Unit 8 International Relations

In addition to the institutions developed as part of the Liberal International Economic Order, technology played an important role in ushering in the Global Economy Era. What kinds of technology advancements have been particularly important in the globalization of the economy? Give a brief summary of the characteristics of the Global Economy Era. Define liberal capitalism.

Technology: computers, information and communication technology (the digital era), and the rapid development of faster and more efficient transportation technology have made this era possible. Global Economy Era: This era is characterized by: · Share of most countries' economies made up by exports or imports has risen sharply · Talking about a county's national economy makes less sense because so much economic activity crosses borders; half of China's and Russia's economies are tied up with international trade. Liberal capitalism: a philosophy of complete or near complete free markets and minimal governmental regulation in the economy. There are variations to liberal capitalism, but the idea is minimal government involvement in the economy especially in decisions about what to produce and consume. Decisions about production and consumption are guided by the "invisible hand" of supply and demand working through the price mechanism.

American Recovery and Reinvestment Act of 2009 or ARRA

The American Recovery and Reinvestment Act of 2009 commonly referred to as the "economic stimulus" was a $787 billion stimulus package enacted by Congress in February 2009 and signed into law by President Barack Obama. The key goal of ARRA was to provide a "jolt" or stimulus to the economy by increasing demand for goods and services through direct government spending and investment and through tax cuts (putting money in people's pockets to spend).

hegemon

a country that is an undisputed leader within its region or the world. After World War II, the United States was considered the world hegemon.

North American Free Trade Agreement (NAFTA)

a free trade agreement between Canada, Mexico, and the United States. The agreement greatly reduced all barriers to trade between the three countries and resulted in a significant increase in trade of goods and services among the three.

negative interest rate

a government policy of charging banks for holding too much of their currency in reserve. The policy is meant to make loans more available and spur economic growth.

colonialism

the situation where one country takes over another country and administers it with a local bureaucracy. Examples include the British colonization of the United States prior to the Revolution and the Belgian colonization of Rwanda.

Industrial Revolution

the transition of many of the world's states from an agricultural economic system to one that was based on industry and manufacturing. During this period, factories replaced farms as the biggest producer in many countries.

gross domestic product

total value of goods and services produced by a nation's economy in a year, excluding transactions with foreign countries

Fiscal policy

use of government spending and taxation for the purpose of achieving economic goals

What does the statement "those who have the gold get to make the rules" mean in terms of international politics and organizations? Use the World Bank as an example

"Those who have the gold get to make the rules" means that the states with the most money get to have the power in economic relationships and institutions. Rich countries often make the rules or have great influence over the practices of international economic institutions. At the World Bank, for instance, less developed countries accepting loans often have to comply with free-market reforms that cause problems and hardships in their local economies. World Bank loans have sometimes been used to coerce other states; the US blocked loans to Chile between 1970 and 1973 in order to force the socialist president of Chile to step down from power.

What is a centrally planned economy? Give an example. Have any purely centrally planned economies produced a level of wealth comparable to the advanced capitalist countries? What do you think is the fundamental weakness of these economies?

A centrally planned economy is one in which all decisions related to production in the economy are controlled by the central government not the private sector. The Soviet Union (until the end of the Cold War) and Cuba are two good examples of centrally planned economies. None of these economies has produced a level of wealth even close to capitalist economies because lack of competition reduces the efficiency and innovation of industries. The price and quality of goods is generally inferior to that of free market economies.

Two major factors led to the end of the National Economy Era and to the beginning of the International Economy Era. The first factor was the development of new ideas and arguments about international trade and economics. Summarize the argument about trade that Adam Smith made in Wealth of Nations. What does the concept of absolute advantage mean? What does the concept of comparative advantage (developed by David Ricardo) mean? What is "classical liberal economic theory" more generally?

