Econ 4311 Final Review

From the structuralists point of view, there are three key factors that allow inflation to rise. What are these three factors? Explain how they work.

1. Inadequate purchase power of exports (economy cannot import enough food ) food prices rise 2. Labor market are not competitive neither homogeneous (labor unions) 3. Most markets are not competitive: Oligopolies firms pass inputs and wages higher costs to the final price of the good.

What are the solutions that the structuralists propose in order to reduce inflation? Explain the reasoning behind these solutions.

1. Wage and price control to stop inflation inertia 2. Reduction in fiscal deficit 3. Monetization to avoid rising interest rates 4. Incomes policy to reduce conflict over the share of income accruing to labor and capital

The Austral Plan, in which country and when was it implemented (year)? What were the fundamental points of this plan? Was the plan successful (explain)?

Argentina: 1985 Prices, wages, and exchange rate management: prices and wages were frozen and the (nominal exchange rate wage was fixed) Fiscal adjustment: higher prices for public services, higher import tariffs and forced savings schemes for workers Monetary reform: new currency Austral Inflation was still present, real exchange overvaluated >> external account deficit

Nowadays, in the Community of Andean Nations, trade in goods is fully deregulated between which countries?

At present time, trade between Bolivia, Columbia, and Ecuador is fully deregulated.

During the Ecuador crisis, deposit withdrawals increased. Why did this happen? Explain.

Basically this happened due to the bank run that happened. In other words, the reason why this happened was due to the fact that there was absolutely no guarantee that you would be able to get your money back in the event that you wanted to get them back, since there was no get-deposit-back guarantee.

Additionally both countries were hit by similar external shocks. List these three shocks and explain why they are important.

Besides the fact that Mexico and Chile both faced the same initial macroeconomic conditions, both countries also were hit by moderately identical external shocks. These were: Increase in World Interest Rates scenario was so important was due to the fact that the debt that both Mexico and Chile had was issued in US$. And when the US$ appreciated due to contractionary monetary policies by the US Fed President Paul Volcker, it meant that the two countries had to pay more than originally anticipated. This is the prime reason why the increase in world interest is an important external shock. This also meant that former investments in the country were not as profitable anymore, since the capital was not being fully utilized, which contributed to a decline in TFP in both countries. Plummeting Prices of the Countries' Primary Exports is that Mexico was reliant on petrol exports to finance their debt whereas Chile was reliant on copper exports to finance their debt. However, when the price for these two commodities fell, it meant that they were not getting as much revenue in as before. In the long run and partially so in the short run, the financing of debt became an issue. This is the primary reason why this concept is one of the three important external shocks. This also meant that terms of trade decreased, which in the economy model that the study takes contributes to a decline in total factor productivity. Cut-off of Foreign Lending both countries were using new loans to finance old ones and thus had rolling debt. However, when this borrowing was cut-off, issues financing the debt became apparent and began to emerge. To conclude, increasing world interest rates fall in prices for primary exports, and cut-off of foreign lending were the primary external shocks that both countries experienced. The reason why they were so important is discussed above.

When did Ecuador announce dollarization? Finally, what did they mean by dollarization?

Both Ecuador as well as El Salvador became fully dollarized economies by 2000 and 2001 respectively. Ecuador announced that this would happen on January 2000. This basically means that the entire country would use the USD as its official currency.

In 2003 this group initiated negotiations with the US via CAFTA. In 2004 it was renamed CAFTA- DR. What does CAFTA-DR stand for? Which countries are part of this Free Trade Agreement?

CAFTA-DR stands for "Central American Free Trade Agreement - Dominican Republic". The following countries are. i. Guatemala ii. El Salvador iii. Honduras iv. Nicaragua b. And in 2004, the following countries joined: i. Costa Rica ii. Dominican Republic

What does CAN stand for?

CAN is an abbreviation for "Community of Andean Nations".

The study analyzes four possible explanations for the difference between Chile and Mexico's experience. List the four possible explanations. Which explanations do they rule out?

