Inr quiz 2 Flashcards
Free Trade is mutually beneficial, So why do Barries to trade exist?
Trade is a technology which means there are some people who will lose their jobs while others benefit. Trade barriers exist to protect domestic producers by redistributing income from consumers and foreign producers to domestic producers.
what are 4 ways trade leads to increased wealth?
- Opportunities to sell goods elsewhere
- New larger markets to sell more or new goods
- More efficient
- Cheaper products
What two ideas did Adam smith highlight for how trade increases productivity, which increased wealth?
Specialization
division of Labor
In the context of international trade, what is the absolute advantage?
The ability of a country or firm to produce more of a particular good or service than other countries or firms can produce with the same amount of effort and resources.
In the contact of international trade, What is comparative advantage?
The idea that countries should specialize in their economic production based on the opportunities costs of producing various goods.
What is opportunity cost?
?
What are the four factors of production that we discussed in class?
Land
Labor
Capital
Human capital
What does huckster Ohlin model tell us about who exports what and who imports what?
the model states that relative endowments determine the comparative. Industrial country are rich in capital and skilled labor and should therefore export goods that make intensive use of these endowments like capital intensive goods. If a country is abundant in labor it should export goods that are labor intentive.
Why do countries restrict trade? what is the primary political problem with trade?
trade is a technology, some people win and some people lose. countries restrict trade to protect domestic actors. trade barriers redistribute income from consumers and foreign producers to the domestic producers.
Trade barriers redistribute income from who to whom?
Trade barriers redistribute income from consumers and foreign producers to domestic producers
what is protectionism?
The use of specific measures to shield domestic producers from imports. They are trade barriers
What are 5 types of trade barriers? be able to define and explain each type.
Tariff: Tax on imports
Quotas: A law that sets limits on the amount of a specific good that can be imported
Subsidies: government incentive to the domestic producers of a good (take away taxes, grants)
Prohibitions: not allowing any imports of a certain good
Non-tariff barriers: barriers that are not taxes
What type of trade barriers have greatly increased in the last two decades?
Non- tariff barriers
What does the Stolper-Samuelson theory tell us about preferences on trade?
An individuals trade preferences are based on if they gain or lose from trade. The people who benefit from trade are the ones that have the factor that is abundant and being exported.
factor based preferences (land, labor, capital)
What does the Ricardo-diner theory tell us about preferences on trade?
An individual’s preferences are based on the industry they work in. domestic preferences in in trade policy are based on specific factors.
Why is the cost of sugar higher in the USA? What major social interaction explains it?
The cost of sugar is higher in the USA due to protectionism. The USA produces sugar and the USA keeps the prices higher to protect the jobs of people in the sugar industry.
Which type of political institution will typically be more supportive of free trade?
Democracies because trade increases aggregate wealth. Autocracies are afraid that increasing aggregate wealth is a threat to their power?
What is the embedded liberal compromise?
Compensation for the losers of trade from the winners
- job retraining programs
- relocation assistance
- community development assistance
- grow human capital
which social interaction challenge did we use to explain how many countries approach the making of international trade policy?
Prisoners Dilemma. Everyone wants to have consumers to sell to but no one wants others to have access to their consumers.
How did GATT lower trade barriers?
Little by little:
- Norms of reciprocity
-national safeguards
-negotiating rounds and adressed different issues or sectors
What is the most favored nation status
Norm of reciprocity. the smallest level of tariffs a country gives to one country, they will give any other country the same level if they enter the club/agreement
What is the primary different between GATT and the World Trade Organization
The WTO has enforcement capabilities. they have a court which can enforce penalties.
What did Autor find regarding manufacturing employment in the U.S
USA manufacturing employment declined after China got WTO membership
What did Autor suggest was an important factor affecting the U.S. presidential election of 2016?
Chinas huge import growth has a major effect on who won the US 2016 election. The counter factual claimed that if china’s import growth was 50% smaller than there would have been less republican votes and the electoral college would have been different, resulting in trump losing.
If countries want investment so greatly, why are relations between foreign investors and countries so hostile and politically controversial.
Actors want money but don’t want the terms requires of them to have money such as the interest rates
What started the 2007 financial crisis in Europe?
Credit crunch hit USA housing market which led to the US housing bubble busting, this then spread to Europe.
The EU and the IMF agreed to bail out Greece in 2008. What did they ask for in return for their loans?
The greeks had to implement austerity measures that would reduce their budget deficit. These austerity measures are very unpopular because they include policies such as reducing government spending, benfits, and increases taxes. the austerity measures are very unpopular with citizens
What are austerity measures?
Unpopular policies enforced by foreign lenders to reduce the receiving countries budget defecit. they include reducing spending, benefits to people, and increasing taxes.
What are the two primary types of foreign ivestnments
Portfolio
Foreign Direct investment
How do prtfolio investments differ from FDi? describe or give an example to illustrate.
The portfolio investment is where the international actor has no role in management over a countries welfare through influence. An FDI investor has control over the management because they own the assets., An example of FDI would be Nike buying a manufacturing plant in china.
