International Economy Midterm
(Session 12 Neoliberalism) What explains the emergence of the Second Globalization wave? How is the Second Globalization related with the rise of Asia?
1. Neoliberalism and Washington Consensus 2. Collapse of ISI strategy and command economy 3. Reduction of import duties, lower tariffs, new technology, transportation 4. Outsourcing 5. Asia = cheap workforce 6. Little barriers to labor mobility
(Session 4 The Economic Liberal Perspective in Practice) Why did international trade grow so much in the second half of the 19th century?
1. The spread of industrialization 2. Great job opportunities in many depopulated areas of rich, natural resources at a time of no barriers to migration 3. Modernization of transportation systems 4. Development of a common international monetary system, ¨the gold standard¨ 5. Changes in policy towards free trade
(Session 2 Institutions and Economic Growth) Why are some countries rich and others poor? Explain briefly two of the hypothesis proposed by social scientists to answer this question.
A potential answer could be that there are extractive and inclusive institutions prevalent in many different nations. Extractive: - Power + wealth is concentrated in the hands of a few, leading to arbitrary decisions causing uncertainty. - Nation´s resources solely benefit the elite. - Can encourage growth and exploit nation´s resources, but only in the short-term (never lead to prosperity). - Elite does not guarantee property rights and does not allow people to receive non-propaganda education. Ex. China Inclusive: - Promote economic growth in the long-term through: investing in education, infrastructures, and education, enforcing property rights, and reducing uncertainty by designing clear/stable rules of the game. - Leads to an increase in living standards as political power is distributed via a ¨pluralistic¨ manner (the interests of different social groups are represented).
(Session 7 Money and Exchange Rate Systems) Why was price stability guaranteed with the gold standard?
Adopting the gold standard facilitated transactions with world leaders like Great Britain. Fixed exchange rates encouraged stability and growth. Foreign-exchange risk (the risk of losses because of unexpected changes in exchange rates) disappeared. Long-term balance of payments stability arose due to cooperation among central banks and the ¨price-specie-flow¨ mechanism (a sort of automatic balance-of-payments adjustment that prevented any country from running large and persistent deficits or surpluses).
(Session 8 Crisis and Financial Regulation) Why did so many people invest in the New York stock market by 1929?
American citizens enjoyed a ¨boom time¨ following WWI. Encouraged by the competitiveness of the American economy, the expansion of the American multinationals across the world, and the lack of business opportunities in Europe, the stock market flourished. 90% of the total amount was financed through brokers, who borrowed from the bank, so they barely had to pay anything and did not need creditworthiness. The common American was buying stocks and the brokers were intermediaries. There was also virtually no supervision of financial markets and banks´ debt.
(Session 11 The End of the Bretton Woods System) The rise of Japan and other Asian countries, which challenges implied for the American economy? How is their rise related with the end of the Bretton Woods System?
American economy: - Productivity slowdown - Growing competition of Asian Tigers - Increasing labor costs and labor contest (workers demand for higher wages) - Increasing budget deficits - The end of the gold-dollar standard (increased monetary instability and risks associated with international transactions) The end of the Bretton Woos system and the crisis of the 1970s were caused by external oil shock + structural problems associated with decreasing returns and increasing economic instability.
(Session 15 The Asian Model) To what extent is the East Asian model of development based on Washington Consensus policies?
Asian model of development is based both on the market and the state. Market-led growth led to rapid expansion. However, the following occurred: - Greater income inequality - Absolute power of the Chinese Communist Party = restrictions to labor mobility and entrepreneurship, privileges for firms managed by the officers of the Communist party, no fully secure property rights, President´s increasing power - No freedom of speech, government´s censorship, no free searching on the internet Both consensus were aimed at a solution for prosperity. China and the US also got their inputs from other countries to support the domestic production and economy.
(Session 9 Embedded Liberalism: the Keynesian Compromise) Compare the gold standard with the gold dollar standard designed at Bretton Woods. Discuss the advantages and disadvantages of the latter.
Bretton Woods = the USD would be the only currency convertible into gold on demand (the gold-dollar standard). Most of the countries tried to re-establish the gold standard after World War I, but it had been totally collapsed during the Great Depression in 1930s. Some economists said complying with the gold standard had prohibited monetary authorities from increasing the money supply rapidly enough to recover the economies. Therefore, the representatives of most of the world's leading nations met at Bretton Woods, New Hampshire, in 1944 to create a new international monetary system. The representatives had decided to link the world currencies to the dollar since the United States accounted for over half of the world's manufacturing capacity and held most of the world's gold during that time.
(Session 13 ISI in Latin America) Which two imbalances did the ISI strategy finally cause? How were they resolved?
By 1980, most governments had borrowed so much money to finance the budget and trade deficits that they were not able to repay the resulting debt -let's say that interest rates had been very low in the precedent years, what had encouraged the accumulation of high external debts (see next question). State investments also led to high budget deficits, that were financed regularly by printing more paper money. This is behind the rise in inflation, together with the oil crisis. High budget deficits and inflation.
(Session 7 Money and Exchange Rate Systems) It is said that China "manages its currency". What does this mean? Why does the Chinese government do so?
China utilizes a fixed exchange-rate system, which means that the nation can establish a fixed price for their currency in terms of an external standard. This is because of competitive devaluation, or to reduce the value of domestic currency to boost exportation (also a traditional reaction to economic crises). Furthermore, overvalued exchange rates serve as a symbol of power. This causes imports to be relatively cheap and make exports expensive.
(Session 9 Embedded Liberalism: the Keynesian Compromise) Discuss the role played by the United States in the international system developed after World War II.