Chile and Mexico are two interesting countries, since they both experienced severe economic crisis, however, both recovered at different rates. The study proposes these following four explanations reasons for this: Standard Monetarist Story Corbo and Fisher's real wage story Sachs' debt overhangs story Structural reforms story The done study proposes that out of all the three explanations, only the fourth one holds true, even though the three other ones do indeed hold some merit. Moreover, only one part of the reform section actually holds true; the trade reforms undertaken part. To conclude, the only part of the four possible explanations that holds true is the 4th one that deals with Government reform policies. And the only part of this one that actually holds true is the trade reforms.

NAFTA has generated a lot of controversy. Explain two arguments in favor and two against NAFTA. Elaborate.

Cons: i. Loss of manufacturing jobs in the US and Canada: There are concerns that American and Canadian manufacturing industries would relocate to Mexico to take advantage of lower tariffs and therefore create unemployment in the American and Canadian manufacturing sectors. ii. Environmental Laws: There are concerns that US and Canadian businesses would relocate to Mexico to take advantage of the more lax environmental laws. b. Pros: i. Encouraged business confidence: as well as increased willingness to work together. This would create more stability in the region. ii. Shift to efficient production: Since both countries are allowed to trade among themselves, each country would take care and produce where it has a comparative advantage.

Explain what type of structural adjustments were needed in Ecuador prior to the year 2000.

Decentralization, privatization of energy and telecom companies

What are the costs of inflation?

Dollarization causes people to not hold their assets in the local currency. Costly as dollarization always is. Uncertainty in economic integrity causes firms to not know how much and when to produce. Capital Flight is when investors take their money out of the country, and this results in new potential investors not wanting to invest.

Define dollarization.

Dollarization is the use of US dollars instead of a national currency.

State the three types of natural disasters that have affected Ecuador's economic performance. In which sense has it been affected?

Ecuador has been the unfortunate victim of several natural disasters. The following are the most common: i. El Nino (hurricanes and floods): This destroyed crops as well as deteriorated infrastructure. ii. Earthquakes: Infrastructure was damaged as well as oil and gas pipelines. iii. Droughts: This damaged crops and damaged the country's coca exports. iv. All of the disasters above had lots of adverse effects on the economic performance of the country.

What is the tradeoff between having a fixed exchange rate and a floating exchange rate? State two advantages and two disadvantages for each type of policy.

Fixed Exchange Rate: Pros: Reduces uncertainty Lowers risk premiums Cons: Exports become less competitive Overvalued currency leads to current account imbalance For floating exchange rate: Pros: Neutralized impact of external shocks as well as inflation due to imports Cheaper export prices promote competitiveness. Cons: Unpredictable external debt and volatility in terms of prices on imports. Stability is only as strong as the underlying central bank is (credibility is fragile).

What does the Heckscher-Ohlin theorem add to the concept of comparative advantage?

He extended the Theorem of Comparative Advantage to include two-factor framework that deals with capital and labor. For instance, one country could have more capital in their agriculture in terms of better tractors. Another country could have a lower wage or a larger agricultural labor force. According to this theory, if both cooperate, both will be better off.

Name two of the most imported agricultural products categories from Mexico to the US.

Fresh vegetables as well as fresh fruit are the two most imported agricultural products accounting for $6.7 billion a year combined.

Briefly explain the differences between the golden age, the ISI era and the 80s in terms of trade policies.

Golden Age: Trade with the surrounding world, especially EU and US where the LA countries exported primary goods because they were needed in the aforementioned areas for the industrialization. b. ISI: Here, protectionism and domestic production was prevalent. Therefore, most of the LA countries closed their city gates to the surrounding world and grew ever inwards. c. 80s Era: Due to the fiscal and financial crisis surrounding many LA countries, many devalued their currency and began to increase their exports in order to get more and more dollars into their respective economies.

Are MERCOSUR's workers elected or staffed by national representatives?

In comparison to an economic union, Mercosur delegates are staffed by national representatives. This is the complete opposite scenario of an economic union.

Name two of the most exported categories from US to Mexico. (excluding agricultural products)

In general, machinery and electrical machinery from the US to Mexico are the biggest category of exports from the two countries accounting for roughly $70 billion dollars a year combined. Moreover, private commercial services to Mexico are the second largest category.

