Global Economics

David Ricardo

- 1772-1823 - Classical British economist known for theory on wages and profit, labor theory of value, and the theory of comparative advantage, which was a fundamental argument in favor of free trade and specialization of individuals. Also helped with law of diminishing return. -Great work was Principles of Political Economy and Taxation (1817) (included theory of comparative advantage) - Associated with free trade --> mutual national benefit from trade even if one country is more competitive in every area than its trading counterpart and that a nation should concentrate resources only in industries where it has a comparative advantage

Uruguay Round

- 8th round of multilateral trade negotiations conducted within framwork of the GATT from 1986-1994, 123 countries as contracting parties - Created the WTO - Goals: extend GATT trade rules to areas previously exempted as too difficult to liberalize (agriculture, textiles) and increasingly important new areas previously not included (trade in services, intellectual property, investment policy trade distortions) -The key agreement that emerged from the Uruguay Round was the creation of an international dispute settlement system, that was not previously included in GATT agreements, leading to bureaucratic sluggishness that negatively affected developing nations trying to negotiate fair trading agreements with stronger nations.

European Union

- A political and economic union of 28 member states that are located primarily in Europe. -started by the Maastricht treaty in 1993, it was, like its predecessor the European Community, an economic alliance, but it has since developed to include a governing political body as well - Has developed an internal single market through a standardised system of laws that apply in all member states - EU policies aim to ensure the free movement of people, goods, services, and capital within the internal market, enact legislation in justice and home affairs, and maintain common policies on trade, agriculture, fisheries, and regional development. - Goal to establish a single European market that abides by one set of customs and courtesies. -Represents roughly 22% of the world economy and is one of the largest economic forces on the planet, including being the largest trading partner with the US -Adopted Euro in 1999 -Reason for Euro: currency risks were removed from European trade so a European citizen can easily identify the best price for a product from any company in member nations without first running each price through a currency converter. This makes prices across the EU transparent and increases the competition between members. Plus, easier travel and governed by European Central Bank, removing political pressure from economic matters

Industry Supply Chains

- A supply chain is a network between a company and its suppliers to produce and distribute a specific product, and the supply chain represents the steps it takes to get the product or service to the customer - The supply chain comprises the flow of all information, products, materials and funds between the different stages of creating and selling a product. Every step in the process, including creating a good or service, manufacturing it, transporting it to a place of sale and selling it is a company's supply chain. - Sig: Reduce operating costs, improve financial position. Organizations increasingly find that they must rely on effective supply chains, or networks, to compete in the global market and networked economy. In recent decades, globalization, outsourcing, and information technology have enabled many organizations, such as Dell and Hewlett Packard, to successfully operate collaborative supply networks in which each specialized business partner focuses on only a few key strategic activities - Difference between a value chain and a supply chain is that a supply chain is the process of all parties involved in fulfilling a customer request, while a value chain is a set of interrelated activities a company uses to create a competitive advantage.

Public Financial Account

- At their core, the PUBLIC Financial Account are financial assets (portfolio or tangible) that are purchased by the government. - Taken together with Private Financial Accounts, which are the financial assets of the public sector, they are a key component of a country's balance of payments. - The Financial Account generally deals with the money that is crossing borders to purchase or sell assets, including bank deposits. - Taken together with the Capital Account (which is generally very tiny) it must balance out the Current Account of a country, thus creating an equilibrium in financial flows, ensuring that there is not a surplus and deficit in one versus the other. - If the financial account runs a large enough surplus, it can help offset a trade deficit, which is a negative consequence. - It means that the country is selling off its assets to pay for purchases of foreign goods and services, so it is most beneficial for the Financial Account and Capital Account to be in balance with the Current Account.

Federal Reserve Bank (and tools for influencing money supply)

- Central bank of the United States and arguably the most powerful financial institution in the world. -Founded by Congress in 1913 to provide nation with a safe, flexible, and stable monetary and financial system - Considered independent because its decision do not have to be ratified by the President or any other government official (still subject to congressional oversight tho) - Banks maintain accounts at Fed to make payments for themselves or on behalf of customers. End of the day balances in these accounts are used to meet the reserve requirements mandated by the Fed. Banks can lend end of day excess to institutions that expect shortfall in balance - Today Fed manages growth of bank reserves and money supply to allow stable expansion of economy - 3 tools: > Change reserve requirement. % of reserves bank must hold. Decrease in ration allows banks to lend more, thus increasing supply of money. > Change federal interest rate. Interest rate central bank charges commercial bank to borrow additional reserves, and private banks will then follow > Open market operations. Buying and selling gov securities by the fed. If fed buys securities from bank, increases money supply and vice-versa

Central government deficits

- Deficit occurs when expenditure > revenue, indicates financial health - Gov. deficits form the national debt - Expenses exceed income - To correct budget deficit, a nation may need to cut back on certain expenditures or increase revenue generating activities - Countries can counter budget deficits by promoting economic growth through fiscal policies such as reducing government spending and increasing taxes. For example, reducing regulations and taxes on corporations to improve business confidence. Can print currency, but this risks devaluation of currency - History: Early 20th century, few industrialized countries had large deficits. This changed after WWI, because countries borrowed heavily and depleted their financial resources in an effort to finance the war. This also allowed the US to emerge as the dominant world economy after WWI, because it did focus on domestic growth, only jumping into the war late in the game, preserving and building its budget surplus while the other industrialized nations of Europe destroyed themselves. However, other countries, especially those in Europe, were able to reduce deficits until economic growth rates dropped in 1960s and 1970s

Factors of Production

- Describes inputs that are used in the production of goods or services in order to make economic profit - Includes: land, labor, capital, and entrepreneurship (All three of these are required in combination at a time to produce a commodity) - The utilized amounts of the various inputs determine the quantity of output according to the relationship is called the production function. Production Possibilities Curve: - Assumes full use of factors of production available to it - An economy's factors of production are scarce; they cannot produce an unlimited quantity of goods and services. A production possibilities curve is a graphical representation of the alternative combinations of goods and services an economy can produce.

