FINAL EXAM Flashcards
current account
reflect market value of a country’s exports minus imports
capital account
reflects volume of public and private foreign direct investment, grants, and loans flowing in and out of the country
Prebisch-Singer Hypothesis
if prices of a country’s main export commodities are trending downward in the long term, that country needs to diversify their exports (into manufactures) to avoid dependence on those commodity exports
comparative advantage
a good for whose production in a specific country is at a lower opportunity cost than any other goods which could be produced in that country
specialization
countries should specialize in export of the products it can produce at the lowest relative (opportunity) cost
Ricardo and Mill’s “Static Model”
only one factor: labor
Heckscher and Ohlin’s “factor endowment theory”
two factors: labor and capital
countries should specialize in production of the good whose inputs it has the largest endowment of
countries with lots of labor should specialize in labor intensive industries (primary products) and countries with more capital should specialize in capital-intensive industries (like manufacturing)
Conclusions of the Neoclassical trade models:
all countries gain from trade
world output increases
int’l wage rates gradually equalize (promotes equality)
trade stimulates growth
Critiques of traditional trade theory
1) initial inequalities in factor endowments may be reinforced by trade according to specialization by comparative advantage (North-South models)
porter’s competitive advantage theory => dev’ing countries should focus on qualitative improvements towards technologically advanced factors of production, not only basic ones
Vent for surplus theory => opening up agrarian societies to free trade does not reallocate fully employed resources, but rather mobilizes underemployed resources
2) technology NOT fixed => many primary products that ddev’ing countries depend on have been replaced by synthetic substitutes
3) NOT perfectly competitive => large firms enjoy increasing returns to scale and then monopolize
4) governments DO play a role in trade relations (subsidies, quotas, tariffs)
5) trade is NOT balanced
6) trade gains usually do NOT accrue to nationals
factors working against primary commodity export expansion
1) low income elasticity
2) low pop. growth in developed countries
3) low price elasticity
4) international commodity agreements largely have failed
5) rise of synthetic subsitutes
6) agricultural subsidies in developed countries
Five undesirable outcomes of ISI
1) protection of infant industries is inefficient and costly
2) foreign firms are the biggest beneficiaries
3) subsidization of imported capital goods created balance of payments defecits
4) overvaluation of exchange rates hurts exports
5) does not stimulate self-reliant integrated industrialization
nominal rate of protection
tariff as a percentage of the initial commodity price w/o it
effective rate of protection
measures difference in value added between domestic and world prices
EFFECTIVE RATE USUALLY FAR EXCEEDS NOMINAL RATE
four arguments for tariff protection
1) easy govt revenue
2) helps balance of payment issues
3) foster industrial self-reliance
4) greater control over economic destiny
dual exchange rates
overvalue exchange rate for capital good for import, and keep a lower exchange rate for luxury consumer goods that they’re trying to replace
devaluation
helps ameliorate balance of payments deficits!!!
arguments for efficiency of Export oriented industrialization + problems
1) government intervention can prevent market failures
2) export expansion can facilitate technology transfers
3) “learning by doing”
4) performance is rigorously tested when firms intend to export
5) export targets are more visible, problems are more mangaeable
6) specializing in goods popular in high income countries will lead to higher incomes => you are what you produce!!
problems:
1) question of govt competence and authority
2) gray areas between govt and WTO regulations
trade diversion
trade blocs divert trade from a more efficient outsider towards themselves
Taiwan
1) emphasis on education
2) extensive infrastructure development
3) thorough land reforms
4) high savings rates
5) absorbed commercial ideas from US and Japan
6) first decade ISI and then switched to EOI
success comes form gov’t intervention, NOT the market
current account
export - imports + investment -debt service + remittances
capital account
private FDI + loans by private int’l banks - foreign assets in domestic banking system - resident capital outflow
basic transfer
(d-r)D
if d > r, BT is positive, Forex gains
if d < r, BT is negative, Forex loss
1980s Debt Crisis
1973 oil embargo -> high prices paid for oil go back to OPEC countries as “petrodollars” -> petrodollars deposited in US and European commercial banks bc low demand from developed countries -> banks lend aggressively to developing countries (dev’ing countries were reluctant to borrow from IMF bc of structural adjustment) -> led to excessive borrowing, excessive debt servicing obligations -> developing countries had two options: curtail imports and adopt restrictive fiscal measures, or finance their current account deficits via more external borrowing
four components of IMF stabilization
1) liberalization of trade
2) devaluation of official exchange rate
3) stringent domestic anti inflation program
4) open up the economy to commerce