Adam Smith and David Ricardo argued that countries should produce those products that they could produce most efficiently and trade with other countries for the rest. By doing so, businesses would be more competitive and efficient, and the countries that specialized would accumulate more wealth. absolute advantage - when a country is more efficient at producing a single good than another country. comparative advantage - being more efficient at producing a good or service relative to another country. One country might be better at producing all products compared to another country, but comparative advantage means that the country is best or better at producing a specific product compared to the other country. Liberal economic theory is an economic theory that asserts that economies should be driven by supply and demand in a free market rather than controlled or regulated by government. Smith and Ricardo were the fathers of this theory. Smith wrote about the invisible hand guiding markets, which is essentially millions of consumers and producers making choices about what to buy or produce. Allocation through markets, according to Smith, is more productive and efficient than allocation by a central authority such as a state. Again, the term "liberal," does not mean the same thing in economic theory as it means in US domestic politics so try not to confuse the two.

Economic integration between countries can lead to peace. Explain this statement using the European Coal and Steel Community as an example.

After WWII, six European countries joined together to form an economic organization to coordinate steel production. French leaders developed the concept as a way of preventing Germany from building an aggressive military as it did just before WWI and WWII. The organization was the seed that led to the modern day European Union and several decades of peace.

The IMF plays a key role in helping countries that have difficulty meeting debt obligations (liquidity crisis) or paying for imports due to currency fluctuations (balance of payments crisis). A liquidity crisis is like a personal bankruptcy for a country. The IMF assists the indebted country as it renegotiates its debt payment schedule with banks and other institutions (recently happened to Greece). In exchange for its assistance, the IMF often makes the indebted country implement an austerity program. What is an austerity program, and why are they so unpopular?

Austerity programs are programs of severely restricted government spending, often on social welfare programs like pensions or unemployment benefits. These cutbacks are imposed when the country must balance its accounts. These austerity programs often create severe hardship among vulnerable populations in the countries affected. They are unpopular due to the hardships they result in, and they often lead to political instability

The second factor that led to the International Economy Era was the Industrial Revolution. Briefly summarize the Industrial Revolution. What country, which led the Industrial Revolution, became an economic and military hegemon by the mid-1800s? The volume of international trade increased significantly in the International Economy Era and increased the wealth of powerful states substantially. However, a trade war developed in the late 1800s and early 1900s. Which two rising powers engaged in protection of their "infant industries"? How did a trade war in the mid-1920s contribute to the Great Depression? Why is it risky for US presidential candidates (from either party) to talk about abruptly ending trade agreements like NAFTA? (draw a historical parallel).

By the mid- 1800s, the Great Britain was a economic and military hegemon and led the industrial revolution. The United States and Germany both engaged in protectionist policies in the 1800s to protect infant industries and allow them to develop before introducing them to foreign competition. Infant industries are those that are just starting out; Alexander Hamilton was an advocate of protection of infant industries in the US. In the mid -1920s, many countries decided that the best way to help their domestic economies was to restrict trade with other countries. A trade war ensued. A trade war is a situation when many or all states engage in protectionism. The states try to block imports and promote exports, but since all countries do this, very little international trade occurs. The trade war in the 1920s led to a sharp decline in global trade and a drop in wealth production. Most economists argue that this trade war was a major contributing factor to the Great Depression. All presidential candidates should be careful in the way they talk about trade because a trade war with multiple countries will lead to reduced trade and reduced wealth. Given the level of economic interdependence among the major economic powers, a trade war could severely impact the global economy (just as the 1920s trade war did). In addition, today, many goods are produced in a global supply chain, in which components of products come from multiple countries. (Example: auto industry in North America)

What is fair trade? What is NAFTA? How did NAFTA affect Mexican farmers initially

Fair trade is the concept that producers should be paid a fair price for their products. Most fair trade products, including coffee, chocolate, handcrafts, etc. are certified by the Fairtrade International organization. Most of these products come from LDCs. NAFTA - a free trade agreement between Canada, Mexico, and the United States that began in 1994. The agreement greatly reduced all barriers to trade between the three countries and resulted in a significant increase in trade of goods and services among the three. Effect on farmers - As noted above in question 19, one of the short-term effects of the North American Free Trade Agreement (NAFTA) was that Mexican farmers and agricultural companies had to suddenly compete with US agricultural companies that are among the most efficient in the world. Many Mexican farm workers lost their jobs. This is one of the reasons why so many Mexicans illegally crossed the border into the US in the 1990s. In certain parts of Mexico, there was no way for workers to support their families, and the Mexican government did little to help these workers with trade adjustment assistance. In the long term, as business adjust to the effects of trade, certain sectors of Mexican agricultural benefitted (e.g., avocado growers). In addition many auto assembly plants have been built in Mexico and have contributed to a growing Mexican middle class (which has a stabilizing effect). NAFTA was revised in 2018 and the name of NAFTA was changed to the US - Mexico - Canada agreement (USMCA).