Doha Round

- Doha, Qatar; November 2001; latest round of trade negotiations among the WTO membership under director general Mike Moore - It was called to make up for the failings of the Uruguay round, which largely left developing nations out of the equation. - Also known as Doha Development agenda, objective to improve the trading prospects of developing countries, so that their financial institutions would improve and they could join the WTO - Approved decision on how to address problems that developing countries face when implementing the current WTO agreements -The primary aim of focus of the talks was on agricultural subsidies, namely agriculture industries in what regions receive subsidies. The US left the Doha Round during the Bush admin primarily due to the fact they felt most of the subsidies were being granted to European Agriculture, therefore negatively affecting the American Farmer. -The talks were dead by 2008, and the US reoriented its focus on negotiating a number of smaller trade deals, such as the TTP.

John Maynard Keynes

- During Great Depression, Keynes spearheaded a revolution in economic thinking - Challenged neoclassical economic ideas that said: freemarkets would in short and medium term automatically provide full employment as long as workers were flexible in their wage demands - He argued: aggregate demand determined the overall level of economic activity and that inadequate aggregate demand could lead to prolonged periods of high unemployment -During a recession, it is essential for the government to spend money, and even go into deficit spending if necessary. This is because when it puts money into the economy (via public works projects), companies will hire people, meaning that unemployment will drop, and people will be earning money meaning that they will begin spending in the economy again. - Advocated: use of fiscal and monetary policies to mitigate the adverse effects of economic recessions and depressions, which is exactly what FDR did to begin to raise the US out of the Great Depression - Influenced peaked just before WWII and 20 years after - Declined in 70s due to stagflation in Anglo-American economies and criticisms by monetarists just as Friedman

Comparative Advantage

- Economic law: any economic actor has ability to produce goods and services at a lower opportunity cost than other economic actors - David Ricardo - It is an opposing view to the theory of Absolute Advantage. AA refers to the ability to produce more or better goods and services than somebody else. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume. So, due to natural resources, a country may be better suited to produces goods/services with a low OC, and then trade with a country that needs those goods/services, but had a high OC in producing them. Thus, All actors, at all times, can mutually benefit from cooperation and voluntary trade. - Foundational principle in theory of international trade - Benefits: more income for countries, argument for free trade, tariffs skew comparative advantage (they waste resources on activities that don't produce highest return) - Example: China's comparative advantage with the United States is in the form of cheap labor. Chinese workers produce simple consumer goods at a much lower opportunity cost. The United States' comparative advantage is in specialized, capital-intensive labor. American workers produce sophisticated goods or investment opportunities at lower opportunity costs. Specializing and trading along these lines benefits each.

Fixed Exchange rate regime

- Exchange rate: rate at which one currency can be exchanged for another (aka value of another country's currency compared to that of your own) - Exchange rate is the price at which you can buy that currency - 2 ways price of currency can be determined against another - Fixed/ set/ pegged rate: rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the US dollar, but also other major currencies such as the euro) - To maintain local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return or the currency to which it is pegged. - Pro: Used to stabilize value of a currency by directly fixing its value, therefore value doesn't change based on market conditions. Trade/investment is easier and more predictable (good in small economies). Can also limit inflation. - Con: Pegged currency is controlled by reference value to get worth. Also prevents governments from suing domestic monetary policy to achieve macroeconomic stability - In 21st century, currencies in large economies are typically not fixed. Last economy to do so was China which adopted a more flexible system in 2005

Currency Depreciation

- Fall in the value of currency, as opposed to another country's currency or an international standard like gold, in a floating exchange rate system -Leading causes: easy monetary policy and high inflation - Countries with chronic current account deficits and high rates of inflation generally have depreciating currencies because there is an excess of that currency in foreign markets - If orderly and gradual: improves a nation's export competitiveness and may improve its trade deficit over time - Abrupt and large: scare foreign investors who fear that currency may fall further, leading them to pull investments - inflation can lead to higher input costs for exports, making exports less competitive in global markets, thus widening trade deficits -China routinely accused of keeping its currency artificially low to induce a healthier export market

Subsidies

- Form of financial aid/support/ benefits given to an individual, business or institution, usually by the government in the form of a cash payment or a tax reduction. - Typically given to remove some type of burden, and it is often considered to be in the overall interest of the public, given to promote a social good or an economic policy. - Seen as a privileged type of financial aid, as they lessen an associated burden that was previously levied against the receiver, or promote a particular action by providing financial support, usually against struggling sectors of a country's economy. - They can either be Direct or Indirect, which means a government reduces prices on goods and services so that necessary items in production may be purchased below market value, resulting in savings for the businesses involved in this particular sector. -There are also individual subsidies given by the government to support specific people, such as unemployment benefits or food stamps/welfare.

Foreign Exchange market

- Global decentralized market for trading of currencies - Determines foreign exchange rate - Market where participants can buy, sell, exchange and speculate on currencies. Also provides currency conversion for international trade and investments -Made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors - Forex (foreign exchange) market: largest financial market in the world, trades currencies

GDP (and what factors affect it?)

- Gross Domestic Product (GDP) is the measure of all the final goods and services produced by a country's economy during a specific period of time. - GDP includes all private and public consumption, government outlays, investments, private inventories, paid-in construction costs and the foreign balance of trade (exports are added, imports are subtracted) - GDP is a broad measurement of a nation's overall economic activity, indicator of economic health and standard of living, measure growth and decline - Generally divided into three sections; households, businesses, and government. GDP=consumption+investment+government spending+net exports. - Published by individual countries. International organizations (IMF World Bank) will maintain and publish historical GDP trends as well. - An economic expansion= consecutive quarters of positive GDP growth; two or more consecutive quarters of negative GDP growth= recession. - Common factors that affect a country's GDP are fluctuating interest rates, real wages, value of exchange rate, asset prices, and overall consumer confidence. External events, such as severe weather, political instability, and changing commodity prices can also impact GDP.