When do we say that a Free Trade Agreement has a trade-creating effect?

In general, this is said in the event that a FTA opens up a country further. If this happens, then it is said that the FTA has a "trade-creating effect".

Brazil suffered from indexation. What is indexation and what is its effect on inflation?

Indexation is the attempt to maintain the relative price of goods stable in an environment with high inflation. It was used to make inflation easier to live with.

Define inflation.

Inflation is the rate at which the general level of prices for goods and services rises in an economy.

In the Community of Andean Nations, is there free citizen mobility? And free labor mobility?

It can be argued that this is indeed the case, since the community of Andean Nations embraces the concept of Supranationality. It can be argued that there is free citizen mobility, since a citizen from one CAN-member country can go to another CAN-member country with just their national ID. Because of this, it can also be argued that CAN does also promote free labour mobility, since a person from one CAN-country can just show up in another CAN country with just their original national ID and find work.

This paper compares the economic situation after the debt crises during the 80s in Mexico and Chile. For which country was this decade a "lost decade"? For which country was this decade a "found decade"? Very briefly explain what they mean by lost and found decade.

It can be said that it was a "lost decade" for Mexico and a "found decade" for Chile. The reason for this was due to the fact that "Chile" found the appropriate reforms to take in their financial and banking sector, whereas Mexico was lost as to what appropriate reforms to hold on to. Therefore, lost and found actually means and refers to finding and missing the efficient economic reforms that lead to an efficient banking and financial system, respectively.

What were the two original members of Mercosur? When was MERCOSUR signed? Between which countries? Who are full members now? And the associate members?

Mercosur was a treaty signed between Argentina and Brazil in order to promote industrial integration. 1991 i. The full members nowadays are: 1. Argentina 2. Brazil 3. Paraguay 4. Uruguay 5. Venezuela ii. The associate members are the following countries: 1. Bolivia 2. Chile 3. Columbia 4. Ecuador 5. Guyana 6. Peru 7. Suriname

Mexico exports most of its goods to which country? And imports it from which country?

Mexico exports most of its goods to the US, which account for roughly 78% of all its exports. And it imports roughly 50.5% of all its goods and services from the US.

What was the primary good that Mexico was exporting? What was the primary good that Chile was exporting?

Mexico was exporting oil, while Chile was exporting copper.

Monetarists and Structuralists propose a different explanation on how inflation is generated. State and explain both of these theories.

Monetarists (Orthodox) believe that inflation is a monetary phenomenon and that its main cause is government deficit spending financed by money creation. They believe that inflation takes place when too much money is chasing too few goods. Structuralists (Heterodox) believe that inflation is caused by structural problems in the economy and that its main cause is a shortage of key goods. These are the people that believe that inflation is indeed caused by structural problems in the economy.

Elaborate on the statement: "Inflation is a monetary phenomena". (long answer)

Monetarists believe that inflation takes place when too much money is chasing too few goods. Monetarists further believe that there is indeed a positive correlation between money growth rates and inflation. Additionally, they believe that governments should reduce their spending to reduce inflation, since governments can sustain their deficits by either borrowing money or by printing money, by way of seigniorage.

Did the central bank give up to all its functions? If not, what functions did they keep? What did they give up to?

No, the central bank did not give up on all of its functions. In particular, the could still do the following: i. Issue coins in dominations smaller than $1 against foreign currency holdings. ii. Liquidity operations. iii. Would continue to hold reserve deposits. iv. Could still continue to borrow from banks that are liquid and lend to illiquid banks. 1. However, the central bank gave up on: a. Seigniorage

What is seigniorage? When does seigniorage cause inflation? Why?

Seigniorage is the government's ability to buy goods and services by printing money. Since an increase in the supply of money is nearly costless for the government, this is quite simple to do. It causes inflation when: 1. The economy is at full employment 2. There are sector specific shortages Since the cash that people hold loses value after new money is printed, inflation acts like a tax since consumers are forced to spend less (in real terms), while the government buys real goods and services. Inflation also occurs when money grows faster than the real growth of income

Both countries faced similar initial conditions on the macroeconomic level. List the four initial conditions.

