INTL 3200 Midterm 2

What is the relationship between democracy and trade liberalization?

- Democracies have more liberal trade policies than autocracies. - The argument is that in democracies, voters can punish leaders for policy outcomes that limit growth for the benefit of a few. - But democracy is not free of perverse incentives. - Evidence from Daniel Kono shows that democracies move from transparent protection (taxes) to opaque forms of protection (non-tariff barriers) And, structure of institutions within a given country matters.

How do governments manage the political conflict generated by the distributional conflicts of trade openness? (embedded liberalism)

- Governments design policies to make liberalization more successful politically. - US has trade adjustment assistance, but the broader welfare state is partially insurance against costs of economic openness. Referred to as the "embedded liberalism" compromise; versions of this include unemployment insurance, state-sponsored health care, education, income support, and more.

How are currency values determined?

- Governments face a trade-off: - Fixed exchange rates ensure currency stability and predictability which encourages international commerce (trade, tourism, finance, migration) - Fixed exchange rates also lock government into policies that might be bad for domestic public (give up interest rate autonomy); may make speculative attacks more likely § With floating exchange rate, government is free to use interest rates to stimulate/cool off the economy- so if in a recession they can decrease interest rates to increase spending - To maintain a fixed rate, for example, the government might need to raise interest rates, but this might tip the economy into recession as borrowing becomes more expensive. - If a country exports a lot, tough times might put pressure on the government to devalue. BUT, failing to defend the rate, might lead holders of debt denominated in foreign currencies to end up owning more than they did previously. (Argentina 2001). - Defending the exchange rate - If a country chooses to fix the exchange rate, they then must take actions to defend that rate: § Use interest rates to incentivize/disincentivize the holding of the currency Actively manipulate the supply of the domestic currency (ex- buy up local currency using foreign currency, but can run only

When does foreign aid work?

-The dose is right -Domestic political institutions already exist to effectively administer the aid -It is predictable -It is given in the right sectors On it's own, it's not going to be enough. Foreign investment is really what's going to change things.

What are the three waves of globalization?

1st wave- 1870 to 1914: new tech, telegraph, telephone, mass migration of labor to North America 2nd wave- 1945-1980: global trade and investment were supported by new organizations such as the World Bank and the International Monetary Fund and GATT 3rd wave- 1980- present - expanded on earlier efforts to liberalize international trade and investment- WTO was founded

Group of 77

A coalition of developing countries in the UN, formed in 1964 with 77 members, that seeks changes to the international economic order to favor the developing world. It has grown to over 130 members but retains the original name.

Voluntary Export Restraint

A foreign country agrees to voluntarily limit exports to your country

International Monetary Fund (IMF)

A major international economic institution that was established in 1944 to manage international monetary relations and that has gradually reoriented itself to focus on the international financial system, especially debt and currency crisis.

Adjustable Peg

A monetary system of fixed but adjustable rates. Governments are expected to keep their currencies fixed for extended periods but are permitted to adjust the exchange rate from time to time as economic conditions change.

Depression

A severe downturn in the business cycle, typically associated with a major decline in economic activity, production, and investment; a severe contraction of credit; and sustained high unemployment.

Recession

A sharp slowdown in the rate of economic growth and economic activity.

What is the effect of a tariff on demand for the good?

A tariff decreases the demand for the good because it becomes more expensive.

Tariff

A tax imposed on imports by the government

Which of the following would be expected by the Heckscher-Ohlin trade theory? A. A country with abundant fertile land exporting agricultural products. B. A country with abundant capital importing manufactured goods. C. A country with abundant fertile land importing agricultural products. D. A country with abundant labor exporting agricultural products. E. A country with abundant capital exporting agricultural goods.

A. A country with abundant fertile land exporting agricultural products.

How is comparative advantage different from absolute advantage?

Absolute Advantage: the ability of a country or firm to produce more of a given good or service than other countries or firms using the same amount of effort or resources.

Who gives in the most foreign aid? (in absolute terms? As a percentage of GNI?)

Absolute Terms- United States As a percentage of GNI- Norway and Luxembourg

Bilateral Investment Treaty

An agreement between two countries about the conditions for private investment across borders. Most of these treaties include provision to protect an investment from government discrimination or expropriation without compensation, as well as mechanisms to resolve disputes.