Maquiladora System

- In Mexico, a maquiladora is a manufacturing operation, where factories import certain material and equipment on a duty-free and tariff-free basis for assembly, processing, or manufacturing and then export the assembled, processed and/or manufactured products, sometimes back to the raw materials' country of origin - Arrangement allows plant owners to take advantage of low cost labor and to pay duty only on the value added, that is on value of the finished product minus the total cost of components. - Originated in Mexico in the 1960s - Provide employment and significant foreign exchange earnings for Mexico's economy - NAFTA (1993) created a Free Trade Zone which led to more Maquiladoras - They are a prime example of special economic zones that are used in many countries. For example, NAFTA has allowed companies to export raw materials to Mexico on a tariff and duty-free basis. Then goods/services are produced in Mexico, but sold in America. This system deprives the US worker a job, and many critics of NAFTA has pinpointed this loophole as an example of the trade deal's failings.

Major contributions of John Maynard Keynes about the importance of managing Aggregate Demand in an economy

- In the short run, especially in recessions, economic output is strongly influenced by aggregate demand. -Aggregate demand does not necessarily equal the productive capacity of the economy, but is instead influenced by host of factors and can behave erratically - Keynesian economists generally argue that, as aggregate demand is volatile and unstable, a market economy will often experience inefficient macroeconomic outcomes in the form of economic recessions (when demand is low) and inflation (when demand is high) - Can be mitigated by monetary policy by central bank and fiscal policy by government.

Diminishing Marginal Value

- Law of economics stating that as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product. -Marginal utility may decrease into negative utility, as it may become entirely unfavorable to consume another unit of any product. Therefore, the first unit of consumption for any product is typically highest, with every unit of consumption to follow holding less and less utility. -The law of diminishing marginal utility directly relates to the concept of diminishing prices. As the utility of a product decreases as its consumption increases, consumers are willing to pay smaller dollar amounts for more of the product.

Mass Customization

- Mass customization is the process of delivering wide-market goods and services that are modified to satisfy a specific customer need. - Mass customization is a marketing and manufacturing technique that combines the flexibility and personalization of custom-made products with the low unit costs associated with mass production. - Mass customization products may also be referred to as made to order or built to order. -Due to its ability to build a core product that can handle a variety of secondary functions attuned to the customer's desires, the attraction to mass customization has taken hold globally in the last decade-plus, and is emerging as the dominant production style for profitable goods sold on both the domestic and global marketplace. - Enabled by technologies such as computerization, internet, product modularization, and lean production

Company Value Chain

- Model developed by Michael Porter - Process by which businesses receive raw materials, add value to the raw materials through various processes to create a finished product, and then sell that end product to customers - Breaks down the flow of production activities into five categories. Each one of these categories is an opportunity for a company to maximize efficiency and create a competitive advantage. (see image) -Aim: to increase profits by creating value at each of the five product touch points so the value exceeds the cost associated with the product.

Interdependence

- Mutual reliance between two or more groups, to varying degrees - Core aspect of the liberal ideology - The idea that when states, organizations, and companies are dependent on one another for prosperity, they are less likely to enter into conflict with each other. - From the economic perspective, this is largely dependent on industry supply chains. When corporations have invested in assets around the globe and are dependent on their existence to maintain profits, they are going to try to protect those investments. - Foreign policy: When a large percentage of a country's gross national product is dependent on goods produced abroad, states are more likely to work towards mutually beneficial economic policies that allow for prosperity. - Interdependence came into popular policy in the mid 20th Century when technological advances made it easier for economies to interact. - Examples: Organizations such as the GATT and eventually the WTO have worked to assist in the creation of liberal economic policies that assist in the advancement of interdependent policies. - A modern example of this is the relationship between the US and China. These two countries are at odds in many respects, but the US is so dependent on manufacturing in China and China is so dependent on the US consumer base that any sort of major conflict between the two countries is unlikely.

Hand-Craft Production

- Process of manufacturing by hand with or without the aid of tools. -Common method of production in the pre-industrialized world. This started to change in the 1850's as the assembly line marked the beginning of the world of mass production. - Produces higher quality products, but it made the mass sale of products difficult because any sort of repair or replacement was near impossible given the fact that each product was unique. - Mass production is economically more efficient, but creates lower quality products. -Craft production economies are localized while mass production economies have much more opportunity for widespread manufacturing as well as outsourcing/offshoring for manufacturers. Example: early automobiles. As their sales grew rapidly, the craft production model made any sort of repair difficult since the consumer would always have to return to the original craftsman. When the mass production model introduced standardized, interchangeable parts, the craft production market took a serious hit.

Inflation Rate (and why does it matter?)

- Rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly. - Effects: goods and services within a country cost more, borrowing is more difficult because lending agencies are likely to increase interest rates, it erodes long term savings since the actual value of the money saved decrease. - Policy makers since end of 20th century try to keep inflation steady at 2% per year - Countries with higher growth can absorb higher rates of inflation

Sovereign Wealth Funds

- State-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds. - Invest globally. Most SWFs are funded by revenues from commodity exports or from foreign-exchange reserves held by the central bank, which accumulates the funds in the course of its management of a nation's banking system; this type of fund is usually of major economic and fiscal importance. - Other sovereign wealth funds are simply the state savings that are invested by various entities for the purposes of investment return, and that may not have a significant role in fiscal management. - There have been attempts to distinguish funds held by sovereign entities from foreign-exchange reserves held by central banks. - Sovereign wealth funds can be characterized as maximizing long-term return, with foreign exchange reserves serving short-term "currency stabilization", and liquidity management. Generally, the majority of SWFs tend to invest in lucrative markets, most specifically oil.

GATT

- The General Agreement on Tariffs and Trade (GATT) was formed in 1947 and took effect in 1948, after World War II. The GATT is an international trade treaty designed to boost the economic recovery of countries. - Primary purpose: to increase international trade by eliminating or reducing various tariffs, quotas and subsidies while maintaining meaningful regulations and fair competition. - Signed by 23 countries. Council for Trade in Goods is responsible for Gatt - The GATT, taking effect in 1948, is the predecessor to the WTO, formed in 1995, which still uses GATT text in its framework, but now includes the key dispute resolution mechanism. Both the GATT and WTO have been effective in reducing tariffs considering the fact that the average tariff of a GATT participant was 22% in 1947 and 5% in 1999

IMF

- The International Monetary Fund was created at the UN Bretton Woods Conference in July, 1944. - International organization headquartered in Washington, D.C., of "189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world." - Goal: build a framework for economic cooperation and avoid a repetition of the competitive devaluation that had contributed to the Great Depression. - 3 ways to help ensure stability of international monetary system: 1. Surveillance of economic policies by highlighting risks. 2. Providing loans to member countries to help with prevent balance of payment issues (i.e. Portugal and Greece). 3. Capacity development, which basically helps member countries design monetary policies that foster stability and growth. Sig: key international institution that works to stabilize the global monetary system. Example of liberal institutionalism in practice.