Sizeable foreign debts Appreciated real exchange rates (wrt US dollar) Large current account deficits Weakness in their corresponding banking system

What does NAFTA stand for? When did negotiations begin? When was it signed? Name the countries and the presidents that signed NAFTA. When did it come into force?

Some facts about NAFTA that are relevant to this issue. i. NAFTA is an abbreviation: for "North American Free-Trade Agreement". The negotiations began on February 5th, 1991. ii. NAFTA was signed: by Mexico, the US, and Canada on December 17th 1992. iii. NAFTA came into force: on January 1st, 1994.

David Ricardo introduced the theory of the comparative advantage. Explain what it states. According to his theory, why is free trade beneficial?

States that if there are two countries and each produces the good that it is good at and the good in which it has a comparative advantages, then both countries would benefit, as the output in the world would increase due to a shift in production that makes production efficient.

State one benefit of international trade from the point of view of the consumers and another one from the point of view of the producers.

The benefit from both points of view would be the following: i. Consumers: Consumers like trade, since the variety of goods that they have available increases. ii. Producers: Producers like this too, since they have access to better tech and inputs in their firms.

What does CACM stand for?

The concept and abbreviation of CACM stands for Central American Common Market.

In the late 90s Ecuador experienced a crisis. What were the domestic factors that intensified the bad economic situation? Explain the relevance of each of these factors.

The crisis was intensified by the following factors: i. Public-sector dependence on oil revenue: Relevant, since the revenue that the country got out of oil was extremely volatile. ii. Semi-dollarization: This one was relevant, since the demand for the stable USD further drove the value of the Sucre down, which meant that debt financing became more and more of a burden. iii. Banking system: The banking system was both weakly administered as well as inadequate in supervision. Moreover, the banking system was also further exposed by shocks. iv. Public administration: The public administration was very weak. Moreover, there was a lot of pressure to subsidise energy

In the late 90s Ecuador experienced a crisis. What were the external factors that caused such a crisis? Explain the relevance of each of these factors.

The crisis was made due to the following factors: i. Climatic shocks (El Niño): Destroyed crops and infrastructure ii. Oil prices decreased iii. International financial crisis --> This lead to a recession in export markets.

Explain the differences among the four categories of regional integration.

The differences are the following: i. Free trade area (FTA): This sort of agreement only abolishes trade restrictions between participating members. However, each country maintains independent tariffs and trade policies with the rest of the world. ii. Customs Union: This one has the same as a FTA, however, the only difference is that it also has a common external tariff for the group. iii. Common market: This one has the characteristics of the above, however, it also seeks to work cross-border on policy-making things such as agriculture and social issues. iv. Economic union: This sort of union has a full economic integration as well as free movement of labour. Moreover, it has a common monetary policy as well as a common currency.

In March 1999, Ecuador's government announced a one year freeze on most deposits. Why did they do it? What was the effect on the economy?

The effects of this policy were the following: i. Temporarily reversed exchange rate depreciation ii. Slowed inflation iii. Disruption of real economic activity 1. As it can be seen above, the government did this in order to attempt to combat inflation as well as soothe the exchange rate depreciation.

The authors claim that structural reforms explain the difference in recovery. List the five types of structural reforms they analyze. Clearly explain why each of these reforms can or cannot explain the difference in recovery.

The five reforms were the following: i. Trade policy: This theory covered the prospect of trade liberalization. This one cannot be used, since Mexico engaged in far more liberalized trade policies that Chile did, however it did not grow faster. ii. Fiscal policy: These fiscal reforms meant that capital accumulation and hours worked increased. However, it is ruled out since these reforms had roughly the same impacts on both countries, which leaves the difference between them unexplained. iii. Privatization: This one is a possible candidate, however, it fails to account for why Chile grew faster than Mexico even though the SOEs in Chile fell less drastically than the ones in Mexico. However, it does point out that because Chile allowed competition with the former state-owned copper producing company, it did grow faster than Mexico, which did not allow any competition with its state-owned petro company. iv. The banking system: Chile had better allocation of credit than Mexico did, since the banks in Mexico were under the government, which wasn't the case in Chile. Therefore, merit. v. Bankruptcy procedures: This one certainly serves merit, since inefficient financial firms that went bankrupt were liquidated in Chile, however, this was not the case in Mexico in which the inefficient firms continued to receive bailouts and thus did not learn from their mistakes.