Multinational Corporation (MNC)

An enterprise that operates in a number of countries, with production or service facilitates outside its country of origin.

What are exchange rate regimes?

An exchange rate regime is the system that a country's monetary authority, -generally the central bank-, adopts to establish the exchange rate of its own currency against other currencies. Each country is free to adopt the exchange-rate regime that it considers optimal, and will do so using mostly monetary and sometimes even fiscal policies. The distinction amongst these exchange rates regimes is generally just made between fixed and flexible exchange rate regimes,

Monetary Policy

An important tool of national governments to influence broad macroeconomic conditions such as unemployment, inflation, and economic growth. Typically, governments alter their monetary policies by changing national interest rates or exchange rates.

Commodity Cartels

Associations of producers of commodities (raw materials and agricultural products) that restrict world supply and thereby cause the price of the goods to rise.

What is Brexit?

Brexit refers to the event surrounding the effort by the United Kingdom to leave the European Union.

What is concessional international finance?

Concessional international finance: money lent to developing countries by government agencies and intergovernmnetal organizations. Rich countries give to poor countries, or lend to them at below-market interest rates. -It is different because they are typically lent at interest rates well below those available in the marketplace. World Bank loans to the poorest nations bear no interest.

What is the Hecksher-Ohlin trade theory, and what does it imply about what kinds of goods each country would produce and export?

Countries will haave a comparative advantage in the goods that make use of the country's abundant resource endowments. Those resources can be land, labor, capital, or human capital.

What is a currency crisis?

Currency Crisis: results when there is sufficient doubt that the gvernment can maintain the fixed exhcange rate. - These concerns lead "hot money" to flee the economy- investors exchange their local currency for more reliable foreign currencies, putting increasing pressure on the government. This is not unlike a run on the bank. If devaluation occurs, those holding foreign denominate debt

Floating Exchange Rate

Currency is traded on an open market without direct government intervention

What's the difference between a customs union and a free trade area?

Customs Union- no internal trade barriers and common external tariff Free Trade Area- just no internal trade barriers

What is the relationship between democracy and sovereign lending?

Democracies tend to have better economies, but the sources of the borrowing advantage may be democratic political institutions. Democracies are more transparent (hard to hide intentions to default ex ante), leaders more accountable (more likely to be punished for not repaying).

Which countries borrow?

Developing countries- they want to use borrowed money to speed growth and increase national output gives developing economies today. But both developed and developing countries borrow.

Why do some countries have higher trade barriers than others?

Different actors have different interests. The source of these differences could be in national institutions, such as a party system or legislative structures biased in favor of the protectionist class (scarce factor) or protectionist secotrs and regions, or-on the other hand- in favor of powerful exporting companies.

What are some explanations for (economically) positive or negative legacies?

Engerman and Sokoloff argue that where control of economy was less concentrated in the hands of a few wealthy land-owners, post-colonial growth was more robust and more broadly shared. Thus, colonial economies dominated by mines and large plantations were less likely to build inclusive economic and political institutions that catalyze development. ES argument is about factor endowments; accidents of economic geography determined future prospects of colonized states. Acemoglu, Johnson, and Robinson argue similarly that institutional quality determines development fortunes. High colonial mortality made it more likely that European set up "extractive states with the intention of transferring resources rapidly to the metropole." Where settlement was easy, more Europeans moved in and set up institutions that encouraged long-run investment up for the long haul. Institutions matter- places that can establish institutions that protect property rights incentivize investment and are more likely to develop economically.

How does the iphone illustrate globalization?

Engineered by Apple in California Raw materials from China "Gorrilla glass" manufactures in Kentucky Chip and display components from Japan, Korea, Taiwan, and US Assembled in China, Brazil, and India

How common are trade restrictions?

Every country currently has at least some restrictions on trade with the rest of the world.

What is export-led growth?

Export-oriented industrialization: spur manufacturing for export with subsidies and other incentives for export production. -Significant government investment, but meant for people to export to people in the developing world.

How are exchange rates managed?

Fixed Exchange Rate and Floating Exchange Rates

How is FDI different from portfolio investment?