International Financial Capital Mobility

- The freedom of corporations to move both capital (physical assets) and financial resources and investments across international boundaries. - This can come in several forms: > Foreign Direct Investment (FDI) is when a foreign company builds a factory in another country (i.e. Toyota's factory in Texas). > Portfolio flows (moving interest rates around depending on interest rates) and bank transfers. - The ease of mobility can be determined by factors such as tariffs/taxes on capital flows, domestic restrictions on foreign capital/financial flows, and exchange rate volatility. - The ease of capital/financial mobility can help determine how interconnected the global economy is. With more relaxed rules and regulations, companies are more likely to utilize FDI's, creating a more interconnected economy. - It also allows investors to experience a better rate of return since they can move their portfolios around to follow good interest rates. - It can also help developing countries in that corporations would be more likely to invest in developing countries which would in turn bring wages to the people of that country.

Federal Funds Rate

- The interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight. - Reserves: excess balances held at the Federal Reserve to maintain reserve requirements - Federal Reserve Bank (FOMC) increases fed funds rate by decreasing money supply in the system that creates higher demand, pushing interest rates higher - Lifted in times of economic expansion and used to cool inflation - FOMC can increase money supply to lower target rate when economy is slow and inflation is benign Sig: one of most important interest rates in the US economy since it affects monetary and financial conditions, which have a bearing on critical aspects of the economy (employment, growth, and inflation) Example: A low federal funds rate makes investments in developing countries such as China or Mexico more attractive. A high federal funds rate makes investments outside the United States less attractive. The long period of a very low federal funds rate from 2009 forward resulted in an increase in investment in developing countries. As the United States began to return to a higher rate in 2013 investments in the United States became more attractive and the rate of investment in developing countries began to fall. The rate also affects the value of currency, a higher rate increasing the value of the U.S. dollar and decreasing the value of currencies such as the Mexican peso.

Mass Production

- The manufacture of large quantities of standardized products, frequently using assembly line technology. -Popularized by Henry Ford, mass produced goods have a lower labor cost and a competitive advantage over hand-crafted goods, which take a much longer time to be produced. - Typically characterized by some type of mechanization, as with an assembly line, to achieve high volume, the detailed organization of materials flow, careful control of quality standards and division of labor.

Current Account

- Trade, investment, transfer payments - Records a nation's transactions with the rest of the world, specifically net trade in goods and services, net earnings on cross border investments, and net transfer payments over a defined period of time, such as a year or a quarter - 1/2 of the balance of payments and the other half is the capital/financial account - measures imports and exports of goods and services; payments to foreign holders of a country's investments and payments received from investments abroad; and transfers such as foreign aid and remittances -A current account surplus indicates that the value of a country's net foreign assets (i.e. assets less liabilities) grew over the period in question, and a current account deficit indicates that it shrank.

Private Financial Account

- What: measurement of increases or decreases in international ownership of assets. Owners can be individuals, businesses, government, or central bank. Assets can be: direct investments, securities (stocks or bonds), or commodities (gold/hard currency) - At their core, the PRIVATE Financial Account are financial assets (portfolio or tangible) that are held by members of the private sector, be it individuals or corporations. - Taken together with Public Financial Accounts, which are the financial assets of the public sector, they are a key component of a country's balance of payments. - The Financial Account generally deals with the money that is crossing borders to purchase or sell assets, including bank deposits. Taken together with the Capital Account (which is generally very tiny) it must balance out the Current Account of a country, thus creating an equilibrium in financial flows, ensuring that there is not a surplus and deficit in one versus the other.

Currency Appreciation

- When the value of one currency increases in relation to another in a floating exchange rate system - Reasons for appreciation: government policy, interest rates, trade balances, and business cycles - A currency quote is the rate at which one currency is exchanged for another -When a states' currency appreciates, its consumers will start buying less domestic products and more foreign products because other currencies are relatively cheaper now. When currency appreciates or strengthens in relation to other currencies, imports get cheaper - When currency appreciates or strengthens in relation to other currencies, imports get cheaper (your dollar will buy more of another foreign currency so that you can purchase foreign goods, good news for American companies who import a lot of raw materials --> higher profit margins)

Unemployment rate (why does it matter?)

- the percentage of unemployed workers in the total labor force. It is widely recognized as a key indicator of labor market performance. A closely watched economic indicator, the unemployment rate attracts a great deal of media attention, especially during recessions and tough economic times. - Unemployed workers mean nation as a whole loses their contribution to the economy in terms of g&s that could have been produced. Unemployed also lose their purchasing power which can lead to unemployment for other workers

Stagflation

-A condition of slow economic growth/ high unemployment (economic stagnation) accompanied by rising prices/inflation and decline in GDP. - This condition occurs rarely; the last time it occured in the US was in the 1970s under the Carter admin. - Exacerbated by poor fiscal/monetary policy - Lack of academic consensus as to its causes - Stagflation is dreaded among all policy makers, because of the dilemma it presents for economic policy. Many of the actions that could be used to lower inflation often exacerbate unemployment and vice versa. Erasing stagflation once it occurs is expensive both fiscally and in social terms

Economic Protectionism

-A method that is employed to protect a home economy from foreign competition -Economic defense tool, contrasts the idea of free trade and economic interdependence. - Implementation of tariffs, quotas and subsidies. --> Serves to drive up the price of foreign goods in a domestic market, thus trying to persuade consumers to opt for the domestically produced product. - Subsidies of domestic industries: allows producers to lower the price of their goods. - Domestic producers to simply produce more goods than foreign competition. - Can be good for the economy in the short term, they are typically quite harmful in today's global economy. -Example: Smoot-Hawley Tariff of 1930. This tariff heavily subsidized domestic farm goods to compete with the cheaper European goods that were being imported. The result was a trade war that severely exacerbated the Great Depression. - Trumps current trade wars Sig: Has large effects on the global economy and can set the tone for a country's willingness to conduct international trade and diplomacy.

