Global Trade and Finance

Question 1

two components of the global finance system

Answer 1

o International monetary system (regulates exchange rates (price of one currencies relative to another) b/w economies
o International investment system (regulates how capital flows across borders)

Question 2

explain financialisation

Answer 2

progressive insertion of the logic of finance becoming more prevalent in our lives

Question 3

define financial markets and its role

Answer 3

where people trade fungible items (usually more accurately ‘exchanges’)

• Role: link lenders and borrowers in allocating economic resources
• Developed to support the ‘real’ economy

Question 4

explain real and money economy

Answer 4

o The ‘real’ economy: concerned with producing goods and services- e.g. manufacturing
o The ‘money’ economy: financial markets, concerned with buying and selling fungible items

Question 5

what is an inherent part of financial markets and why

Answer 5

risk= expectations of future income flows uncertain

Question 6

3 parts of mundell flaming

Answer 6

capital mobility
exchange rates
monetary policy

Question 7

explain MF capital mobility

Answer 7

ability of money to cross borders freely

 Allows access to greater funds for investment + growth

Question 8

explain MF exchange rates

Answer 8

existence of fixed or minimally floating currencies
 Reassures investors that value of their money not lost through depreciating currency + avoids uncertainty of fluctuating currencies

Question 9

explain MF monetary policy/autonomy

Answer 9

able to set own interest rates in response to domestic conditions
 Rates able to influence domestic growth and employment

Question 10

what is mundell flame tricot know as

Answer 10

impossible trinity

Question 11

why can’t gov peruse monetary policy if already strving for first two

Answer 11

o If gov pursue indep. Monetary policy, might then set domestic interest rates low to drive economic activity bc economy experiencing downturn (so lower interest rate to drive activity)
o Then capital leave country as interest rate low= less return in domestic market
o Capital leaving= produces downward pressure on exchange rate
o Gov could increase interest rates to maintain value of exchange rate but this means abandoning initial goal of lowering interest rates

Question 12

which combination of MF does gold standard express

Answer 12

• Fixed exchange rates + capital mobility

Question 13

which combination of MF does bretton woods express

Answer 13

• Fixed but adjustable exchange rates + independent monetary policy

Question 14

which combination of MF does liberalisatoin express

Answer 14

• Sacrificed fixed exchange rates to prioritise capital mobility and preserve autonomy over monetary policy

Question 15

benefit of gold standard

Answer 15

Reduced foreign exchange risks (provided certainty + // increased international trade) and the incentive for speculation

Question 16

cost of gold standard

Answer 16

constrained government policy (less control over domestic policy) + long-term stability came alongside short-term fluctuations generated by periodic surges in the world’s gold stock

Question 17

benefit of bretton woods (embedded lib)

Answer 17

Government spending used to shape aggregate demand (a ’demand-side’ theory to managing the business cycle
• Enabled open economy but governments remained able to target domestic objectives i.e. unemployment)
• Through keyenism policy (spend more to stimulate economy + reduce unemployment) - I.e. infrastructure projects
• Fundamental disequilibrium- countries given option to change peg value of currency if under pressure - sustained payment deficient (more money leaving than coming in) (IMF)
• // could control capital movement (control private financial flows that had potential to disrupt exchange rates and gov autonomy in economic policy) = Mundell Policy

Question 18

cost of bretton woods

Answer 18

unhelpful in tackling stagflation alongside broader structural issues (Triffin Dilemma)

Question 19

why nixon shock occured (bretton woods end)

Answer 19

• Ending gold standard= Nixon to intervene in economic downturn + tackle unemployment more effectively
• Structural pressures on US dollar
• Fixed exchange rates undermined by Triffin Dilemma: balance b/w dollars and gold deterior, more dollars outside US than inside + gov not able to redeem dollars for gold
• // Floating exchange rates

Question 20

benefit of liberalisation

Answer 20

Monetarism (in response to stagflation- targeting high inflation over unemployment), with governments controlling amount of money in circulation – a ‘supply-side’ theory to managing the business cycle – tackled structural issues

Question 21

cost of liberalisation

Answer 21

created conditions for increased speculation (transactions taking place for profit on expectation of movement in the values of currency rather than to finance international trade and investment)