Provide a good general definition of globalization. The spread of globalization involves two processes that occur simultaneously—broadening and deepening. Give an example of each type of process

Globalization - the increasing integration of global society through the spread of technology, foreign trade, transportation, cultural exchange, political institutions, and social connections. Broadening - more and more countries have ties with each other Deepening - the ties among interdependent countries become deeper; for example, the level of trade between the US and China is extremely high, so much so that if one country's economy falters, it will have a great effect on the other country.

How did colonialism benefit the major powers such as Great Britain in the National Economy era? Give an example of imperialist war fought by two major powers over colonial territories.

Great Britain basically used its colonies for the extraction of resources like gold, silver, agricultural goods, and other raw materials. As it became wealthier and more powerful militarily, it sought more and more colonies around the world. The British were arguably the most successful imperialists in history. The British and French fought each other over the North American colonies. The British and the Dutch fought over Indonesia and South Africa.

Marx believed human history would go through five historical epochs: 1) hunter-gatherer society (primitive communism); 2) feudalism; 3) capitalism; 4) socialism; and 5) communism (utopian state in which inequality and poverty would disappear, and government would wither away). He also thought that the socialist revolution would start in Great Britain. Why? Where did the first socialist revolution occur in 1917? Name five other states that experienced a socialist revolution. In practice, did the socialist revolutions in these five countries lead to the utopian state that Marx envisioned? Three out of four of the world's worst mass murderers were Marxist dictators. Name them and briefly summarize the atrocities they committed.

He thought revolution would start there because of extremely poor working conditions that he had witnessed (think Dickens novels). The first socialist revolution occurred in Russia in 1917. Other states that experienced a socialist revolution include: China North Korea Vietnam Cambodia Cuba No, socialist revolutions in these countries most definitely did not lead to the utopia that Marx had envisioned. Marxist dictators committed 3 out of 4 of the worst mass atrocities in the modern era: Stalin (Russia) - 38 million murdered Mao Zedong (China) - millions murdered (exact number not known) Pol Pot - 20 percent of Cambodia's population tortured and murdered Marx, who believed that human nature was essentially good but corrupted by greed, would be aghast at these atrocities committed in the name of Marxism.

What is hyperinflation and why is it so destabilizing? How did hyperinflation contribute to the rise of Adolf Hitler in Germany?

Hyperinflation is a situation where a currency loses its value very quickly. Regular inflation occurs at relatively low levels (2-5 percent per year), but hyperinflation means a currency can lose most of its value in a year, month, or even day. Germany experienced hyperinflation in the period after WWI due to the enormous war debts it was forced to pay after WWI. It was also impacted by the trade war of the 1920s. Terrible economic conditions contributed to the rise of an extremist like Hitler.

International Macroeconomic Coordination

In a global economy that is becoming more and more interconnected, coordination of economic policies between nations is becoming increasingly important; however, national sovereignty makes this kind of coordination difficult. For example, in the aftermath of the financial crisis and the US "Great Recession," China agreed to increase its government spending to offset slack caused by a downturn in the global economy. China was acting in its own self-interest as well as the interest of other states. Why? When US workers lose their jobs and cannot buy Chinese goods, China's workers suffer too. Hence, there is a need to coordinate policies among countries, especially the major economic powers.

International Regulatory Coordination

In a global economy that is becoming more and more interconnected, financial capital (or money) is hyper-mobile. That means that money can move around the globe in a fraction of a second "at the push of a button." As a consequence, financial regulators in major economies need to coordinate financial policies and regulations related to banking, credit and securities. If they do not, money may flow out places where the financial sector is highly regulated to places with fewer regulations, again putting the global economy at risk.