Lean Manufacturing

-Based around eliminating as much waste from the production process as possible. Waste is usually defined as something that does not add value from the customer's perspective. - Systematic method for waste minimization without sacrificing productivity - Waste is eliminated from the design, manufacturing, distribution, and customer service processes for higher overall efficiency and value. - Developed by the Toyota executive Taiichi Ohno (1912-90) during post-Second World War reconstruction period in Japan, and focuses on only manufacturing what undeniably adds value. Because Toyota was able to grow from a small company in post-WWII Japan to the largest car manufacturer in the world by the 1990s, the idea of only producing goods/services that improve overall customer value has become popularized with manufacturers everywhere.

Monetary Policy

-Consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. - Maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep in their bank reserves. - 2 types: expansionary and contractionary. >Expansionary monetary policy increases the money supply in order to lower unemployment, boost private-sector borrowing and consumer spending, and stimulate economic growth. This description applies to many central banks since the 2008 financial crisis, as interest rates have been low and in many cases near zero. >Contractionary monetary policy slows the rate of growth in the money supply or outright decreases the money supply in order to control inflation; while sometimes necessary, contractionary monetary policy can slow economic growth, increase unemployment and depress borrowing and spending by consumers and businesses. An example would be the Federal Reserve's intervention in the early 1980s: in order to curb inflation of nearly 15%, the Fed raised its benchmark interest rate to 20%. This hike resulted in a recession, but did keep spiraling inflation in check

Economic Liberalism

-Economic system organized on individual lines, which means the greatest possible number of economic decisions are made by individuals or households rather than by collective institutions or organizations. - Basis: strong support for a market economy and private property in the means of production. - Tend to oppose government intervention in the free market when it inhibits free trade and open competition, though not opposed to government intervention in every circumstance. - Tenants are Free markets and private ownership of capital assets - Rose in response to mercantilism and feudalism - Today: opposed to socialism and planned economies (and protectionism)

Economic Nationalism

-Ideology that favors state interventionism in the economy, with policies that emphasize domestic control of the economy, labor, and capital formation, even if this requires the imposition of tariffs and other restrictions on the movement of labor, goods and capital. - Oppose globalization or at least question the benefits of unrestricted free trade. - May include: mercantilism, protectionism, or import substitution -Especially prominent in the late 19th/early 20th centuries, when, for smaller states, a strong economy, which translates into strong domestic political power, could be the difference between maintaining sovereignty or being conquered - Example: The economic policies advocated by Donald Trump in the wake of the United States presidential election, 2016 has been considered by some as a (partial) return to the economic nationalism of the Theodore Roosevelt Era. Trade Tariffs on Chinese raw materials like aluminum and steel

Investment (relationship to GDP/savings)

-Investment is an asset that is purchased/ funded with the hopes that it would generate future revenue; it could be the buying of capital or the building of a factory. -It is used to help calculate a country's GDP (C+I+G+Ex-Im). -In this sense it is balanced against savings to help determine a nation's current account balance and ability to borrow/lend money to the rest of the world. -If Investment/spending >savings/earning. Then a country will be a net borrower.

Great Recession

-Period of economic decline that occurred during the late 2000's and early 2010's. Officially lasted 2007-2009. Worst economic decline since the Great Depression, though it was relatively minor in comparison (the world GDP fell around 1% rather than 15% seen in the Great Depression). - Unemployment rate doubled in US -Stemmed from the financial crisis of 2007-8 during which the trading of subprime mortgages in the US caused a chain of economic collapses, beginning with the crash of the housing market. The root cause of this crash came from a lack of government regulations in the financial sector and breakdown in corporate governance as well as excessive borrowing and risk by households. - Impacts: public outcry for reforms in corporate regulatory policies. Changed global economic balance of power. Hit developed countries much harder, which gave rising economies such as China and India chances to make their mark in the future advancement of the world economy.

FDR

-President during most of the Great Depression, implementing his New Deal domestic agenda in response to the worst economic crisis in U.S. history. - As a dominant leader of his party, he built the New Deal Coalition, realigning American politics into the Fifth Party System and defining American liberalism throughout the middle third of the 20th century. - Unemployment fell dramatically during Roosevelt's first term. It increased in 1938 ("a depression within a depression") but continually declined after 1938. Total employment during Roosevelt's term expanded by 18.31 million jobs, with an average annual increase in jobs during his administration of 5.3%. - New Deal: series of federal programs, public work projects, financial reforms and regulations enacted in the United States during the 1930s, created in response to the Great Depression. The Federal Emergency Relief Administration (FERA) set aside millions for direct relief payments to the poor. The Civilian Conservation Corps (CCC) funded forestry jobs for thousands of men. The National Industrial Recovery Act (NIRA) set codes for fair business practices. ----most influential of Roosevelt's New Deal programs was the Social Security Act, which provided pensions to the elderly through a payroll tax. Altered over the years, Social Security has remained a significant source of support for elderly and disabled Americans.

