Midterm II Flashcards
Factors of Production
The inputs used to produce goods and services, typically categorised as land, labor, capital for investment, and human capital (skilled labor).
Absolute vs. Comparative Advantages
Absolute Advantage: The ability of a country or firm to produce more of a particular good or service using the same resources compared to others.
Comparative Advantage: The ability of a country or firm to produce a particular good or service at a lower opportunity cost than others, even if it does not have an absolute advantage in that good’s production.
Heckscher-Ohlin Trade Theory
The theory that a country will export goods that make intensive use of the factors of production in which it is well endowed. Thus, a labor-rich country will export goods that make use of intensive labor
Stolper-Samuelson Model
the theorem that protectionism benefits the scarce factor of production. This view flows from the Hecksher Ohlin Approach: if a country imports goods that make intensive use of its scarce factor, then limiting imports will help that factor. So in a labor scarce country, labor benefits from protection & loses from trade liberalization
Ricardo-Viner Model
A model of trade relations that emphasises the sector in which factors of production are employed rather the nature of the factor itself. This differentiates it from the Hecksher-Ohlin Approach for which the factors of production is the principal consideration
GATT & WTO
GATT (General Agreement on Tariffs and Trade): A post-World War II international trade agreement aimed at reducing tariffs and other barriers to trade. It laid the foundation for modern trade liberalisation.
WTO (World Trade Organisation): Successor to the GATT, established in 1995, it provides a formal institution for monitoring international trade agreements, resolving disputes, and furthering trade liberalisation globally.
Most FavoUred Nation (MFN)
A status established by most modern trade agreements guaranteeing that the signatories will extend to each other or any favourable trading terms offered in agreements with third parties
Protectionism
the imposition of barriers to restrict imports
Trade Barriers
government limitations on the international exchange of goods. (e.g. tariffs, quotas)
Regional Trade Agreements
Agreements among three or more countries in a region to reduce barriers to trade among themselves
Portfolio vs. Direct Investment
Portfolio Investment: A form of investment where investors purchase stocks, bonds, or financial instruments in a foreign country but do not control the operations of the entity they invest in. The focus is on financial returns, not management.
Direct Investment (FDI): A form of investment where a company or individual establishes or significantly controls a business in a foreign country (e.g., building factories, setting up branches). It involves management control and long-term presence.
International Monetary Fund (IMF)
The IMF is a major economic institution that was established in 1944 to manage international monetary relations and now focuses on the international financial system, specifically debt & currency crises
Functions:
Provides loans to countries facing balance-of-payment crises.
Offers economic policy advice and technical assistance.
Benefits & Controversies of the IMF
Benefits of IMF-
negotiates directly on behalf of credits as collective group
Produces agreements that set global standards
Monitoring and verification lead to increasing information and transparency
Creates opportunities for future, iterated interactions
Costs of the IMF-
reinforces subordinate status of debtor nations
Does not address local issues and concerns
Violates sovereignty via non economic conditionalities
Negligible effects
Conditionalities
IMF conditionalities
provides inexpensive loans to debtor nations
In return, recipients accept structural adjustment programs or conditionalities
Implementation of conditionalities leads to future access
Compliance signals credit worthiness and attracts credits and global investors
Concessional Financing
Concessional Financing
Loans to developing countries with generous terms and below-market interest rates
Provided to those unable to borrow
Reflects economic & political motivations of government leaders
Examples - world bank, inter american development bank, asian development bank
Cost-Benefit Analysis (Creditors & Debtors)
CHECK DOC. —-> Why Relations Become Hostile
Conflicts between lenders (creditors) and borrowers (debtors):
Lenders want their money back with interest.
Borrowers may struggle to pay and ask for better terms.
Both sides negotiate to avoid a financial fight.
Benefits of FDI (to MNCs & Host Country)
Benefits of FDI to MNCs
overseas investment seen as profitable
Lower factor costs ( labor, land, capital)
Access to local markets & resources
Avoid trade barrier of domestic economy
Generous tax incentives to attract investors
LAX regulatory and environmental restrictions
Benefits of FDI to host country
less risk and accessible, relative to loans
Spillover effects - managerial, technological and marketing expertise
Brings in investment capital & tax profits
Creates employment opportunities within domestic economy
Provides access to international markets
FDI (Foreign Direct Investment) & Multinational Corporations (MNCs)
Benefits for MNCs:
Lower costs for labor and materials.
Access to local markets.
Avoid trade barriers.
Benefits for Host Countries:
Job creation, new technology, and economic growth.
Access to international markets and investments.
FDI Spillover Effects
Indirect benefits to the host country from foreign direct investment, including:
Technology Transfer: Adoption of advanced technology and practices from MNCs.