The groundwork for the Global Economy Era was laid in the period right after WWII with the creation of an international economic institutional framework. This institutional framework rests on three assumptions: o In general, in the long run, trade makes countries richer overall and makes economies more efficient. (Even though it sometimes leads to painful losses in the short run for particular industries and workers) o Countries that trade with each other tend not to fight each other on the battlefield because war is costly for business. o Trade leads to cultural exchanges and ties among people. These exchanges help people learn about other cultures and lead to a greater likelihood of peaceful resolution of conflict. (See Immanuel Kant's reasoning from IR Unit 3) It is very important for your understanding of the global economy and for the next exam that you know the definitions of the following:

Liberal International Economic Order (LIEO) - the post-WWII economic system built on commitments to free trade and free market economics, with international institutions to help countries coordinate and cooperate Bretton Woods System - The global economic system established by the US and other countries after World War II to promote capitalism, free trade, and policy coordination. Nicknamed Bretton Woods for the location of the conference in New Hampshire, the three core institutions planned were the IMF, World Bank, and GATT (later becomes World Trade Organization). World Bank - a Bretton Woods organization created in 1946 that provides loans and grants to countries for long-term development. The World Bank started by helping to fund the reconstruction of Europe after World War II and later focused on helping countries in the developing world (LDCs or less developed countries) grow their economies. International Monetary Fund (IMF) - one of the Bretton Woods organizations created in 1946. The IMF provides short-term loans to countries that cannot make basic payments on their debt. It also helps countries reschedule their debt. It is increasingly involved in the management of international financial crises. General Agreement on Tariffs and Trade (GATT) - an organization of countries that agree to work together to reduce trade barriers and promote free trade. Member states were considered "most favored nations" and received preferential trade agreements. The GATT was replaced by the World Trade Organization in 1995. World Trade Organization (replaced GATT in 1995) - an international trade organization that promotes free trade between member countries. In addition to the functions of the GATT, the WTO also has a "trade court" or dispute settlement body that enforces the rules of the organization. The dispute settlement body has generally been very effective. Most-Favored Nation Status - the preferential trade status that members of the GATT gave to other members. MFN could also be granted to non-members if a country chose to do so. The United States granted China MFN status for years before China entered the WTO agreement. Nontariff barrier - a requirement that foreign goods or services must meet that is specifically designed to block or obstruct those goods or services from sale in that market (e.g., country specific regulations that are hard for a foreign country to meet initially)

. Globalization has had both positive and negative impacts across the globe. Name three positive consequences and three negative ones (there are many more—these are just a few examples).

Positive: · Generally, the more open to trade and globalization a country is, the more likely it is that conditions for women improve. They are more likely to be able to find jobs, and multinational corporations (MNCs) tend not to discriminate against women or engage in forced labor practices. · The presence of MNCs often leads to improved working conditions and pay as local employers mimic the labor practices of MNCs in order to compete for workers. · In general more trade among countries leads to more peace. More trade brings international business people into a country as well as foreign journalists, and it is much more difficult for regimes to hide actions such as ethnic cleansing or genocide. One of the reasons why the Rwandan genocide was so severe was because Rwanda was very isolated from the outside world at that time. · In a globalized world, people benefit from exposure to other cultures. Simple pleasures such as access to international food, art, films, TV shows, etc. are possible and often lead to better understanding and cultural appreciation. · From an economic standpoint, trade generally drives up the quality of products due to competition and lowers the price of products for consumers. Negative: · Not all MNCs pay decent wages (even by the standards of a less developed country) and not all provide good working conditions. · Trade creates winners and losers within an economy in the short term. In other words, some businesses may suffer when exposed to foreign competition, and workers in certain sectors may lose their jobs. At the same time, some sectors of the economy may benefit from international trade, and workers in those sectors will see better pay and improved conditions. For example, one of the short-term effects of the North American Free Trade Agreement (NAFTA) was Mexican farmers and agricultural companies had to suddenly compete with US agricultural companies that are among the most efficient in the world. Many Mexican farm workers lost their jobs. In the US, some workers engaged in manufacturing of things like televisions or cars were hurt as some manufacturing and assembly shifted to Mexico. · The effects of trade (with winners and losers) can destabilize a country politically, especially when the government fails to act to help those workers displaced by trade. · Nearly all countries that trade with each other abide by WTO rules, and sometimes these rules can limit a country's sovereignty. For instance, the EU banned hormone-fed beef. However, the US challenged that ban at the WTO, and the EU lost that case. The EU still does not permit hormone fed-beef, but they have to pay a penalty to do so.