State four advantages of a free trade area.

The following four are advantages of a free-trade area: i. Countries Can Take Advantage of Economies of Scale ii. Generates International Competitiveness iii. Broadens Markets for Non-Traditional Exports iv. Strengthens Markets

State and explain the importance of four of the objectives of NAFTA (according to the article 102).

The following four are some of the objectives of NAFTA: i. Provide protection and enforcement of intellectual property rights: Important for countries like the US and Canada, such that their new interventions are not stolen. ii. Create procedures in order to resolve trade disputes: Important for the sake of having appropriate measurements to handle conflict. iii. Lowering tariffs and quotas on textiles and apparel: Important, since most or a lot of textile is produced in Mexico. This would boost the Mexican economy. iv. Removed tariffs on cars imported to Mexico: This would boost the Canadian and American economy, since these are the two economies that actually produce cars.

In the year 2000, macroeconomic conditions were more favorable to Ecuador. Why?

The following macroeconomic conditions were favorable: i. Oil prices increased: Important, since Ecuador got more revenue coming in. ii. Current account surplus: This was important, since there was no trade deficit to finance, which is good for the Ecuadorian economy. iii. Lending by multilateral nations: They had more money for more projects. iv. IMF Loan: Since IMF approved their credit to give out loans it is good for the country.

What implementation problems did they face? Explain why these problems were important.

The following problems were initially faced in terms of implementation: i. Unfreezing of time deposits: This was important due to timing issues, which costs money. ii. Price level increase from devaluation of the Sucre: Inflation always causes issues in an economy. iii. Adjustment of prices and energy: A lot of economic inefficiencies happen when prices are not optimal. iv. Practical issues with people not familiar with the dollar: The elderly had significant convenience issues in their everyday life due to this.

There are two side agreements to NAFTA. What are they? Why are they important?

The following two are the two side-agreements of NAFTA. i. North American Agreement on Environmental Cooperation: Important, since governments are ineffective outside its geographic range. ii. North American Agreement on Labour Cooperation: Important, since this one would seek to protect, enhance, as well as promote basic worker rights on both sides of the border.

In the 90s two important adjustments to the Central Bank of Ecuador were made. What were they, and when did they happen? What is their importance?

The following two critical adjustments were made: i. No direct lending to the government (1992): The central bank could not lend directly to the government. ii. Independence (1998): The central bank became independent of the government.

What were the causes of Ecuador's semi dollarization in the 80s and 90s?

The following were the causes of Ecuador's semi-dollarization. i. High inflation: This meant that the Sucre was instable, which lead to more demand for the USD. ii. Globalization: Dollar-denominated currencies and transactions became more prevalent. iii. Increased contractual relationships: There was an increase in renting, professional services, etc.

In class we saw four critiques to trade liberalization. State and explain them.

The four critical points of view were the following: i. Dependency Critique: As two countries begin to trade among themselves, they also become increasingly reliant upon one another, which is bad in the state of war for example. ii. Environmental Critique: One country might locate its businesses to another one where its environmental laws are more lax. iii. Gender Critique: Difference in gender iv. Welfare Critique: It is not known which country actually gains from trade, only that it is known that the total world output increases.

What was the goal of CAN? What were the original difficulties they faced?

The goal of the CAN agreement was to overcome the limitations of economics of scale from the ISI policies. i. The initial difficulties that were faced were: 1. Political disputes among countries 2. Differing domestic economic policies and goals.

In class we saw four categories of regional integration. State them and order them according to the level of integration involved (from less integration to more integration).

