______ phenomena that affect exchange rates
short run phenomena
in the long run, purchasing power parity doesnt exist with regard to exchange rates because….
in the long run, the prices and exchange rates should even out
the Big Mac Index
the economist magazine publishes a Big Mac index every year saying what the exchange rate should be based on prices of Big Macs..and what actually is
most of the time, the implied exchange rate is __________ compared to the actual exchange rate
is not the same
internationally, lower interest rates make demand for dollar _________, so the dollar gets _________
weaker dollar means __________ exports and ________ imports, which _________x-m (in GDP)
decline, weaker
increased exports, decreased imports, which increases net exports
In an open economy, when the interest rate is lowered, AD moves _______
right
monetary policy has a ________ impact on AD in an __________ economy than in a _______economy
monetary policy has a greater impact on AD in an open economy than in a closed economy
when the Feds lower the interest rates, what three things are affected domestically (2) and internationally?
- domestically, consumption (in GDP) increases
- domestically, investment (in GDP) increases
- internationally, net exports increases
ALL RESULT IN AD MOVING RIGHT
fiscal policy has a _________ impact on AD in an _______ economy than in a _______ economy
fiscal policy has a smaller impact on AD in an open economy than in a close economy
in a closed economy, when government increases spending….what two things happen? in an open economy, what three things happen?
in a closed economy, G goes up but C and I go down
in an open economy, G goes up but C and I go down AND net exports goes down
why do net exports go down when government increases spending?
- the government increases spending by borrowing
- borrowing increases interest rates, so consumption and investment decrease
- the dollar gets stronger, so net exports decrease
floating exchange rate
-when did china partake in floating rates?
value of currency determined by supply and demand in foreign exchange markets
(China post 2010)
fixed or pegged exchange rates
-when did China do this crap?
currency value is maintained as constant against another currency
(China 2005-2008)
managed float
-when did China do this crap?
currency value is mainted as constant against another currency (China pre-2005) (China 2008-2010)
the gold standard
a country is backed by- or exchangeable for - a specific amount of gold
under a gold standard, size of money supply is determined by what?
the amount of gold a country has
-supply cant grow unless more gold is produced
what are the 3 main arguments for the gold standard?
- gold standard would promote price stability
- there will be less financial panics
- it would force the government to live within it’s means…it would be like giving the government a debit card instead of a credit card
argument against gold standard promoting price stability
- during the gold standard age, price levels fluctuated between -9% and +5%
- outside of the US, price levels have basically not grown or grown by only about 2 or 3% each year
argument against gold standard reducing financial panics
- financial panic of 1907: bunch of big NY banks made bad investments, investments turned out bad, stock market crashed 50%, people worried that banks lost their money. Millionaires pleged to give their own money to bring US out of the crisis
- all of this occured during the gold standard age
argument against gold standard reducing a government’s ability to borrow
- A GOVERNMENT’S ABILITY TO BORROW HAS NOTHING TO DO WITH A GOLD STANDARD
- between 1900 and 1920, our US government debt increased from $2 billion to over $25 billion on the gold standard
argument against gold standard protecting exchange rates
- it is 100% incorrect to think being on a gold standard somehow protects the value of US dollar
- if the price of gold changes, the dollar changes
- the price of gold fluctuates..sometimes down, sometimes up!
what is the main argument for people who think a gold standard is bad?
the government and central bank can’t control the money supply!
-the Stock Market Crash of 1987 could’ve completely crashed our economy, but the disaster was averted because the Feds qucikly increased the money supply…this would be impossible under a gold standard
when did the US abandon the Gold standard?
1933
Bretton Woods Standard
the US fixed their currency to the price of gold and all other world currencies agreed to fix their exchange rates against the dollar
why did the Bretton Woods standard work for a short time?
this only worked because everyone fixed their exchange rates to each other, and everyone fixed them to the dollar…eventually went away because major problems emerged after a while
purchasing power parity
the theory that in the long run, exchange rates move to equalize the purchasing powers of different currencies
what four things determine exchange rates in the long run?