Skill Development: Training and upskilling of local workers.
Infrastructure Growth: Improved infrastructure, often funded by FDI projects.
Market Competition: Stimulates local firms to improve efficiency and innovation.
Factors of Inequality in LDCs
Factors that contribute to persistent economic disparities in Less Developed Countries (LDCs), such as geography, domestic policies, international institutions, and historical contexts.
Landlocked Developing Countries
Countries without access to coastlines face high transaction costs, dependency on neighboring states for trade, and reduced competitiveness in global markets.
Resource Curse
Countries rich in natural resources often face economic problems like corruption, lack of diversification, and weak accountability, leading to underdevelopment.
Colonial Legacies
The historical impact of colonization on LDCs, where extractive institutions and economic systems designed for the colonizers’ benefit created lasting inequalities.
Dependency Theory
An economic theory arguing that LDCs are structurally disadvantaged by their reliance on exporting raw materials to richer countries, locking them into a cycle of dependency and underdevelopment.
East Asian Miracle
he rapid economic growth and development in East Asian countries like South Korea, Taiwan, and Singapore, attributed to export-led industrialization, government intervention, and global market integration.
Import-Substitution Industrialisation
An inward-focused economic strategy aiming to reduce dependence on foreign goods by promoting domestic manufacturing through tariffs and subsidies.
Export-Oriented Industrialisation
An outward-focused economic strategy encouraging domestic industries to produce goods for foreign markets, using trade liberalization and incentives.
Washington Consensus
A set of free-market economic policies advocated by institutions like the IMF and World Bank, emphasizing trade liberalization, privatization, and openness to foreign investment.
UNFCCC
A global treaty formed in 1992 (enforced in 1994) to stabilize greenhouse gas emissions. It emphasizes “common but differentiated responsibilities,” meaning countries share the responsibility but recognize different levels of contribution and ability.
Externalities
Costs or benefits of a decision or action that affect others who did not choose to be involved in it. Externalities can be positive (benefits) or negative (costs).
Public Goods vs. Common-Pool
Public Goods:
Definition: Non-excludable and non-rival resources, meaning everyone can use them without reducing availability to others.
Example: Clean air.
Problem: Free-riding (everyone benefits, but few contribute).
Common-Pool Resources:
Definition: Non-excludable but rival resources, meaning overuse can deplete them.
Example: Fisheries.
Problem: Overuse (too many people using the resource).
Kyoto Protocol
A major UNFCCC agreement adopted in 1997 (enforced in 2005). It required developed countries to reduce emissions by 5.2% below 1990 levels but exempted developing nations.
Montreal Protocol
A 1987 agreement to phase out substances depleting the ozone layer, like CFCs. It is considered one of the most successful environmental treaties.
Paris Agreement
A 2015 UNFCCC agreement focusing on global efforts to limit temperature rise to 1.5°C above pre-industrial levels. Countries submit nationally determined contributions (NDCs) and update them regularly.
Economic Statecraft
The use of economic tools (sanctions or inducements) to achieve foreign policy objectives.
Strategies of Economic Statecraft
Negative sanctions - deny gains, control trade, signal intent, behavior linkage
Positive inducements: promises and extension of economic exchange (trade, aid, investment, etc)
Sanctions vs Engagement
Sanctions vs. Engagement
Sanctions: Negative measures like trade restrictions, asset freezes, and embargoes designed to deny resources and signal disapproval.
Engagement: Positive measures like economic incentives, trade agreements, and aid designed to build cooperation and induce reform.
CVID
What is the US interpretation of denuclearization
US seeks CVID, a maximalist position
CVID: complete, verifiable, irreversible, denuclearization
Social Control
A regime’s ability to dominate social structures and suppress dissent through surveillance, indoctrination, and monopolized organizations.
Hard Target
A state like North Korea with:
A narrow ruling coalition focused on military and security.
Social and political systems resistant to external pressures like sanctions.
Strong control over economic activity and social organization.
Problems of Commitment and Coordination
Commitment Problems: Inability to trust that one party will follow through on promises.
Example: The target state may doubt the credibility of promised inducements or fear irreversible costs.
Coordination Problems: Difficulty aligning actions among multiple actors with divergent interests.
Example: Sanctions failing due to inconsistent enforcement by key partners (e.g., China and South Korea).
Sunshine Policy
South Korea’s strategy (1998-2007) of engaging North Korea through economic inducements to foster peaceful relations and encourage reform.
Features:
Flexible reciprocity (offering aid without requiring immediate concessions).
Focus on separating political and economic issues.
Criticisms:
Aid was used by North Korea to consolidate its regime rather than reform.
Viewed by critics as giving up leverage.