Foreign Direct Investment (FDI): investment in a foreign country via the acquisition of a local facility or creation of a new one. This is the largest in terms of global capital flows. Portfolio investment: investment in foriegn stocks, bonds, or other instruments (no managerial control)

What is foreign aid?

Foreign aid is money given to a country for military or economic development reasons. It can be bilateral (government to government) or multilateral (IO to government).

What has been the effect of globalization on income inequality in the third wave?

Globalization has caused greater inclusion and influence of developing countries- such as Brazil, China, India, and South Africa.

Fixed Exchange Rate

Government commits to keep its currency at or around a specific value relative to another currency (often dollar or euro) -Used by smakk, open countries to facilitate trade and investments

What is the official development assistance? (ODA)

Governments lending or granting capital to other governments for developed purposes. Foreign aid, not as big as we would think it is

Who is Raul Prebisch and what was he known for?

He is known for the Primary Product Curse.

Why are some countries underdeveloped?

History/Colonial Legacies Geography Government Policies International Factors

What is home bias?

Home bias is the tendency for investors to invest the majority of their portfolio in domestic equities, ignoring the benefits of diversifying into foreign equities. This arose due to the extra difficulties associated with investing in foreign equities, such as legal restrictions and additional transaction costs.

What happens to holders of foreign denominated debt if the country devalues?

If devaluation occurs, then those holding the foreign denominated debt may have trouble making their payments; often leading to a banking crisis.

How does the level of debt denominated in foreign currency affect the decision to devalue or not devalue the currency?

If you devalue the currency, then you become more attractive for your goods on foreign markets. But if you don't devalue the currency, then it could lead to unemployment. When the currency is devalued, anyone in the country with substantial foreign-currency debts, including the government, faces serious trouble. As the local currency drops in value, the burden of foreign-currency debt rises.

What is ISI?

Import-substituting industrialization (ISI): reduce imports and encourage domestic manufacturing through trade barriers, subsidies, and state ownership of basic industries. -Heavy government involvement

What are the two kinds of sovereign debt and how are they different?

Internal Sovereign Debt- debt owed to actors within the same country External Sovereign Debt- debt owed to actors abroad - This is the largest portion of portfolio investment

What is the effect of a tariff on the willingness of domestic producters to produce the good?

It allows for concentrated benefits to be enjoyed by the producers so a gain in producer surplus.

What is the effect of a tariff on consumer prices?

It increases consumer prices and this, in turn, results in a loss of consumer surplus.

What are factors of production?

Land (agriculture) Labor (used to produce goods and services) Capital (machinery, equipment, financing) Human capital (skilled labor)

Quantitative Restriction (quota)

Limits placed on the amount of a particular good that is allowed to be imported

What is sovereign lending?

Loans from private financial institutions in one country to sovereign governments of other countries

Melitz model

Melitz (firm affiliation): a final model that is increasingly important is from Marc Melitz - Firms differ in their productivity (efficiency) - Opening the economy will benefit efficient firms (they will prosper and grow), while inefficient firms exit (go out of business). - So trade policy preferences will depend on the productivity and size of ones firm Small mom and pop stores won't want trade openness but large firms will want trade openness

Where is most of the value added to an Iphone?

Most of the value is from the US in engineering the phone. We use China for the labor, not for the supplies.

Was the 2016 Brexit vote the first referendum on UK membership in the EU?

No! There was one in 1974. In the first one, UK membership is controversially domestically. Labor comes to power in late 1974 and the cabinet is split on EC membership. Labor government holds negotiations with other EC members because they want more economic and political flexibility. Plan is to renegotiate UK membership and then hold a referedum. They voted to stay in the EU.

Bank for International Settlements

One of the oldest international financial organizations, created in 1930. Its members include the world's principle central banks, and under its auspices they attempt to cooperate in the financial realm.

Is sovereign debt FDI or portfolio investment?

Portfolio Investment

What forms does international investment take?

Portfolio Investment, Soviergn Lending, Foreign Direct Investment, Remittance, and Official Development Assistance (ODA)

What are exchange rates?

Price of one currency is increasing in terms of another

What is the primary product curse?