Housing Bubble

-Run-up in housing prices fueled by demand, speculation, and exuberance. Start with an increase in demand during a time of limited supply. Since it takes a long time for the supply of houses to increase, by the time the supply hits the original demand levels, the actual level of demand has likely stagnated or decreased, causing a sharp drop in prices and ultimately causing the bubble to burst. - The most recent example of a housing bubble came in the early 2000's culminating in 2008 with the Great Recession. As the demand for houses skyrocketed in the US, failure of government oversight allowed for banks to give out adjustable rate mortgages to people far above their realistic spending limits. As the mortgage-backed securities market began to fall when homeowners failed to pay their mortgages, housing prices fell by up to 40% and there were millions of home foreclosures. The housing bubble which caused the great recession brought the failure of corporate governance into the public eye and played a part in the shift of balance of economic power around the world

Production Possibility Frontier

-This shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed. -Allocating scarce resources from one product to another involves an opportunity cost -If we increase our output of consumer goods (from point A to point B) then fewer resources are available to produce capital goods -If the law of diminishing return holds true then the opportunity cost of expanding output of X measured in terms of los units of Y is increasing. - Assumes resources are fixed, and choice between two commodities

Alexander Hamilton

-as the first Secretary of the Treasury, he built the nation's economic order by implemented the nations first tariff system, national bank, and established trade relations with former enemy Britain - Developed system of nuanced but assertive economic nationalism - Said trade restrictions were crucial to development of young nation's industrial base and a guard against practices of European nations he deemed unfair - Trade regulation = essence to economic policy - Commerce must be subject to restraints of government -Hamiltonian school of thought: pro-British and US should spearhead its foreign affairs with its liberal economic values. Also passionate believers in strong Executive who is able to guide fiscal policy and deftly control and secure the nation's markets

Adam Smith

1732-1790 - Economic philosopher, who is considered the father of modern economics, and whose ideas are the basis for the classical school of economics -A proponent of laissez-faire economic policies (minimizing government intervention and taxation in free markets), he wrote "Wealth of Nations," which also argued for the division of labor and specialization to induce prosperity - Stated that in a free market, prices are determined by supply and demand. - The "invisible hand": the tendency of free markets to regulate themselves by means of competition, supply and demand, and self-interest -concept that each person, by looking out for him or herself, inadvertently helps to create the best outcome for all - Wealth of Nations: concept of GDP (based on production and commerce) and argued for free exchange

Concept of Multiplier

A multiplier is the factor by which gains in total output are greater than the change in spending that caused it. It is usually used in reference to the relationship between investment/government spending and total national income. The multiplier theory and its equations were created by British economist John Maynard Keynes. He believed that any injection of government spending created a proportional increase in overall income for the population, since the extra spending would carry through the economy. ΔPlanned Expenditure/1-marginal propensity to consume You want the change in planned expenditure to be less than the total output, so the number, when plugged into the Keynesian multiplier (1/mpc) is greater than 1.

Tariffs

A tariff is a tax imposed on an imported good or service. They are used to restrict imports by increasing the price of goods and services purchased from overseas and making them less attractive to consumers. Governments may impose tariffs to raise revenue or to protect domestic industries from foreign competition. By making foreign-produced goods more expensive, tariffs can make domestic-produced ones more attractive. By protecting these industries, governments can also protect jobs. Tariffs can also be used as an extension of foreign policy: imposing tariffs on a trading partner's main exports is a way to exert economic leverage Tariffs can have unintended side-effects, however. They can make domestic industries less efficient by reducing competition. They can hurt domestic consumers, since a lack of competition tends to push up prices. They can generate tensions by favoring certain industries over others, as well as certain regions over others: tariffs designed to benefit manufacturers in cities may hurt consumers in rural areas, who do not benefit from the policy and are likely to pay more for manufactured goods. Finally, an attempt to pressure a rival country using tariffs can devolve into an unproductive cycle of retaliation, known as a trade war.

World Bank

An international financial institution that provides loans to countries of the world for capital projects, primarily for reconstruction and development. The World Bank's stated goal is the reduction of poverty. However, according to its Articles of Agreement, all its decisions must be guided by a commitment to the promotion of foreign investment and international trade and to the facilitation of capital investment. The World Bank was created at the 1944 Bretton Woods Conference along with the International Monetary Fund as a result of many European and Asian countries needing financing to fund reconstruction efforts. The intention behind the founding of the World Bank was to provide temporary loans to low-income countries which were unable to obtain loans commercially.

Oil Shocks of the 1970s

By the early 1970s, American oil consumption-in the form of gasoline and other products-was rising even as domestic oil production was declining, leading to an increasing dependence on oil imported from abroad. Despite this, Americans worried little about a dwindling supply or a spike in prices, and were encouraged in this attitude by policymakers in Washington, who believed that Arab oil exporters couldn't afford to lose the revenue from the U.S. market. These assumptions were destroyed in 1973, when an oil embargo imposed by members of the Organization of Arab Petroleum Exporting Countries (OAPEC) led to fuel shortages and sky-high prices throughout much of the decade. -After WWII, the Allied powers carved out land in Palestine to create the state of Israel, which lead to much tension in the region (specifically Egypt and Syria) so violent conflict ensued known as the Yom Kippur war in 1973. During this war the USSR sent arms to Egypt and Syria while the United States helped arm Israel. In response, members of the Organization of Arab Petroleum Exporting Countries (OAPEC) reduced their petroleum production and proclaimed an embargo on oil shipments to the United States who was the main supporter of Israel. Even when the war was over the embargo still lasted, creating an international energy crisis. The Americans wrongfully thought that a boycott on Arabian oil would hurt the Persian Gulf financially but the rise in price per barrel made up for the reduced production. -resulted in stagflation in the US

WTO

Coming into existence in 1995 after an agreement between 123 nations in the Uruguay negotiation round, it essentially acts as a governing body to police the ideals of GATT, which means devotion to free-moving, tariff-free globalized trade. The WTO deals with regulation of trade in goods, services and intellectual property between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements. Now comprised of over 155 member states, it comprises about 96% of world trade, and mediates any trade disputes any member countries may have amongst each other.

Consumer Surplus

Consumer Surplus is the difference between what consumers are willing and able to pay for a good or service relative to its market price, or what they actually do spend on the good or service. If they are willing to spend more on a good/service than it actually costs, then they will be able to keep more of their income, leaving them with an unexpected surplus. On the other hand, if the price of a good/service is higher than they are able to afford, they will run a personal deficit. It is believed the price an individual is willing to spend on a particular good or service reflects the amount of utility he receives from that good or service, however this differs person to person

E3D Manufacturing

E3D= Everything 3D Reference to the rise of 3D printing and the monumental impact it could have on future production. Whole products are able to be produced upon command, bypassing complex and global manufacturing chains. This practice also challenges copyright and patent laws, as replicas of products may be produced as well.