The levels or categories of regional integration are the following: i. Free trade area (FTA) ii. Customs Union iii. Common market iv. Economic union 1. As you move further and further down the list above, the more integrated it becomes

What countries are full members of the Community of Andean Nations today? And associate members?

The present day members of CAN are the following countries: i. Bolivia ii. Columbia iii. Ecuador iv. Peru b. The present day associate members are: i. Argentina ii. Brazil iii. Paraguay iv. Uruguay v. Chile

What are the solutions that the monetarists propose in order to reduce inflation? Explain the reasoning behind these solutions.

The proposals include: (1) Reduce government debt, (2) Reduce government spending, (3) Privatize the market, (4) Devalue currency, (5) Free prices, (6) Liberalize imports and exchange controls, and (7) Increase interest rates.

Why did semi dollarization made the crisis even worse? Elaborate.

The semi-dollarization made the crisis worse due to the following reasons: i. Exchange rate depreciation: Basically, as the value of the Sucre kept going down, more people started demanding the dollar lead to a further decline in the value of the Sucre. ii. Unmatched borrower position: As the value of the Sucre kept going down, non-performing loans were becoming more and more difficult to finance.

One of the theories that could explain the differences in performance between the two countries is the "Standard Monetarist Story". Explain what the theory says and why the authors of this paper rule out this theory as a possible explanation.

The standard monetarist story proposed that GDP growth can be expanded or stimulated by expansionary monetary policy, therefore the more rapid the growth of the money supply is, the faster the GDP growth will be. This theory was ruled out, since it implies that Chile should have recovered even more slowly than Mexico, which was not the case. Therefore, this case is a contradiction.

The authors claim that TFP movements drove both the initial downturns in Chile and Mexico and the difference in recoveries. What drove the TFP movements? (Differentiate between initial drop and subsequent drop). Why was the decline in TFP in Mexico more prolonged in comparison to Chile? What are the two mechanisms for the initial TFP drop?

The study hypothesis that it was the external shocks discussed above that initiated the initial total factor productivity (henceforth abbreviated as "TFP") drops. Moreover, the study proposes that the subsequent TFP drops came into existence due to the government policies in both countries at that time, since both countries had domestic policies that made their respective banking systems very fragile. b. When looking at the recovery that both countries made, it is apparent that Chile did recover faster than Mexico did in terms of the decline in TFP being more prolonged in Mexico in comparison to the one in Chile. The reason for this was that the Chilean government took quicker action in terms of reforming their economy, in particular their banking system. One of the most notable reforms was that the Chilean government let inefficient financial institutions go bankrupt, whereas the Mexican government was late with policy implementations in this area. In short, rapid policy reforms in Chile lead to recovery of TFP. This was not the case in Mexico. c. The study further proposes that the two mechanisms for the initial TFP drop were the following: i. Higher interest rates: When the interest rates increased, it meant that previous investments that were profitable were not as profitable anymore, since the associated capital was not fully utilised, further leading to a decline in TFP. ii. A Deterioration of Terms of Trade (henceforth abbreviated as ToT): Since the ToT deteriorated, both Chile and Mexico had to export more and more to maintain the quantity of the imports that they had. This meant that more domestic recourses and services were needed to produce. In the model that the study makes, negative ToT shocks attribute to declines in TFP. d. The two concepts above were the mechanisms that drove the TFP movement down, however, if someone wants to account for the difference in the recovery paths in both countries, the answer lies in the timing of privatisation and bankruptcy polices that the Chilean rapidly government took.

Name three of the key elements of NAFTA?

The three key elements of NAFTA are the following: i. Liberalisation of exports: of fresh fruit and vegetables from Mexico into the US and liberalisation of corn and wheat products from the US to Mexico. ii. Lowering tariffs and quotas: especially on textiles and appeal iii. Removal of tariffs on cars: especially on the ones, which were imported into Mexico from the US.

What are the four elements characterizing the trade liberalization?