Primary product Curse: Raul Prebisch argued that less developed economies were at a disadvantage because they tended to produce primary products or raw commodities. Commodities like coffee or sugar... They tend to decline in price over time. They are very sensitive to short-term price changes. The demand for these goods doesn't rise as quickly compared to manufactured goods with world income. LDCs that rely on exports of these goods won't gain as much from global growth and will be more affected by global recessions.

What kinds of international institutions have states created to manage trade?

Reciprocity, MFN status, World Trade Organization, General Agreement on Tariffs and Trade (GATT)

What are reciprocity and MFN status? Do they encourage or discourage trade cooperation?

Reciprocity: negotiate reductions in tariffs that are balances (but not necessarily on the same products) Most-favored nation: if you reduce tariffs for one member, you must reduce them for all members They both encourage trade cooperation.

What are regional trade agreements? What are two examples?

Regional trade agreements are agreements among three or more countries in a region to reduce barriers to trade among themselves. -The amount of RTAs has increased rapidly over the past 20 years. -European Union - started as a customs union of 6 countries and now encompasses 28 nations in a single market -NAFTA- made up of United States, Canada, Mexico

What is the backstop?

Relations between Ireland and Northern Ireland have been troubled in the past. Lots of concern that a physical border would reignite violence. Backstop was a means to keep Ireland in the customs union until a way to prevent a physical border could be arranged. Variously described as an insurance policy or safety net, the backstop is a device intended to ensure there will not be a hard border between Northern Ireland and the Republic of Ireland, even if no formal deal can be reached on trade and security arrangements. It would mean that if there were no workable agreement on such matters, Northern Ireland would stay in the customs union and much of the single market, guaranteeing a friction-free border with the Republic. This would keep commitments of the Good Friday agreement intact.

What is remittances?

Remittances: money sent by individuals in one country to individuals in another, typically a migrants sending money to family back home. During recessions, less remittances happen.

Ricardo-Viner model

Ricardo-Viner (industry affiliation): factors of production are immobile within the country; capital and labor cannot be reallocated. - Once investments are made, workers and management have strong interest in any policies that might raise their profits (including tariffs) - Industry, rather than class becomes the key split. - Ex: When it comes to steel tariffs in the US, labor (workers) and capital (management/investors) in the steel industry favor trade barriers. But labor and capital in the auto industry likely have a different take- they don't have steel tariffs Factors are immobile within the country: capital and labor cannot be reallocated to different industries.

What is sovereign debt?

Sovereign debt is a special kind of portfolio investment. Sovereign debt is specialy because it represents loans to national governments.

How can openness to international investment lead to recessions and economic crisis?

Soverign debt can quickly become a burden to debtor nations, which makes them less popular. Gov attmpting to service their debts often cut spending and raise taxes to raise the money needed to pay off loans. They raise interest rates to restrain wages, profits, and consumption, which in turn reduces imports and increases exports. This in turn weakens the domestic economy and these measures can cause a recession or even a depression.

Stolpher-Samuelson model

Stolper-Samuelson (factor ownership): protection benefits the locally scarce factor of production - Key assumption is that factors are mobile and so can be used anywhere in the economy. - Intuition: if trade benefits that abundant factor (H-O), then protection benefits the scarce factor. - Trade is spooky: the scarce factor is scared of trade openness. - Workers vs capital- Labor will favor protection - Who supports trade? ○ The locally abundant factor will favor trade openness, while the scarce factor will oppose it. Implication: class-based conflict ○ In the developing world, this implies that labor will support trade, while in the developed world labor will oppose trade. ○ Ex: in the US labor normally opposes trade openness (it is a scarce factor), while in Bangladesh (labor favors openness). In labor-scarce US, labor's wages likely decline as openness increases, but the reverse is true in labor-abundant Bangladesh. - Problems Factor-based demands for protection are not the norm, however... most demands for protection come from narrow groups like farmers or the steel industry. With Bush steel tariffs, we saw capital and labor band together

Non-tariff Barriers

Subsidies and regulations that are imposed for the purpose of limiting foreign imports

What are the major types of trade policy instruments?

Tariff, Quantitative Restriction (quota), Voluntary Export Restraint, Non-tariff Barriers

Which country is the largest holder of US foreign debt?

