Midterm II

Question 1

Factors of Production

Answer 1

The inputs used to produce goods and services, typically categorised as land, labor, capital for investment, and human capital (skilled labor).

Question 2

Absolute vs. Comparative Advantages

Answer 2

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.

Question 3

Heckscher-Ohlin Trade Theory

Answer 3

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

Question 4

Stolper-Samuelson Model

Answer 4

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

Question 5

Ricardo-Viner Model

Answer 5

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

Question 6

GATT & WTO

Answer 6

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.

Question 7

Most FavoUred Nation (MFN)

Answer 7

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

Question 8

Protectionism

Answer 8

the imposition of barriers to restrict imports

Question 9

Trade Barriers

Answer 9

government limitations on the international exchange of goods. (e.g. tariffs, quotas)

Question 10

Regional Trade Agreements

Answer 10

Agreements among three or more countries in a region to reduce barriers to trade among themselves

Question 11

Portfolio vs. Direct Investment

Answer 11

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.

Question 12

International Monetary Fund (IMF)

Answer 12

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.

Question 13

Benefits & Controversies of the IMF

Answer 13

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

Question 14

Conditionalities

Answer 14

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

Question 15

Concessional Financing

Answer 15

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

Question 16

Cost-Benefit Analysis (Creditors & Debtors)

Answer 16

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.

Question 17

Benefits of FDI (to MNCs & Host Country)

Answer 17

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.

Question 18

FDI Spillover Effects

Answer 18

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.

Question 19

Factors of Inequality in LDCs

Answer 19

Factors that contribute to persistent economic disparities in Less Developed Countries (LDCs), such as geography, domestic policies, international institutions, and historical contexts.

Question 20

Landlocked Developing Countries

Answer 20

Countries without access to coastlines face high transaction costs, dependency on neighboring states for trade, and reduced competitiveness in global markets.

Question 21

Resource Curse

Answer 21

Countries rich in natural resources often face economic problems like corruption, lack of diversification, and weak accountability, leading to underdevelopment.

Question 22

Colonial Legacies

Answer 22

The historical impact of colonization on LDCs, where extractive institutions and economic systems designed for the colonizers’ benefit created lasting inequalities.

Question 23

Dependency Theory

Answer 23

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.

Question 24

East Asian Miracle

Answer 24

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.

Question 25

Import-Substitution Industrialisation

Answer 25

An inward-focused economic strategy aiming to reduce dependence on foreign goods by promoting domestic manufacturing through tariffs and subsidies.

Question 26

Export-Oriented Industrialisation

Answer 26

An outward-focused economic strategy encouraging domestic industries to produce goods for foreign markets, using trade liberalization and incentives.

Question 27

Washington Consensus

Answer 27

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.

Question 28

UNFCCC

Answer 28

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.

Question 29

Externalities

Answer 29

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).

Question 30

Public Goods vs. Common-Pool

Answer 30

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).

Question 31

Kyoto Protocol

Answer 31

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.

Question 32

Montreal Protocol

Answer 32

A 1987 agreement to phase out substances depleting the ozone layer, like CFCs. It is considered one of the most successful environmental treaties.

Question 33

Paris Agreement

Answer 33

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.

Question 34

Economic Statecraft

Answer 34

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)

Question 35

Sanctions vs Engagement

Answer 35

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.

Question 36

CVID

Answer 36

What is the US interpretation of denuclearization
US seeks CVID, a maximalist position
CVID: complete, verifiable, irreversible, denuclearization

Question 37

Social Control

Answer 37

A regime’s ability to dominate social structures and suppress dissent through surveillance, indoctrination, and monopolized organizations.

Question 38

Hard Target

Answer 38

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.

Question 39

Problems of Commitment and Coordination

Answer 39

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).

Question 40

Sunshine Policy

Answer 40

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.