These are the following elements that characterize the trade liberalization. i. Reduction of the coverage of a non-tariff barrier ii. Reduction of the average level of import tariffs iii. Reduction of the distribution of the tariff structure iv. Reduction of export taxes

Elaborate on the statement: "The main cause of inflation is caused by structural problems in the economy"

These are the people that believe that inflation is indeed caused by structural problems in the economy. Moreover, these people believe that the main cause of inflation is caused by a shortage in key goods. The increase in prices that is transmitted through the economy makes economic agents demand higher wages to maintain the same purchasing power. Moreover, structuralists believe that inflation is a necessary evil for economic growth and that expansion in money supply is a response to inflation, since more money is needed to cover the same transactions.

1993 and 1994 were good years for Ecuador. Why? Elaborate.

These years were the good years due to: i. New exchange rate policy: Floating exchange rate policies meant that uncertainty and financial outflows were reduced. ii. Descend in Public Deficit: iii. Economic boom: Real GDP grew at 2.22% per year. iv. Structural reforms: Lots of privatization took place in the financial sector. Moreover, inefficient firms were obliterated. v. Inflation fell: Inflation in the country fell from 31% to 26%.

Currency devaluations increase or decrease inflationary pressure? Elaborate.

They increase the pressure because people hear of the decrease of value of the money, then decide to raise prices on goods to fight the possible loss of value. Depending on how bad the increase is in inflation then people may demand other currency dropping the demand for that currency also causing inflation. And finally capital flight can occur because people are trying to not lose money so they do their best to change currency this is worst when the rich people in the country do this to not lose value of their money.

During the Ecuador crisis, where deposits guaranteed? Explain. What is the relevance of this?

They were not guaranteed, since the banks did not have the amount of money in their vaults to actually be able to make such a guarantee. This is very relevant, since people lost faith in the financial system and this made the bank-runs more and more prevalent.

In which year was the Community of Andean Nations treaty signed? Which countries where the original members? Which country joined in 1973?

This agreement was signed in 1969. The original members were Bolivia, Chile, Ecuador, and Peru. In 1973, Venezuela joined.

Over the 1980s and 1990s Ecuador's became semi dollarized. What does it mean?

This basically means that the country implements a bi-monetary system in which both the USD as well as the Sucre's is accepted for transactions, even though the Sucre is the official currency.

In recent years China has become one of the major players in international trade. What is the relation between China and Latin American countries? Is China hurting or benefiting LA countries? Elaborate.

This certainly depends on which country we are talking about. In the event that we are talking about LA countries who's primary exports consist of primary goods, then China is helping these countries recover, since China needs lots and lots of primary goods for their industry. b. On the other hand, if the LA country relies on manufactured goods such as Brazil, then China is not being a positive externality, since Chinese manufactured goods are much better and much more competitive compared to Brazilian ones, which overall hurts Brazil.

In 1987 an earthquake hit Ecuador. Why did this affect economic performance?

This did affect economic performance in the south direction, since the earthquakes as well as El Niño did make infrastructure as well as agriculture poor. This meant that both crops did out and everything became more expensive transportation and production wise. All of this meant that the economy went south and sour.

After the debt crisis hit, Latin American went from a current account deficit to a current account surplus. Why did this happen? (Simply stating "because exports where higher to imports" it is not an accepted answer).

This happened due to the fact that the LA countries manipulated and devalued their currency such that their primary goods would become more competitive. This meant that they were able to export more and more goods. As a result, they went from a national account deficit to a national account surplus.

In class we saw that the economic performance of Ecuador between 1970 and 2000 was poor. This was caused by three main problems. Name them and explain what they are and why they were important.

This happened due to the following reasons. i. Currency Devaluation and fiscal/monetary issues: The value of the Sucre decreased and kept on decreasing. This caused inflation in the country as well as exchange rate instability. ii. Natural Disasters: There was for instance one earthquake that stopped oil exports for a long time. This meant that pipelines were damaged and as a result, the country's income was iii. Oil-prices: In the 1970s, world oil prices decreased, which meant that the country had to borrow more and more money, which meant more and more accumulated debt.

One of the hypothesis that tries to explain Mexico's slow recovery is the "Debt Overhang Story". Explain the hypothesis. Why do the authors rule out this possibility?