Since 2010 which of the following constitute the largest portion of Foreign investment
FDI
Which region had the most foreign direct investment in 2015?
Europe
Is FDI more common between two wealthy, developed countries or one wealthy and one less developed country? explain why?
Two wealthy countries because investors believe it is safer. capital is scarce in poor countries and there are higher interest rates.
Why do investors invest in foreign countries? Explain how it typically works?
investors invest abroad to earn higher rates of return on their capital
Why do firms borrow from foreign investors?
Firms invest borrow capital to increase productivity of other factors of production especially labor
What is concessional finance and where does it typically come from?
concessional finance are below market rates on Laos given to poor countries to help with infrastructure. they com from the world bank.
What are three sources of conflict between investors and borrowers?
- terms of investment
- loans
- obsolescing bargains
When a government borrows money from foreign investors, who often benefits within the country? if that country has difficulty paying back the loans, who often pays the most within the borrowing country?
A small population of the country. Most of the population will have to duffer and pay back the loan. usually, the poor citizens who do not benefit from the initial loan
What is moral hazard and how does it apply to international finance?
A moral Hazard is when an actor or individual does not pay the full cost of their actions. They take riskier decisions because of the insurance
What is a typical solution for a moral hazard problem? give an example
Better regulation and monitoring, have a deductible, dot give insurance to everyone, have a screening process
What are the Breton Woods twins?
World Bank and IMF
What does the IMF do?
manage the international monetary system and prevent disastrous failures like the Great Depression.
Why do IMF borrowers sometimes object to the lenders demands
It is biased towards lenders, there may be austerity measures that are unfavorable.
What are the 3 primary types of FDI?
Greenfield: building a new factor
Mergers and acquisition- when MNC buys a firm in a foreign country
Joint ventures: MCN goes to work with the other country
What is the common one word definition of FDI?
Outsourcing
Why do firms/corporations sometimes pursue FDI? Why do host countries seek FDI?
Market access
Aquire natural resources
minimize factor costs
lower taxes
regulatory environment
outsourcing
How is FDI regulated
Not deeply regulated at the international level. there are bilateral investment treaties.
What does the Heckscher-Ohlin theorem tell us about immigration
The USA should be a net importer of labor (immigrants), bc we are capital abundant. immigrants move to place where there is a capital abundance.
If no one wants a currency crisis, why do they occur?
There are winners and losers. Some people benefit from it?
If everyone wants monetary stability, why are we not able to acheive it?
Different interests
What are the three major purposes of money?
- A unit of account
- A store of value
- A medium chance that is agreed upon
What three general factors affect the stability and value of money? explain each
- Domestic interests and policies(exporters and importers)
- the countries role on the global economy (how much does a countries economy depend on trade)
- The countries interaction with the international institutions (less wealthy countries that need loans from International institutions)
What is the exchange rate?
the price of a national currency relative to other national currencies. can go up or down.
What are 3 types of change rate regimes disucussed in class?
Floating: not backed by anything
Fixed/pegged: one countries currency is related to the value of another countries currency
Replacing one currency with another: a smaller country adopts a larger countries currency
How can a state depress the value of its currency?
The government can issue more currency, the more currency in circulation, the less valued it is.
How can a state raise the value of its currency?
taking money out of circulation
Which groups in a country tend to favor an undervalued currency?
foreign investors
exporters
Which groups in a country tend to favor an overvalued currency?
Consumers
importers
what are the pros and cons of a fixed exchange rate regime?
Pros: stable
Cons: reduced government flexability
What are the pros and cons of a floating exchange rate regime?
Pros: more government autonomy, they can interere
Cons: less stability/ certainty in the rate
which groups in a country tend to favor a fixed exchange rate regime?
businesses that export (Wall Street)
Long term investments and investors
borrowers of a foreign currency
those concerned with inflation
which groups in a country tend to favor a floating exchnage rate regime?
Consumers and businesses that have primary domestic activities
people who want the govenermt to have more power in Economy
When was the golf standard dominant and how did it work?
1870-1914
Each country pegs its currency to the price of gold. For every ounce of gold we will give you $20.
How does the wizard of Oz connect to international monetary politics? discuss the major characters from the perspective of international monetary politics.
The wizard of Oz was written by an irritated farmer about the gold standard. he beleived that the gold standard did not work for the USA and that the republics supporting it were frauds.
Wizard: McKinley
Dorothy: Nave American public
Lion: William jennings
Scare crow: farmer
TInman: indsutrial worker
When did the Bretton woods monetary regime start and end? how did it function? why did it end?
Started after World War II. ended in 1973
it fixed the value of the dollar to gold to provide clarity and stability on how much a currency is worth compared to other currencies. Every other country could adjust their currency except for the USA. Nixon decided overnight to get rid of this system because it wasn’t beneficial to the USA and it was not popular. Other countries doubted the US commitment to $35/ounce
What is the name for the current international monetary regime
Managed float
Why do national currencies sometimes collapse in value
Government commitments are no longer credible
What are the benefits and costs of international cooperation to prevent or end currency crisis ?
Benefits: reduce contagions, keep issues contained and not spread to other countries
Costs: the loans
