Final Review (actual) Flashcards
Autarky
The situation of not engaging in international trade; self-sufficiency.
Factor of production
An input that exists as a stock providing services that contribute to production. The stock is not used up in production, although it may deteriorate with use, providing a smaller flow of services later. The major primary factors are labor, capital, human capital (or skilled labor), land, and sometimes natural resources.
Factor mobility/specificity
The degree to which a factor of production, such as labor or capital, is able to move, either among industries or among countries, in response to differences in its factor price, thus tending to eliminate such differences.
Opportunity cost
The cost of something in terms of opportunity foregone. The opportunity cost to a country of producing a unit more of a good, such as for export or to replace an import, is the quantity of some other good that could have been produced instead.
Comparative advantage
The ability to produce a good at lower cost, relative to other goods, compared to another country. In a Ricardian model, comparison is of unit labor requirements; more generally it is of relative autarky prices. With perfect competition and undistorted markets, countries tend to export goods in which they have comparative advantage. See also absolute advantage. Due to Ricardo (1815).
Ricardo-Viner Model
A specific factors model with a single specific factor in each industry and one mobile factor, named after two of the many who used this as the standard model of trade prior to the Heckscher-Ohlin Model. It extends the simple Ricardian Model by allowing the marginal product of labor to fall with output. It was revived by Jones (1971), Samuelson (1971), then merged with H-O by Mayer (1974), Mussa (1974), and Neary (1978).
Single factoral terms of trade
The purchasing power, in terms of the price of imports, Pm, of a country’s factors, thus accounting for both the net barter terms of trade and its own factor productivity, Ax, in production of exports: SFTT = NBTT*Ax = (Px/Pm)*Ax. Term introduced by Viner (1937).
Specific Factors Model
A model in which some or all factors are specific factors. The most common version is the Ricardo-Viner Model, with one specific factor (often capital or land) in each industry plus another factor (often labor) that is mobile between them. But an extreme form of the model, the Cairnes-Haberler Model, has all factors specific.
Specific Factor
A factor of production that is unable to move into or out of an industry. The term is used to describe factors that would not be of any use in other industries and also – more loosely – factors that could be used elsewhere but do not, in the short run, have the time or resources needed to move. See specific factors model. The term seems to come from Haberler (1937).
Heckscher-Ohlin Model
A model of international trade in which comparative advantage derives from differences in relative factor endowments across countries and differences in relative factor intensities across industries. Sometimes refers only to the textbook or 2x2x2 model, but more generally includes models with any numbers of factors, goods, and countries. Model was originally formulated by Heckscher (1919), fleshed out by Ohlin (1933), and refined by Samuelson (1948, 1949, 1953).
2x2x2 H-O Model
The Heckscher-Ohlin Model with 2 factors, 2 goods, and 2 countries.
Factor Endowment
The quantity of a primary factor present in a country. See endowment.
Factor Price Equalization
The tendency for trade to cause factor prices in different countries to become identical. Ohlin (1933) argued that trade would bring factor prices closer together. Samuelson (1948, 1949) showed formally the circumstances under which they would actually become equal.
Factor Abundance
The abundance or scarcity of a primary factor of production. Because, in the short run at least, the supplies of primary factors are more or less fixed, this can be taken as given for determining much about a country’s trade and other economic variables. Fundamental to the H-O Model.
Factor Intensity
The relative importance of one factor versus others in production in an industry, usually compared across industries. Most commonly defined by ratios of factor quantities employed at common factor prices, but sometimes by factor shares or by marginal rates of substitution between factors.
Median Voter Theorem
The median voter theorem, in its simplest form, is formulated within the framework of a unidimensional, spatial model. The theorem says that the opinion held by the median voter will become the decision, if the simple majority rule is used. The median voter is the voter having as many voters on her one side of the scale as on her other side. The single peakedness condition, as defined above, is a condition for the truth of the theorem.
single peakedness condition
Assumption that each member of the society ranks candidates, or other political proposals, lower the farther away, in either direction, they are from his or her own position on the scale. This means, for example, that the voter V1 ranks C2 before C1 and also that the same voter ranks C3 before C4, and C4 before C5. When this assumption is fulfilled it is easy to see that each voter’s preferences can be represented by a curve like a mountain with a top at the voter’s own position and slopes going steadily downward in both directions from that position.