Savings

Money set aside for future use. According to Keynesian economics: Disposable income - Consumer expenditure over given period of time. Income not spend on consumer g&s - Keynes says that investment = savings (always) -It is used as a marker for a country's Current Account Balance and a nation's Net Lending and borrowing via the rest of the world. If a country takes in more money (saves/earns from the rest of the world), then they will be a net lender (rather than borrower). If they invest more than they save, they will be a net borrower. - Gave rise to controversy as to whether they are always equal or generally unequal - Intuitive: if i am saving things and put it into a bank, that bank will lend that money and it will be used for investment. - National Income = Consumer spending + investment +gov spending Y = C+I+G Y-C-G=I Y-C-G = National Savings (S) S=I

Offshoring

Offshoring is the concept that production and labor costs are potentially cheaper in a different country so companies based in a more expensive country move their operations to the cheaper country to cut costs. Offshoring comes with a set of pros and cons. One pro is that much of the revenue earned abroad returns to this country in wages for other employees, investment in R&D, profits for shareholders, and taxes for the government. One con might be that the "more sophisticated jobs" that US workers are supposed to move on to now that their jobs have been moved offshore do not exist. They are never firmly defined. And it is an affront to the US worker who trained for the "jobs of the future" only to see those computer programming jobs outsourced.

Outsourcing

Outsourcing is the idea of getting a company to handle the internal activity of another company through a contract. The activity that the outside company is handling could range from anything between call center support to facility management. The word "outsourcing" comes from the phrase "outside resourcing." It could come from both foreign or domestic contracting depending on whatever the internal activity requires within the company. The difference between outsourcing and offshoring is that outsourcing could be a domestic company handling the activity of another company whereas, offshoring means the resources of a company are literally moved to a foreign company. For instance, an american computer company contracting the resources of a call center in Ohio would be outsourcing. That same computer company using factories in Taiwan to make the parts for their computers is offshoring.

Great Depression

The Great Depression was a severe worldwide economic depression that began in the US in 1929 and moved across the world. It lasted until the late 1930's. It was the longest and deepest depression of the 20th Century and is now considered the benchmark for how low the economy can fall. It began after a massive fall in stock prices in fall of 1929 and hit it's full strength on what is now known as Black Tuesday (29 Oct. 1929). In the first three years, the world GDP fell an estimated 15%. - Personal income, tax revenue, profits, and prices all plunged. International trade fell by over 50% as well. The combination of all of these caused unemployment in the US to rise to 25%. - Economist John Maynard Keynes argued that long term declines in aggregate expenditures resulted in high levels of unemployment and production. Monetarists, such as Milton Friedman, argued that the crash of the stock market that resulted in ⅓ of all banks to vanish, is the root cause of the depression. In reality, the cause is likely a combination in that the government banked on the economy to self-equalize. The combination of public and private entities failing to spend necessary amounts of money to keep production levels stable and the severe and rapid stock market crash are the likely combination that resulted in the 10 year depression. Governments around the world tried to react to the Great Depression by increasing spending. This was spearheaded in the US by FDR's New Deal. Though this helped some, the industrial demands of WWII are what really pulled the world out of the depression. The historical significance of the Great Depression is that is market a low point in 20th Century economics and provided a baseline and lesson to leaders about what not to do in regards to spending and international trade.

Keynesian-cross model

The Keynesian-cross model determines the equilibrium level of gross domestic product (GDP) by the point where the total or aggregate expenditures in the economy are equal to the amount of output produced. Real GDP is usually depicted along a horizontal axis and the measure of aggregate expenditure is along a vertical axis. The final ingredient of the Keynesian cross is the aggregate expenditure schedule, which shows the total expenditures in the economy for each level of real GDP. The intersection of the aggregate expenditure line with the 45-degree line shows the equilibrium for the economy because it is the point where aggregate expenditure is equal to output or real GDP. The point where the aggregate expenditure line crosses the 45-degree line will be the equilibrium for the economy. It is the only point on the aggregate expenditure line where the total amount being spent on aggregate demand equals the total level of production.

Millenium Development Goals

The Millenium Development Goals were the eight goals developed in 2000 by the UN that were supposed to be implemented by 2015 following the Millenium Summit. All 191 nations and 22 international organizations committed to reaching these goals by 2015. 1. To eradicate extreme poverty and hunger 2. To achieve universal primary education 3. To promote gender equality and empower women 4. To reduce child mortality 5. To improve maternal health 6. To combat HIV/AIDS, malaria, and other diseases 7. To ensure environmental sustainability 8. To develop a global partnership for development Each goal had specific targets and dates for those targets to be reached so to accelerate that process the G8 finance ministers agreed in June 2005 to provide enough funds to the World Bank, the International Monetary Fund (IMF) and the African Development Bank(AfDB) to cancel $40 to $55 billion in debt owed by members of the heavily indebted poor countries (HIPC) to allow them to redirect resources to programs for improving health and education and for alleviating poverty. As of 2013, progress towards the goals was uneven. Some countries achieved many goals, while others were not on track to realize any. A UN conference in September 2010 reviewed progress to date and adopted a global plan to achieve the eight goals by their target date. New commitments targeted women's and children's health, and new initiatives in the worldwide battle against poverty, hunger and disease.

New Deal

The New Deal was the domestic program of the administration of U.S. President Franklin D. Roosevelt between 1933 and 1939, which took action to bring about immediate economic relief as well as reforms in industry, agriculture, finance, waterpower, labour, and housing, vastly increasing the scope of the federal government's activities. The term was taken from Roosevelt's speech accepting the Democratic nomination for the presidency on July 2, 1932. Reacting to the ineffectiveness of the administration of President Herbert Hoover in meeting the Great Depression, American voters the following November overwhelmingly voted in favour of the Democratic promise of a "new deal" for the "forgotten man." Opposed to the traditional American political philosophy of laissez-faire, the New Deal generally embraced the concept of a government-regulated economy aimed at achieving a balance between conflicting economic interests. -most important reform:SOcial Security

NAFTA

The North American Free Trade Agreement (NAFTA) was implemented on January 1, 1994 between Mexico, Canada and the United States. The agreement eliminated most tariffs on trade between these nations. NAFTA's purpose is to encourage economic activity between the three major economic powers of North America. Numerous tariffs, particularly those related to agriculture, textiles and automobiles, were gradually phased out beginning at the agreement's implementation and ending on January 1, 2008. The legislation was developed during George H. W. Bush's presidency as the first phase of his Enterprise For The Americas Initiative (EA). The Clinton administration, which signed NAFTA into law in 1993, believed that it would create 200,000 U.S. jobs within two years and one million within five years because exports play a major role in U.S. economic growth. The administration anticipated a dramatic increase in U.S. imports to Mexico under the lower tariffs.