In 1995, GATT was replaced by the World Trade Organization (WTO). The WTO has been very important in the settlement of trade disputes between states and in the maintenance of the free trade system. Describe the US-EU conflict over beef that went to the WTO dispute settlement body. What was the outcome?

The EU placed a ban on hormone-fed beef from the US. The US contested the ban, and the WTO ruled in favor of the US because it claimed there was no conclusive scientific evidence at the time of problems caused by hormone fed beef. The US was permitted to place tariffs on some EU products in retaliation because of the WTO ruling.

Write a brief description of the National Economy Era. What is mercantilism? What is protectionism? If you follow the current presidential campaign, you probably know that Donald Trump is advocating protectionist policies. Give an example of one of his protectionist policy recommendations

The National Economy Era best describes the late stages of the pre-Westphalian and early part of the Westphalian eras. During this phase, most of the economic activity occurred within, rather than across, the borders of the states. The era was characterized by the following practices: Mercantilism - an economic policy that combines free enterprise and government. The government uses its power—including its military—to enhance private business, and private business provides revenues to the government to maintain and enhance its power. Early mercantilist policies often included bans on the purchase of foreign products unless absolutely necessary Colonialism - the situation where one country takes over another country and administers it with a local bureaucracy. Examples include the British colonization of the United States prior to the Revolution and the Belgian colonization of Rwanda; in the National Economy era, governments would use their militaries to secure resources for businesses by colonizing other places. International norms changed in the 20th century and colonialism is no longer an accepted practice. Protectionism - a policy of blocking or restricting the trade from other countries in order to "protect" domestic businesses. For example, European countries do not allow U.S. hormone-fed beef to be sold in Europe so that they can protect European farmers (and because they do not want hormones in their beef). Donald Trump has said several times that he plans to end certain trade agreements in order to better "protect" US industries. (Bernie Sanders too)

What are the three eras in the development of the global economy and the dates associated with them? (See Figure 8-1, PPT Notes)

The National Economy Era: 1648-1815 The International Economy Era: 1815-1975 The Global Economy Era: 1975-Present

Historically in the world of IR, economic power has meant that rich states can exploit the natural and human resources of other states. The economic power of rich states often translates into military power and the ability to get what they want. As we learned in earlier units of this course, the British and the US went to great lengths to preserve their access to oil in the 20th century and beyond. Briefly summarize the measures that the UK and US have taken to secure access to oil. What do you think would happen to the Middle East if a cheap, sustainable substitute for oil were developed? There is another fundamental, scarce resource that many experts believe will be a cause of conflict and possibly war in the future. Can you guess what that resource is? Hint: You definitely cannot live without it!

The United Kingdom captured Baghdad from the Ottoman Empire (modern-day Turkey) in order to ensure that they had access to oil. The modern state of Iraq was actually created by the UK. They invaded Iraq and modernized it to secure unobstructed access to oil reserves. The United States brokered a deal that gave Standard Oil Company exclusive rights to explore and extract oil in Saudi Arabia. US sold weapons to Iraq during the Iran Iraq War, but later went to war to liberate Kuwait, another oil rich state, from Iraq. Without oil revenues, the economies of many countries of the Middle East would experience severe downturns and possibly even collapse. Many of these countries have failed to invest or underinvested in other kinds of economic and human development. In addition, the collapse of oil revenues would most likely produce widespread civil unrest in many places because unemployment is already high in many of these places. Iran, for instance, has one of the youngest populations in the world, with roughly sixty percent of its population under age 30 and high unemployment in this age group. The other scarce resource that may lead to resource wars in the future, especially in this Middle Eastern region, is WATER.