Riker Theorem, Median Voter
The theorem says (Riker, 1962) that a political coalition tends to be as small as possible, as long as it is winning. To be “winning” here essentially means to be “able to dictate the outcome”.
Prisoners’ Dilemma
A strategic interaction in which two players both gain individually by not cooperating, but leading to a Nash equilibrium in which both are worse off than if they cooperated. Important especially for explaining why countries may choose protection even though all lose as a result. See tariff-and-retaliation game.
Tariff and Retaliation Game
The game of countries setting tariffs knowing that by doing so they alter the terms of trade to their own advantage. This is one very specific form of trade war.
Improve the Terms of Trade
To increase the terms of trade; that is, to increase the relative price of exports compared to imports. Because it represents an increase in what the country gets in return for what it gives up, this is associated with an improvement in the country’s welfare, although whether that actually occurs depends on the reason prices change.
Pareto optimal
Having the property that no Pareto-improving (making no one worse off and making at least one person better off) change is possible.
Nash equilibrium
An equilibrium in game theory in which each player’s action or strategy is optimal given the actions or strategies of the other players. E.g., in a tariff-and-retaliation game, with each country able to improve its terms of trade with a tariff, zero tariffs are not Nash, since each can do better by raising its tariff. A Nash equilibrium, with positive tariffs, is likely to be inferior to free trade for both.
Collective action problem
The difficulty of getting a group to act when members benefit if others act, but incur a net cost if they act themselves. (Mancur Olson)
Mancur Olson on Collective Action Problesm
“Indeed unless the number of individuals in a group is quite small, or unless there is coercion or some other special device to make individuals act in their common interest, rational, self-interested individuals will not act to achieve their common or group interests.”
Selective incentives
only a benefit reserved strictly for group members will motivate one to join and contribute to the group
Embedded liberalism
This connotes a commitment to free markets tempered by a broader commitment to social welfare and full employment (John Ruggie). Monetary policy is a handmaiden to these loftier objectives, not an end in itself.
Numeraire good
The unit in which prices are measured. This may be a currency, but in real models, such as most trade models, the numeraire is usually one of the goods, whose price is then set at one. The numeraire can also be defined implicitly by, for example, the requirement that prices sum to some constant.
Grossman-Helpman Model
Politicians’ decisions are based on: Total Welfare = (relative weight on aggregate welfare)*∑V(p, incomes before political contributions) + ∑Contributions
Logrolling
The exchange of political favors, especially among legislators who agree to support each others’ initiatives. Logrolling contributed importantly to the Smoot-Hawley Tariff.
Smoot-Hawley Tariff
The Tariff Act of 1930, this raised average U.S. tariffs on dutiable imports to 53% and provoked retaliation by other countries.
Strategic trade theory argument for protection
In an example of strategic trade policy, the use of a tariff to extract monopoly profits from a foreign monopolist, or to shift profit from foreign to domestic competitors in an international oligopoly. The monopoly case seems to have originated with Katrak (1977), but the classic treatment of the larger issue is Brander and Spencer (1984).
Strategic trade policy
The use of trade policies, including tariffs, subsidies, and even export subsidies, in a context of imperfect competition and/or increasing returns to scale to alter the outcome of international competition in a country’s favor, usually by allowing its firms to capture a larger share of industry profits. The seminal contribution was Brander and Spencer (1981).
Upstream/downstream externalities
The (second best) argument that an industry should be protected because it generates positive externalities for other industries or consumers.
Infant industry protection
Protection of a newly established domestic industry that is less productive than foreign producers. If productivity will rise with experience enough to pass Mill’s and Bastable’s tests, there is a second-best argument for protection. The term is very old, but a classic treatment may be found in Baldwin (1969).
Tests for infant industry protection to be welfare-improving
- Mill’s test = the protected industry become, over time, able to compete internationally without protection. 2. Bastable’s test = the protected industry be able to pay back an amount equal to the national losses during the period of protection.
Economies of scale
A property of a production function such that changing all inputs by the same proportion changes output more than in proportion. Common forms include homogeneous of degree greater than one and production with constant marginal cost but positive fixed cost. Also called economies of scale, scale economies, and simply increasing returns. Contrasts with decreasing returns and constant returns.