This hypothesis is about the fact that Mexico had a large debt overhang in the country in that it paid new debt with old debt, since the external debt that the country had was large. Now, because Mexico had such a large external debt, this study by Sachs' proposes that the large external debt scared investors away since the investors feared that their investments would be taxed to the top such that the Mexican government could finance and pay off old loans. This, according to the theory, was the reason why both investments and output remained low in Mexico. b. The reason why the analysts and authors ruled out this proposal was due to the fact that it was preposterously illogical. The reason for this was that by the logic of this study, Chile should have stagnated even more than Mexico, since Chile had more external debt than Mexico and investments in Chile decreased even more than in Mexico.

When do we say that a Free Trade Agreement has a trade-diverting effect?

This is said when a FTA creates an economic enclave where purchases are only made and bought from one partner. When this happens, it is said that the FTA has a trade-diverting effect.

The Cruzado Plan, in which country was it implemented? Was it a heterodox or orthodox plan? Why was it needed? What were the key steps of this plan? Was it successful in the short run (explain)? And in the long run (explain)?

This plan was announced in Brazil in 1986, and its goal was to deal with inflation. The plan was to use indexation in an attempt to fix macroeconomic issues present in the country. The key steps in the plan were to: Freeze wages Freeze all prices and exchange rates Freeze all In the short-run, this plan was successful, however in the long run, this was not the case, since there was a surge in the demand of higher wages in addition to other monetary and fiscal policies that happened during the time.

After a good performance in 1993 and 1994, in 1995 the economic prospects reversed. Why? Elaborate.

This reversal of economic progress happened due to the following reasons: i. War against Peru: It was costly even though it was short-lived. ii. Political Instability: Some ministers were accused of corruption. iii. Capital flows reversed: Capital inflows became capital outflows. iv. High public sector debt stock remained high: The public deficit became higher and higher.

One of the theories that could explain the differences in performance between the two countries is the "Corbo & Fischer's Real Wage Story ". Explain what the theory says and why the authors of this paper rule out this theory as a possible explanation.

This theory states that the Chilean government manipulated its wage indexation and allowed the country's real wage to fall sharply which meant that the country experienced and export boom and therefore got out of the crisis easier. b. This theory is ruled out since Mexico did indeed take the same measures and by the logic of the theory, the country should have boomed even more than Chile did, however, this was not the case, and Mexico stagnated while Chile grew.

When was the Central American Common Market treaty signed? Which countries where the original members? What were the original goals?

This treaty was signed in 1961. Guatemala, El Salvador, Honduras, and Nicaragua were the original members of the treaty, with Costa Rica joining in 1963. i. The original goals that the CACM had was to: 1. Establish a Central American regional free-trade area. 2. Establish a customs union 3. Integrate the industrialisation efforts of its member countries.

Until the 90s the CACM was mainly dormant. Why? What challenges did they face in the 90s?

This was due to the fact that the CACM had initial issues in that there was for instance a war going on between El Salvador and Honduras. Furthermore, there was lots of political instability in Central America in the 70s and 80s. i. The challenges that they faced in the 90s were the following: 1. Macroeconomic Instability 2. Weak Infrastructure 3. Unskilled human capital

Before trade liberalization, why did LA countries have a high tariff dispersion?

This was due to the protectionist policies that were imposed as a result of the ISI policies. This was done in order to give domestically manufactured goods a chance through the infant industry.

Why are trade agreements important?

Trade agreements are important since: i. Comparative advantage: Allows each country to specialise and therefore make exports and imports better quality and cheaper. ii. Better flow of goods and services: Since tariffs and export taxes are reduced in a trade agreement, the flow of goods and services between both countries is better and easier. iii. Economic Cooporation: When both countries cooperate on trade, political instability between them is much less likely to occur.

What happens if a country with an overvalued currency opens up to trade? For whom is this beneficial? Who does this hurt?

When a country with an overvalued exchange rate opens up to trade, it benefits their importers, since their purchasing power is great. However, it certainly hurts producers in the said country, since their exports become less competitive. Therefore, consumers and importers benefit, exporters get punished.