INR EXAM 2 - International Money & Finance

The current account balance tells us 2 things:

(1) the gap b/t total production and income (2) the gap b/t consumption and spending

CA = private CA + public CA which can be broken down into: CA = (__ - __) + (__ - __)

(S - I) + (T - G)

In terms of the current account exports = (__) income imports = (__)

+, -

When do capital controls have little salience?

- countries moving from a closed to an open financial system - when inflow controls are tightened

What are the mechanisms Spate says this phenomenon (deficit anxiety) works through:

1. Employment prospects 2. National status

According to Steinberg & Nelson: Who you vote for depends on these two things as it pertains to capital controls:

1. Financial Participation: how integrated you are into the finance system 2. Employment security

Why does Rodrik say we are no where close to complete international integration?

1. Formal barrier to trade (national sovereignty) 2. Capital flows (national borrowing opportunities are limited by the willingness of countries to service their obligations rather than their ability to do so)

4 main findings of Steinberg and Nelson:

1. Individuals are knowledgable about outflow controls 2. Controls are perceived as being one of the most important issues 3. Economic self-interest is an important factor in shaping voter's opinions about capital outflow controls 4. Preferences toward capital outflow controls influenced individuals voting behavior

What are the 2 places you can pull from to cover a deficit?

1. Other nations 2. Reserves

What are the two ways to close the gap b/t income and spending what you have a trade deficit?

1. Reduce consumption 2. Increase income

The international trilemma states that a nation can only maintain _____ simultaneously

2

____________ of ________ keep track of imports and exports (transactions) - just like an accounting system

Balance of payments

_________ __________ are policies that restrict cross-border flows and $ and financial assets

Capital controls

This account has to be balanced, it's the main part, it tracts the trade account of exports and imports

Current account

Balance of payments is composed of what 2 main accounts?

Current account & capital account

What are the 3 components to he international trilemma?

Democratic politics, hyper-globalization, national sovereignty

Current Account =

GNP - GNE

In framework of economic integration, your economy grows but your politics shrink:

Golden Straitjacket

maintains nation-state system but ensure that these jurisdictions do not interfere with economic transactions - instead of acting like an obstacle they'd be geared toward facilitating international commerce Domestic regulations and tax policy would either match international standards or be structured so they don't pose resistance to international economic integration essentially, maintaining national sovereignty while markets become international meaning politics have to shrink

Golden Straitjacket

What are the options of international economic integration (3)

Golden Straitjacket Bretton Woods-GATT Global federalism

GNP =

Gross national profit

Are trade deficits bad

IDK (the answer is neither yes nor no - LOOK AT ALL THE COMPONENTS)

Out of the two ways to close the gap b/t income and spending what way is better and produces the least amount of harm? Why?

Increasing income, b/c when you reduce consumption you are decreasing living standards (in countries where they can't borrow from other nations that is very impactful b/c their people have to take a big pay cut)

Does just knowing your current account balance tell you anything about the state of your financial health?

NO (you have to look at investment rates, what we're investing in, etc)

__________ ___________ poses serious restraints on international economic integration

National Sovereignty

When people are arguing about whether the trade deficit is good or bad what should they be asking instead?

What are we doing as a nation? Are we just spending? Or are we investing?

A trade surplus means that..

a country is exporting more than it is importing

A current account deficit means that...

a country is importing more than it is exporting

Describe the characteristics of populism

anti-establishment, nationalist, anti-globalization, nativist

Which of the following policy measures would help reduce a country's current account deficit? a. increase private investment b. increase private savings c. increase gov. spending d. decrease tax revenue

b

Why is the misconception that "bilateral trade should be balanced" wrong?

b/c: - trade deficits aren't good or bad - having balanced trade w another nation doesn't explain anything

Trade deficit misconceptions: (1) Trade deficits are ______

bad

Trade deficit misconceptions: (5) Bilateral trade should be __________ (in the sense that your trade with another nation should be even in order to have a "healthy" relationship)

balanced

Describe global federalism

basically a world government modeled after the US's system: national governments do not disappear, but their powers are severely limited by supranational legislative, executive, and judicial authorities who'd then take care of a world market

Steinberg & Nelson =

capital controls

Understanding whether your deficit is good or bad asks you to look at what you are spending $ on: Good gov spending = Bad gov spending =

college edu, clothes & drinks

CA =

current account

B/c the US dollar is the international reserve currency we have an advantage, it's easy and cheap to finance our CA _________ b/c everyone accepts the dollar

deficit

Spate's focus =

deficit anxiety

Countries that have a surplus will be lending to countries with...

deficits

Populism used to be most commonly associated with what types of nations?

developing

Since the US is the predominant international currency we...

don't rely on reserves, we borrow

What does Rodrik suggest as the only potential way to achieve complete international economic integration?