Learning by doing
Refers to the improvement in technology that takes place in some industries, early in their history, as they learn by experience, so that average cost falls as accumulated output rises. See infant industry protection, dynamic economies of scale.
Most-favored nation status
The principle, fundamental to the GATT, of treating imports from a country on the same basis as that given to the most favored other nation. That is, and with some exceptions, every country gets the lowest tariff that any country gets, and reductions in tariffs to one country are provided also to others.
What questions should you ask about a research question?
– What specifically are you trying to describe or explain? – Is this question significant to understanding something interesting about the world? – What’s new that we will learn from the study?
What is the fundamental problem of causal inference?
– One can never observe the potential outcome under the control state for those observed in the treatment state and vice versa. One can never calculate unit-level causal effects.
Sample selection bias
A type of bias caused by choosing non-random data for statistical analysis. The bias exists due to a flaw in the sample selection process, where a subset of the data is systematically excluded due to a particular attribute. The exclusion of the subset can influence the statistical significance of the test, or produce distorted results. Survivorship bias is a common type of sample selection bias. For example, when back-testing an investment strategy on a large group of stocks, it may be convenient to look for securities that have data for the entire sample period. If we were going to test the strategy against 15 years worth of stock data, we might be inclined to look for stocks that have complete information for the entire 15-year period. However, eliminating a stock that stopped trading, or shortly left the market, would input a bias in our data sample. Since we are only including stocks that lasted the 15-year period, our final results would be flawed, as these performed well enough to survive the market.
Omitted variable bias
In statistics, omitted-variable bias (OVB) occurs when a model is created which incorrectly leaves out one or more important causal factors. The ‘bias’ is created when the model compensates for the missing factor by over- or under-estimating one of the other factors.
What is the real effect of the WTO?
provides a deterrent effect by identifying violations of agreements and to allow governments to legally punish each other by removing previous concessions
Terms-of-trade
When a large country implements a tariff, it can lower the world price, shifting some of the costs of a tariff from the home to the foreign country
Export mobilization
WTO solves PD problem by (1) indefinite repeated interaction (2) more information (3) punishment (dispute settlement mechanism). Goverments thus like liberalization in other countries because it makes exporters happier.
Domestic commitment
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Time-inconsistent preferences
The problem that arises when a decision maker, especially a policy maker, prefers one policy in advance but a different one when the time to implement arrives. Knowing this, others will not find the commitment to the first policy credible.
“Race to the bottom” (taxes/regulation)
The idea that, if one country provides a competitive advantage to its firms by lax regulation (of the environment, for example), then competing firms in other countries will demand even weaker regulation by their governments, and regulation will be reduced to minimal levels everywhere.
Vertical FDI
Foreign direct investment by a firm to establish manufacturing facilities in multiple countries, each producing a different input to, or stage of, the firm’s production process. Contrasts with horizontal FDI.
Horizontal FDI
Foreign direct investment by a firm to establish manufacturing facilities in multiple countries, all producing essentially the same thing but for their respective domestic or nearby markets. Contrasts with vertical FDI.
European snake
An arrangement in which currencies were pegged to each other but left free to float as a group against the U.S. dollar. Named for the graph that the limits of variation of a currency would follow over time.
Snake in the Tunnel
An arrangement used briefly in Europe after the collapse of the Bretton Woods System in which European currencies were permitted to vary ±1% against each other (the snake but ±2.25% against the dollar (the tunnel).
Phillips Curve
An inverse relationship between inflation and unemployment observed by Phillips (1958) and thought to describe an achievable tradeoff between the two macroeconomic ills. It was later found that the true relationship also depends on expectations of inflation in a way that prevents the unemployment rate from differing permanently from the NAIRU.
NAIRU
The level of the unemployment rate at which prices rise at the same rate that they are expected to rise, and thus at which (since expectations needn’t change) the rate of inflation does not then rise or fall. Stands for Non-Accelerating Inflation Rate of Unemployment.
Societal Coalition Theory: Partisan
Lefties are more pro-employment; right-wingers are more inflation-averse. Thus, right-leaning politicians may prefer a fixed ER even if capital mobility is high. However, mixed empirical evidence and model assumes nonrational actors.
For the sectoral model, what are the four sets of domestic interest groups?
- Export-‐oriented producers 2. Import-‐competing producers 3. Nontraded-‐goods producers 4. Financial services industry
What do export-oriented producers prefer for XR?