Why should countries pursue free trade? What is the central argument in favor of free trade? Why does China have a comparative advantage over the US in the assembly of iPods? Why does the US have a comparative advantage over Saudi Arabia in the provision of higher education? What are some possible sound reasons for limiting trade in particular goods? (e.g., security, quality concerns, development of critical domestic industries)

The central argument is that free trade benefits all countries that participate, even if two states are not equal in their abilities. It makes countries more efficient in production and results in economic gains for participants. In addition, competition between producers generally has two effects: it increases the quality of goods produced and lowers the price. China has an advantage in iPod assembly because its labor costs are lower than ours. The US has an advantage over Saudi Arabia in higher education because US universities are among the best in the world. It is cheaper for the Saudis to send their best university students to the US than to try to recreate a "Harvard" in Saudi Arabia. Sound reasons to limit trade: · Security concerns: large countries generally produce many of their own weapons because they do not want to depend on a possible adversary for the purchase of weapons; some states are dependent on agricultural imports to feed their people, and this dependence raises security concerns. · Quality control: a state may refuse to purchase another state's products because of quality concerns like the use of lead paint in Chinese made toys; the issue of quality comes up a lot with agricultural products. · Development of critical domestic industries: certain industries may be considered so critical to a nation's economic growth and security that a nation must be able to produce the critical good (e.g., steel or microchips)

Bretton Woods System

The global economic system established by the US and other countries after World War II to promote capitalism, free trade, and policy coordination. Nicknamed Bretton Woods for the location of the conference in New Hampshire, the three core institutions created were the IMF, World Bank, and GATT (later became World Trade Organization)

Troubled Asset Relief Program or TARP (also known as the "bailout")

The program of the United States government to purchase assets and equity from troubled financial institutions to strengthen its financial sector was signed into law by U.S. President George W. Bush on October 3, 2008. A key goal of the TARP was to stabilize the US financial sector in the aftermath of the global financial crisis of 2007.

World Bank

a Bretton Woods organization created in 1946 that provides loans and grants to countries for long-term development. The World Bank started by helping fund the reconstruction of Europe after World War II and later focused on helping countries in the developing world grow their economies.

Negative Interest Rate

a government policy of charging banks for holding too much of their currency in reserve. The policy is meant to make loans more available and spur economic growth. In essence, banks get charged for holding too much money and not loaning it out. Negative interest rates were used in Europe to help economies recover from the global crisis. They have been tried in Japan to get Japan out of an economic slump.

liberal capitalism

a philosophy of complete or near complete free markets and minimal governmental regulation in the economy. There are variations to liberal capitalism, but the idea is minimal government involvement in the economy.

protectionism

a policy of blocking or restricting the trade from other countries in order to "protect" domestic businesses. For example, European countries do not allow U.S. hormone-fed beef to be sold in Europe so that they can protect European farmers.

austerity program

a program of severely restricted government spending, often on welfare programs, imposed when the country must balance its accounts.

nontariff barrier

a requirement that foreign goods or services must meet that is specifically designed to block or obstruct those goods or services from sale in that market.

positive peace

a situation between two countries that is not simply a lack of conflict, but a mutual affinity for each other. For example, relations between the United States and Canada constitute positive peace, but the relations between the United States and Cuba do not.

devalue

a situation when a currency, like the U.S. dollar, loses its value compared to other currencies. Countries sometimes devalue currencies to boost exports by making them cheaper.

Liquidity crisis

a situation when a government (or a very large financial institution whose failure can threaten the national economy) runs out of cash and is unable to make minimum payments on its debt

Liquidity crisis

a situation when a government runs out of cash and is unable to make minimum payments on its debt or pay for imports.

trade war

a situation when many or all states engage in protectionism. The states try to block imports and promote exports, but since all countries do this, very little international trade occurs.

hyperinflation

a situation where a currency loses its value very quickly. Regular inflation occurs at relatively low levels (2-5 percent per year), but hyperinflation means a currency can lose most of its value in a year, month, or even day.

budget deficit

amount by which annual budget expenditures exceed annual budget revenues

budget surplus

amount by which annual budget revenues exceed budget expenditures

mercantilism

an economic policy that combines free enterprise and government. The government uses its power—including its military—to enhance private business, and private business provides revenues to the government to maintain and enhance its power.

beggar-thy-neighbor

an economic policy that stresses trade protectionism and intends to send the problem of protectionism to other countries. Thus, send the problem to one's neighbor.

recession

an economic slowdown characterized by declining output and rising unemployment

centrally planned (or command) economy

an economy that is run by the government rather than private citizens. Production decisions controlled by government, not market forces. Examples include the Soviet Union and Cuba.