global federalism

Reading a current account deficit we know that it is not necessarily ________ or _____

good, bad

Trade deficits are necessarily _________ or ______ : it depends on how you're using your money, where you're getting it from, and it's overall value long term

good, bad

G =

gov spending

GNE =

gross national expenditures

National sovereignty or the nation-state pertains to territorial jurisdictional entities with ____________ powers of making and administering the law

independent

The Bretton Woods-GATT system sacrifices the objective of a complete ________ _________ integrations

international economic

I =

investment

Relatively ____ ______ workers have done poorly under globalization in advanced countries like the US

less skilled

Spate: Trade deficit priming -->

less support for free trade

Reserves are usually...

liquid assets

Another perk of being the international reserve currency is that we can finance debt at...

low interest rates

In reality, trade deficits do not _________ - they're not a measure of success b/c they don't tell you anything about the relative productive factors

matter

Current and capital accounts are _________ of each other

mirrors

Rodrik says that globalization is held in a very _______ regard in advanced countries

mixed

Perception is that you're importing a lot and not exporting at all, BUT you can have a very healthy economy if you export a lot but import even...

more

Since the current account and capital accounts are mirrors of each other: IF a country has a trade surplus ( + current account) their capital account must be...

negative

How close does Rodrik say we are to complete international economic integration (meaning, a world exists where markets for goods, services, and factors of production are perfectly integrated)?

no where near

Trade deficit misconceptions: (2) Trade balances reflect _________ trade policies why is this wrong?

perfect, the actual influence of trade policy on trade deficits is very small

There is a correlation b/t current account balance and _______________

protectionism

According to Spate, he finds informing people of a deficit makes people percieve it as a negative outcome and therefore become more....

protectionist

There is a correlation b/t current account balance and protectionism: Countries with very large current account deficits tend to be more ___________ Countries with large surpluses tend to be more ___-________

protectionist, pro-trade

This public obsession with the concern over trade deficits comes from the predominant beliefs of ___________

recantilism

All most other countries rely on ____________

reserves (what they don't borrow from someone else they draw from themselves)

We've started to see the rise of populism in ________ countries more recently

richer

Steinberg and Nelson explain that international finance regulation can be ________ under specific conditions

salient

S =

savings

(S - I) + (T - G) essentially asks...

savings - investments (+) tax revenues - gov. spending

T =

taxes (gov revenue)

If a country is running a current account deficit (CA = -) and national private savings = domestic investment then we know...

the gov must be running a budget deficit

What explains the nature of the economic trade offs?

the international trilemma

Despite the fact that having a trade deficit doesn't matter nor provides a clear indicator of a successful vs. unsuccessful economy who still carries this factor as a main concern?

the public

The US has a negative current account b/c we have more payments going out then coming in, which means that we have a...

trade deficit

Economics is a science of...

trade offs

IF a country has a positive current account they have a...

trade surplus

Trade deficits vs. _______ __________

trade surplus

T/F - over the lsat 10 to 15 years the rise of populism has been occurring in the US and W EUR

true

T/F - trade surpluses or trade deficits are not an effective measure of economic performance

true

T/F we can have TOO much globalization

true

T/F you're current account balance can be (-) and still be good

true

What is the key difference b/t global federalism and the golden straitjacket?

under global federalism politics would not shrink (they'd just move to the global level)

Trade deficit misconceptions: (3) Trade deficits lead to ____________ and ______ economic growth Again, it's not enough to know that you have a trade deficit, you need to know why you have a trade deficit - a deficit doesn't tell us about whether the underlying conditions are good or bad

unemployment, slow

According to Steinberg & Nelson: Capital controls are likely to become a publicly salient issue when: Economically ___________ countries reimpose regulations on outflows of $

unstable

What has caused this increase in populism in W EUR rather than latin america more recently?

vote share of populist parties in EUR have increased, driven by the increase in far right ideology

According to Steinberg & Nelson: attitudes on capital controls also influence __________ choice in elections

voter

Just like before, Rodrik states that alliances will form b/t winners and losers of economic integration: winners = losers =

w: exporters, multi-national enterprises and financial interests l: environmentalists, labor groups

Case study of Mexico as it pertain to the misconception that trade needs to be "balanced" Say, you cut imports from Mexico b/c we have a trade imbalance why is this not smart?

we'll consume less (lowering quality of life) we have to make up for the difference somewhere - aka transferring our deficit now to just another nation we choose to trade with next

So what does it mean if CA = GNP > GNE

we're making more than we are spending

When do you get a trade deficit?

when you are spending more than you're making or consuming more than you're producing

usually people associate import heavy with negative consequences but that is...

wrong

According to Spate's article, does telling someone about a trade deficit make them anti-trade?

yes (strong affect)

According to Steinberg & Nelson: You are MORE favorable to capital controls (aka you support them) if:

you work in a domestic industry or in non-tradable sectors