Technically China

What kinds of shocks affect the level of globalization?

Technology shocks: new tech that reduced transport costs and this drives up integration. Political Shocks: War, election of politicians opposed to global integration, type of regime the country has (democracy has lower trade barrieres) Economic shocks: depressions and recessions, China shock in the US

How was the Bretton Woods monetary system different from the current era?

The Bretton Woods monetary system is where the US on gold standard with others ficing their exchange rates to the US dollar but the current era is more loose coordination. Governments of the large econmies agree to intervene to stabilize exchange rates if needed, there is a mix between fixed and floating exchange rates.

From the Gold Standard?

The Bretton Woods monetary system is where the US on gold standard with others fixing their exchange rates to the US dollar. The gold standard is just where all major currenices are backed by gold.

What is an example of an economic union?

The European Union

How is the WTO different from the GATT?

The GATT is an international institution created in 1947 in which member countries committed to reduce barriers to trade and to provide similar trading conditions to all other members. In 1995, the GATT was replaced by the WTO. Some said the GATT was too loose. The WTO is -more structured -more formal -more encompassing of the GATT, although its goal is very similar

What is the WTO?

The WTO is an institution created in 1995 to succeed the GATT and to govern international trade relations. The WTO encourages and polices the multilateral reduction of barriers to trade, and it oversees the resolution of trade disputes.

What is the Washington Consensus?

The Washington Consensus: market reforms (free trade, capital openness, fiscal restraint) proposed by economists in the developed world to be implemented by developing countries. In the long run didn't work well. -More free trade, less taxes -There is a mixed record of success. -It was never really tried.

What is comparative advantage?

The ability of a country or firm to produce a particular good or service more efficiently than other goods that it could produce. A country has a comparative advantage in the production of a good if it can produce the good at a lower opportunity cost than other countries can.

What are the risks of international investment?

The bad - Increases foreign control over major economic decisions in host country -'Crowds-out' domestic investment- they are now more dependent on the foreign corporations -Often FDI comes with expesnive strings -'Enclave economy': benefits of investment concentrated in one sector

What is the European Coal and Steel community?

The goal was to link the economies of Europe in order to prevent conflagration. They will start with the raw materials needed to wage war: coal and steel.

What are the benefits of international investment?

The good - Capital/Savings transfer -Technology/expertise transfer -Less volatile than other kinds of international investment -Does not increase host country debt

Central Bank

The institution that regulates monetary conditions In an economy, typically by affecting interest rates and the quantity of money in circulation.

Who benefits from international investment?

The investors investing in the foreign country capital, and the foreign country

Why do actors wish to invest across international borders?

The search for yield: when times are good, investors look abroad for higher interest rate investments. They are willing to take the risk to go abroad. Retreat to safety: if times get tough, investors are willing to trade yield for safety.

Hecksher-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. For example, a labor-rich country will export goods that make intensive use of labor.

What is the current status of UK's membership in the EU?

They are technically still in it. Although the deadline for them to leave has passed, it has been extended.

How does the IMF help sustain sovereign lending?

They work to 'stem the bleeding' by providing payment support and partial guarantees of investments. But these bailouts come at a price; often policy changes in the debtor country that investors believe will prevent a future crisis.

What is the resource curse?

Those without access to easy income have little choice but to invest in education, infrastructure, and other things that make the economy more productive. States with easy access to oil, for example, tend to be underdeveloped.

What are the distributional implications of trade?

Trade increases demand for labor which in turn raises wages. Also, prices of factors of production tend to become more equal across countries. Wages in rich countries will decrease as wages in poor countries will increase.

What is the OLI framework?

When do firms make a foreign direct investment? OLI tells us they will invest if they: Have an ownership advantage; they own some asset (a technology, patent, management model, etc) that makes them profitable enough to over come the cost the cost of doing business abroad. There is a locational advantage: something about the location makes it more attractive than producing at home and exporting (proximity to natural resources, labor costs, tariff jumping, etc.) There is an internalization advantage: licensing their technology, patent, management model would reduce its value (potentially destroys it).

Austerity

the application of policies to reduce consumption, typically by cutting government spending, raising taxes, and restricting wages

Default

to fail to make payments on a debt