– Fixed ER: They want stability for their international transactions. – Weak Dollar: This keeps the price of their products in world demands low (thus keeping demand high)
What do import-competing producers prefer for XR?
– Floating ER: They want monetary policy to address recessions/inflation. – Weak Dollar: They want to keep the price of imports high in order to spur domestic demand.
What do the non-traded goods producers prefer for XR?
– Floating ER: They want monetary policy to address recessions/inflation. – Strong Dollar: consume more traded goods, travel more
What does the financial services industry prefer for XR?
– Weak preference for floating ER: ER stability leads to more international transactions. Additionally, monetary autonomy helps maintain a stable domestic banking system, low inflation, and more stable interest rates.HHowever, ER volatility creates business opportunities to exploit risk. So – No preference on dollar strength: They can buy foreign assets when the it is strong, and then repatriate them when the dollar is weak. They do prefer capital market openness.
Political business cycle
Generally predict that politicians stimulate the economy immediately before an election in order to attract votes – need monetary independence in order to manipulate PBC. If capital mobility is high for exogenous reasons but a country has a fixed ER, commitment to the ER may not be credible near elections. (E.g., When did Nixon leave Bretton-Woods?) However, 2 problems: one, there is mixed empirical evidence; two, rational voters should not be fooled by it.
“Trilemma” of international economic integration
The trilemma in which any two of the following preclude the third: 1. free international capital mobiility; 2. exchange rate stability; 3. monetary independence.
capital mobility
The ability of capital to move internationally. The degree of capital mobility depends on government policies restricting or taxing capital inflows and/or outflows, plus the risk that investors in one country associate with assets in another.
Symmetry-integration graph
Symmetry on the Y-axis, Market integration on X. Above the “FIX” line, it is better to peg.
What are the costs and benefits of pegging?
Direct pegs boost trade (and Önancial integration) Pegs reduce price dispersion Pegs limit monetary autonomy and raise output volatility
Exchange rate flexibility vs. level
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Security externality
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First generation model of financial crises
Krugman argues that a sudden speculative attack on a fixed exchange rate, even though it appears to be an irrational change in expectations, can result from rational behavior by investors. This happens if investors foresee that a government is running an excessive deficit, causing it to run short of liquid assets or “harder” foreign currency which it can sell to support its currency at the fixed rate. Investors are willing to continue holding the currency as long as they expect the exchange rate to remain fixed, but they flee the currency en masse when they anticipate that the peg is about to end.
Second generation model of financial crises
The ‘second generation’ of models of currency crises starts with the paper of Obstfeld (1986).[4] In these models, doubts about whether the government is willing to maintain its exchange rate peg lead to multiple equilibria, suggesting that self-fulfilling prophecies may be possible, in which the reason investors attack the currency is that they expect other investors to attack the currency.
Moral hazard
The tendency of individuals, firms, and governments, once insured against some contingency, to behave so as to make that contingency more likely. A pervasive problem in the insurance industry, it also arises internationally when international financial institutions assist countries in financial trouble.
“Rajan” hypothesis
• Change in skill-biased* technology leads to rising inequality • (rising inequality after globalization –– the kinds of jobs being created in India are jobs for those who already have skills; the poor don’t benefit from new globalization; more rich people, same amount of poor people) • This leads to real wage stagnation or decline for many people. • Thus, politicians press for more loans for people who probably should not get them. PROBLEM: bad timing. Inequality has been rising in the U.S. since the 80s. These loans don’t come along until 90s and 00s.
“Bernanke” hypothesis
• Asian financial crises lead to global savings glut leading to low interest rates –– All these AAA investments get bought up. –– Thus, this incentivizes race to get more AAA bonds (unfortunately, way underestimating systemic risk)
“Acemoglu” hypothesis
• Thus, Acermoglu Hypothesis = special interests –– Financial industries push for lower regulation, thus leading for higher risk and higher inequality. • Skill-based tech. shift really shouldn’t be a problem for U.S. = we’re mostly middle-class, not poor –– Today, an increasingly large part of $370,000 income tranche get it from finance, not, say, returns to land
Stolper-Samuelson Theorem
The proposition of the Heckscher-Ohlin Model that a rise in the relative price of a good raises the real wage of the factor used intensively in that industry and lowers the real wage of the other factor.