Federal Reserve Board (Fed)

an independent regulatory commission that makes US monetary policy primarily by increasing or decreasing the interest rate

supranational organization

an institution, organization, or law that is over other states. For example, the EU is a supranational organization because it has authority over many European states.

World Trade Organization (WTO)

an international trade organization that promotes free trade between member countries. In addition to the functions of the GATT, the WTO also has a "trade court" or dispute settlement body that enforces the rules of the organization. The WTO replaced the GATT in 1995.

General Agreement on Tariffs and Trade (GATT)

an organization of countries that agree to work together to reduce trade barriers and promote free trade. Other members were considered "most favored nations" and received preferential trade agreements. The GATT was replaced by the World Trade Organization in 1995.

comparative advantage

being more efficient at producing a good or service relative to another country. One country might be better at producing all products compared to another country, but comparative advantage means that the country is best or "better" at producing a specific product compared to the other country.

inflation

increase in prices which results in a decline in the purchasing power of a currency

subprime loans

loans given by banks to private citizens that would be considered to have a high likelihood of default. These loans were made to promote home ownership, but drove up prices and ultimately created an unsustainable economy that collapsed and caused the "Great Recession."

debt to GDP Ratio

measures a country's national debt in relation to the overall size of its economy (GDP); a ratio above 70 percent is a cause for concern (sometimes there is a good reason for rising debt such as response to a major recession); Greece's debt-to-GDP ratio is expected to peak at about 190 percent.

Read the section of the required reading on the currency system (begins on p. 333) on fixed and floating exchange rates. What kind of exchange rate system do we currently have? In a floating exchange rate system, what determines the value of a country's currency? Know the following for the exam

o Generally, in a floating exchange rate system, the value of a country's currency is determined by market forces—supply and demand for that currency. o It is possible for countries to take action to manipulate the value of their currency (there are lots of techniques) o Why would a country want to devalue its own currency? Answer: Because when it devalues its currency, its exports become cheaper for foreigners to buy, and it gives a boost or advantage to export-oriented businesses in that country o Some economists argue that the China sets the value of its currency too low in order to gain an advantage in global trade. Other economists disagree. However, the issue of exchange rates and China's devaluation of its currency is a frequent source of tension in the bilateral relationship between the US and China.

International Monetary Fund (IMF)

one of the Bretton Woods organizations created in 1946. The IMF provides short-term loans to countries that cannot make basic payments on their debt or pay for imports. It also helps countries reschedule their debt.

global supply chain

refers to the way products are often now made with parts coming from multiple countries around the world (e.g., autos)

bilateral

relations between two states. For example, a bilateral summit is a high-level conference between two states.

depression

severe and prolonged economic slump characterized by decreased business activity and a very high unemployment

metropole

the "mother city" or center of an empire. The metropole of the British Empire (which included colonies on every continent except Antarctica) was London.

national debt

the accumulated indebtedness of the federal government (for example, over a period of years)

fair trade

the concept that producers should be paid a fair price for their products.

monetary policy

the control of the money supply (primarily through the interest rate) for the purpose of achieving economic goals

communism

the economic philosophy created by Karl Marx that promotes the radical control of a country and its economy for the equal redistribution of resources to the country's citizens. See Unit 4 for a complete explanation.

globalization

the increasing integration of global society through the spread of technology, foreign trade, transportation, cultural exchange, political institutions, and social connections; includes multiple aspects of the global economy including production, trade, and finance.

Eurozone

the portion of the European Union that uses the euro currency rather than a national currency. These countries include: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Liberal international economic order (LIEO)

the post-WWII economic system built on commitments to free trade and free market economics, with international institutions to help countries coordinate and cooperate

Most-Favored Nation (MFN)

the preferential trade status that members of the GATT gave to other members. MFN could also be granted to non-members if a country chose to do so. The United States granted China MFN status for years before China entered the agreement.

absolute advantage

when a country is more efficient at producing a single good than another country.

balanced budget

when annual revenues=expenditures