Question 22

why was staglflation occurring

Answer 22

o Price shocks were slowing economy – spike in price of oil
 Also meant production less profitable = combination of high unemployment + high inflation
o Keyenism at odds of these events

Question 23

IMF role

Answer 23

• No longer monitoring activity but a lender of last resort

o Large short term loans in times of economic crisis to stabilise + manage debts

Question 24

what is FDI

Answer 24

investment in ownership and management of assets in another country

Question 25

what is portfolio investment

Answer 25

investing in bonds, no management part (shares + stocks)

Question 26

what is banking investment

Answer 26

short term lending and borrowing- usually interbank borrowing

Question 27

what has been the biggest rises in international capital flows

Answer 27

flows in institutional money

Question 28

why are biggest flows in institutional money

Answer 28

due to financial liberalisation

• policies by govs support more liberal cross border flow
• shift to monetarism= competition
• reduce capital control (liberal approach to regulation of financial markets)
• domestic multilateral policy driving new products and tech

Question 29

3 domestic policy of financial liberalisation

Answer 29

eliminated capital controls (move money freely now)

de reg of activities of banks, stockbroking firms etc, allowing increased comp in financial sector

securitisation- allows financial institutions to fund lending activities indirectly through capital markets rather than taking on deposits or borrowing in own name

Question 30

multilateral policy of financial liberalisation

Answer 30

• Changes from the 1980s to EU and OECD rules governing capital flows among members
• Domestic policy decisions made among countries for liberalisation environment for cross border capital flows

Question 31

how did gov create more liberal cross border capital flows

Answer 31

domestic and multilateral policies

Question 32

what did greater competition in financial sector lead to

Answer 32

new financial products and tech

Question 33

what are two new financial products made by liberalisation

Answer 33

o Derivatives: contract between two parties to exchange risk
• Issues:
• Varying levels of counterparty risks (insurance policies)
• Usually traded over the counter (deal put through broker not stock exchange // no public record) = difficulties in tracking volumes and measuring systemic risks
• High return= high risk
o High frequency trading
• Front run= buy ahead of order and make small spread of it

Question 34

Explain casino capitalism

Answer 34

• increase risk =
• High risk high reward
• Expansion of capital flows for speculation, as opposed to production

Question 35

why do states regulate trade

Answer 35

• Protect industries in contemporary era
  o ‘Infant industries’: protect until developed enough to be competitive to foreign suppliers
  o National security- should be self-sufficient in production of certain goods, particularly for defence purposes, e.g. food products
  o Cultural protection- e.g. film, theatre, music
  o Environmental or social goals- to protect labour, protect renewal energy suppliers

Question 36

how do states regulate trade

Answer 36

tariffs + non tariff barriers (NBT)

ie. quotas, subsidies, admin regulations

Question 37

why do states engage in trade

Answer 37

labor productivity

Question 38

explain absolute advantage

Answer 38

entity ability to produce product more efficiently than another, with assumption of same input (employees)
- // goal= produce more than need and sell surplus

Question 39

eplain comparative advantage

Answer 39

benefits of specialization

Question 40

explain how people can be negatively affected by comparative advantage (example)

Answer 40

Re-employment issues
o Theoretically: If one industry declines due to comp from another country, industry will shirk and release its capital and labor = which are then absorbed by industries in which the country is relatively more efficient
o Realistically this does not happen bc:
 Workers cannot move freely across jobs bc experience is specific to line of work, + few skills equally valuable across industries
 Capital movement not quick (interest rates high- no new ventures // not employed

Question 41

how did global trade volumes increase after WWII

Answer 41

• Expansion in South-South trade from the 1990s
• Manufacturing increasingly prevalent, as opposed to raw materials
• Expansion of intra-industry and intra-firm trade

Question 42

Explain unevenness of trade liberalisation

Answer 42

• developing countries lack resources to advance interests through WTO (litigation)
• level playing field (US vs puerto rico)
• one country one vote (formal vs informal)

Question 43

define trade liberalisation

Answer 43

is the removal or reduction of restrictions or barriers on the free exchange of goods between nations

Question 44

define financial liberalisation

Answer 44

deregulation of domestic financial markets and the liberalization of the capital accoun