Ricardo's Model of Trade

The Ricardian model of international trade attempts to explain the difference in comparative advantage on the basis of technological difference across the nations. The technological difference is essentially supply side difference between the two countries involved in international trade. The Ricardian model assumes all other factors to be similar across the countries. The Labor Theory of Value forms the basis of the Ricardian model of trade. This model put stress on technological difference as the prime reason behind the trading activities. Unlike other international trade theories, which propose that trade is beneficial for some, but not favorable for others, the Ricardian model of trade highlights on the fact that trade is beneficial for all the countries involved in international trade. This model suggests that even a backward economy that uses inferior technology is going to benefit from international trade.

Smoot-Hawley Tariff

The Tariff Act of 1930, commonly known as the Smoot-Hawley Tariff, was passed to implement protectionist trade policies, meaning the restriction of imports from other countries. It was passed in order to aid the American farmer, which had to compete with a post-WWI Agricultural boom in Europe, resulting in plummeting prices on American crops. The Act was expanded to include more businesses outside the agricultural sector, but, following retaliatory tariffs by America's trading partners, American exports and imports were reduced by more than half during the Great Depression. As a result, the Tariff is widely considered to have exacerbated the effects of the Great Depression on the global economy. The legislation raised the average tariff by about 20%, which foreign traders could not afford, so they retaliated by implementing similar protectionist policies of their own, shuttering the free-flowing world economy. The Tariff indicated the interwar isolationism the US would embark on, and also shut Congress out of the process of drafting and enacting the general revisions that had marked the first 150 years of U.S. tariff history. This transfer of power from legislative to executive branch in matters of trade was crucial to the leadership the US displayed in the area of trade-liberalization in the post-WWII period.

Balance of Payments

The balance of payments (BOP), also known as balance of international payments, summarizes all transactions that a country's individuals, companies and government bodies complete with individuals, companies and government bodies outside the country. These transactions consist of imports and exports of goods, services and capital, as well as transfer payments such as foreign aid and remittances within a defined period of time, often a year. Divided into 2 accounts: - Current Account: Transactions in goods, services, investment income and current transfers. Included in calculation of national output - Financial Account: Transactions in financial instruments and central bank reserves (transactions in financial instruments) Lumped together with the Capital Account, which is minuscule

Trade Balance

The difference between the value of a country's imports and its exports for a given period. The balance of trade is the largest component of a country's balance of payments. Economists use the trade balance/balance of trade as a measure of the relative strength of a country's economy. The formula for calculating the BOT can be simplified as the total value of imports minus the total value of exports. However, the actual calculation includes several elements, and the amount of the trade deficit or surplus is compared to the country's GDP. To determine if a country is running a trade surplus or deficit, subtract its Credit(exports) from its Debit(imports). The United States has had a trade deficit since 1976 because of its dependency on oil imports and consumer products. Conversely, China, a country that produces and exports many of the world's consumable goods, has recorded a trade surplus since 1995.

Water-Food-Energy-Climate Nexus

The fact that water, food and energy availability, and an increasingly volatile global climate, are inextricably linked, and a sudden scarcity of one commodity could have negative effects on the others. As the world population approaches 8 billion, with increasing demands for basic services, and growing desires for higher living standards, the need for more conscious stewardship of the vital resources required to achieve those services and desires has become both more obvious and urgent. For example, as population rises, it will use more energy, meaning more strain on water and food sources, thus draining those finite resources, all while climate change also acts against those resources as well.

Aggregate Demand (and Keynes)

The total demand for final goods and services in an economy at any given time. Specifies the amount of goods and services that will be produced at a certain price level. Expressed as total amount of money exchanged for those g&s. - does not necessarily represent quality or standard of living - AD = C+I+G+(Nx); Consumer spending on g&s; Private investment and corporate spending for non-final capital goods (factories, equipment); government spending for public goods and social services (infrastructure), Net exports (ex-im) Keynes on importance of managing AD in economy: - In the short run economic output is strongly influenced by aggregate demand. - Keynesian economists generally argue that, as aggregate demand is volatile and unstable, a market economy will often experience inefficient macroeconomic outcomes in the form of economic recessions (when demand is low) and inflation (when demand is high) - Can be mitigated by monetary policy by central bank and fiscal policy by government.

Absolute Advantage

What: -ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group - In the global economy, this refers to the differentiation between the varying abilities of nations to produce goods efficiently - pioneered by Adam Smith in the late 18th century as part of his division of labor doctrine - Countries that have an absolute advantage can decide to specialize in producing and selling a specific product or service and use the funds generated to purchase the goods and services that it requires from other countries. Example: the United States can produce 700 million gallons of wine per year but Italy can produce 3 billion gallons of wine per year, therefore Italy has the absolute advantage

"The Invisible Hand"

What: Used by Adam Smith to describe unintended social benefits of individual self-interested actions. individuals' efforts to pursue their own interest may frequently benefit society more than if their actions were directly intending to benefit society The term refers to an unobservable force that helps the demand and supply of goods in a market to reach equilibrium, as a result of individual interests. Two main ideas: 1. voluntary trades in a free market produce unintentional and widespread benefits. 2. these benefits are greater than those of a regulated, planned economy Each free exchange creates signals about which goods and services are valuable and how difficult they are to bring to market. These signals, captured in the price system, spontaneously direct competing consumers, producers, distributors and intermediaries — each pursuing their individual plans — to fulfill the needs and desires of others.