- price levels
- productivity
- preferences of consumers
- barriers to trade
how to price levels determine exchange rates int he long run?
ultimately, the forces working on PPP affect exchange rates, whether or not PPP is actually achieved
how does productivity determine exchange rates in the long run?
increased productivity lowers costs, increasing demand for that good and that country’s currency
how do preferences of consumers determine exchange rates in the long run?
if consumers prefer goods from a certain country because of some stupid trend, that country’s currency will be demanded, appreciate its value
how do barriers to trade determine exchange rates in the long run?
tariff in place, less demand for goods on tariffed country, currency value depreciates
April European Union unemployment rate
10.9%
April US Unemployment rate
7.5%
before the recession, did the EU or USA have better unemployment rates?
easily the USA
what percent of EU’s GDP is services?
70%
what percent of US’s GDP is services?
78%
what percent of US citizens live below poverty?
17%
what percent of EU citizens live below poverty?
20%
what were the origins of the EU?
After WWII, Europe was destroyed and a dude named Jean Monnet had the idea of the EU
- said that if they act like one big country in regards to things like coal and steel, then another war in Europe would never happen and recovery would be quicker
- European Coal and Steel Community
whose idea was the EU?
Jean Monnet
what was the name of the initial community that led to the EU?
European Coal and STeel Community
Is the European Union Economically integrated, politically integrated, and militarily integrated?
NO, it is just economically integrated.
free trade area
goods and services flow across borders without any restrictions like taxes or quotas
-Canada and US is a free trade area
common market
goods and services flow across borders without restrictions AND inputs to production flow across borders without any restrictions (capital, labor)
Maastricht Treaty of 1991
- put into effect in 1993
- blueprint for a truly integrated economic and monetary union
- laid out plans for a monetary union–a common currency
From 1999-2002, how was the euro utilized in the EU?
prior to 1999, all currencies were pegged to the Euro
in 1999, what happened to the Euro?
euro was introduced for accounting purposes…every receipt you received, every price you saw, had two prices: one in euros and one in the other currency
when was the euro introduced as the official currency of the EU?
1-1-2002, Euro notes and coins entered circulation and the government collected all other currencies from da people
what must candidates for the EU have to join?
- a stable democratic government
2. a functioning market economy
what must candidates for the Euro-zone membership have?
- inflation rates must be low
- interest rates must be low
- budget deficit must not be too high
- debt must not be too high
(funny fact is that the last two conditions rule America out from joining)
advantages of common currency
- increased ease of doing business
- allows for economies of scale in international dealings (size=strength)
- individual countries able to borrow more cheaply
- -less risky, part of this big entitty
how do countries in the EU issue bonds?
each country has it’s own bonds in it’s own currency…there is no EU bond
Eurobond
bonds denominated in other countries currency
what is the fatal flaw of bond issuing within the EU?
technically, bonds issued from each country are considered equally risky…there is no difference in risk between each country
-this caused people to buy too many bonds from poor countries like Spain and Italy
MOST IMPORTANT POINT ABOUT EURZONE COUNTRIES
EACH EUROZONE COUNTRY HAS IT’S OWN FISCAL POLICY, but not monetary policy
-they can tax and undertake government spending by borrowing
disadvantages of common currency
countries not able to pursue their own independent monetary policies
-countries hit hard by 2007-2009 recession unable to pursue expansive monetary policy to promote growth
what does Germany have to do with the crisis in countries like Greece?
- when other countries were borrowing money, Germany was lending it
- when other countries built condos that would never be sold, Germany was building up its manufacturing sector
- when other countries GDP was growing because I was going up, Germany’s GDP was growing because X-M was rising
how is the crisis working between Germany and it’s borrowers?
they have lent other countries money, those countries defaulted on their loans, Germany gives them more money to keep paying loans, but where does this money keep coming from?
So what did Germany’s lending and countries defaulting lead to?
- there have been a series of bailouts and there will probably be more
- European countries have cut government spending
- this has increased unemployment (60% youth unemployment in Greece, all time high unemployment in Spain)
- RECESSION IN EUROZONE
implications for US regarding Eurozone recession
Europe is our largest trading parter in terms of who we export to…large US financial institutions tied to large European financial institutions
RESULT #1: another financial crisis in the US
RESULT #2: US looks like a reliable, safe-haven compared to EU
why will Germany not leave the EU?
o Germany wants to keep Euro around because if the Euro is dropped, Germany’s deutschemark will shoot up, export prices for Germany will skyrocket, Germany’s GDP is 40% exports…Germany wants to keep that Euro around