Creation of the Bretton Woods system led to: 1. International Monetary Fund = lend to members in USD currency so they could join and follow fixed exchange rates. 2. The World Bank = give long-term loans at lower interest rates for reconstruction of Europe. 3. General Agreement on Tariffs and Trade (GATT) = reduce barriers to international trade; not always observed and tended to favor developed nations. USA also promoted Economic Recovery Program, also known as the Marshall Plan, which was the start to the Truman Doctrine (prevent Soviet geopolitical expansion). The USA gave economic, technical, and military aid to any democratic nation threatened by communism. This also helped Europe gain the basic necessities to overcome the most severe shortages. This restored trust in the Western alliance, stopped the spread of communism, and boosted American exportations.
(Session 5 Mercantilism) What are the reasons to provide loans and subsidies to strategic industries?
Export subsidies are payments to exporting firms and encourage them to sell abroad or to reduce the final price of their products. Additionally, the Infant Industry Argument has pushed governments of developing nations to provide protection or loans to domestic manufacturing activities and restrict the imports of manufactured goods. This strategy is known as import substitution industrialization. This serves as protection of domestic manufacturing activities and restrictions on the importations of manufactured goods. This protects infant industries until the point where they can achieve economies of scale and compete with other nations.
(Session 14 Command Economy) Discuss to what extent Russia is a free-market economy today.
Develop new institutions to introduce a market economy and to stimulate growth. Need resources for democratic government, aid from Westerners, and a market to issue public debt (these are the issues of the transition).
(Session 9 Embedded Liberalism: the Keynesian Compromise) What is it known as "Embedded Liberliam" and the "Keynesian compromise"?
Embedded liberalism: democratic state would intervene in the domestic economy and place some limits on international markets to protect society, but also support a relatively free trade. Keynesian compromise: the owners of capital would share gains from growth and rising productivity with workers in the form of rising wages and benefits, while workers maintained social peace and accepted the legitamacy of the liberal capitalist system.
(Session 2 Institutions and Economic Growth) How do institutions affect people's behaviour?
Extractive: people do not innovate or challenge elite´s political power, people/companies have no incentives to make best use of their talent and skills. Inclusive: allows people to engage in a market-based economic system, buyers pay for goods because they have a right to own them (due to private property rights), private property encourages innovation, the interests of different social groups are represented in political institutions.
(Session 14 Command Economy) Who benefited the most from the privatization of the Soviet state-owned enterprises? How might this affect income inequality in the country?
Fast privatization before financial market and legal protection had been developed. The control ended up in the hands of those with privileged information and access to credit (politicians and managers closely related with the government, former communist officers); corruption and income inequality intensified because the new private firms maintained subsidies and monopoly market position = emergence of new Russian oligarchy
(Session 5 Mercantilism) Throughout history, developing countries have tended to introduce mercantilist policies as a way to grow and catch up with the leader. Why?
For Mercantilism, the accumulation of gold or silver was the basis of power and wealth for nations. There was a limited amount of wealth in the world, so each state had to secure its interests by blocking the economic interests of others. Protectionism and nationalism were formed as a result.
(Session 6 National Accounting) GDP formula
GDP = consumption + investment + govt. purchases + (exports - imports). GDP does NOT take into account market value, inputs/intermediate goods, or environmental degradation.
(Session 10 Keynesian Economics) In case of recession, what must governments do according to Keynesian economics?
Government should intervene in the economy to avoid market failures and crisis. Governments should spend money to ensure economic growth. This led to Keynesian economics, based on John Maynard Keynes´ work: market economy + state regulation or a mixed economy or a managed social-market economy.
(Session 14 Command Economy) How did Gorbachev try to reform central planning? With which consequences?
He tried to save Soviet socialism by radically reforming the command economy and reducing coercion. 1. Perestroika ¨restructuring¨ = state maintains control on strategic sectors but allows markets to work in others so individuals had incentives to perform better & foreign trade was liberalized and some foreign capital was allowed to come in 2. Glasnost ¨openness¨ = freedom of speech and expression and right to act independently of the Party, corrupt individuals dismissed
(Session 3 The Economic Liberal Perspective) What do explain international trade according to the Heckscher-Ohlin theory?
Heckscher and Ohlin argued that nations tend to export goods whose production requires a lot of resources that the country has in abundance. - Countries with lots of land will specialize in farm goods. - Countries with a lot of labor with specialize in labor-intensive goods. - Countries rich in capital will focus on capital-intensive products (machinery, sophisticated manufacturers).
(Session 15 The Asian Model) China has grown very fast since the 1980s. What explains that growth? From an institutional point of view, is it sustainable in the long term?
How China grew: - Focused on labor-intensive industries - Liberalized foreign trade, but also introduced selective import liberalization to protect infant industries - Avoided inflation and a budget deficit
(Session 3 The Economic Liberal Perspective) Suppose that Australia and Brazil have the following outputs per worker in producing sleds and clarinets. Which country has a comparative advantage in sleds? And in clarinets? Australia: 300 sleds or 2 clarinets Brazil: 200 sleds or 1 clarinet
How to do it: - If Australia produces 1 sled, divide 2 clarinets / 300 sleds, Australia stops producing 0.0067 clarinets. - If Australia produces 1 clarinet, divide 300 sleds / 2 clarinets, Australia stops producing 150 sleds. - If Brazil produces 1 sled, divide 1 clarinet / 200 sleds, Australia stops producing 0.005 clarinets. - If Brazil produces 1 clarinet, divide 200 sleds / 1 clarinet, Australia stops producing 200 sleds. Australia has an absolute advantage in both sleds and clarinets, but a comparative advantage in the production of clarinets (gives up less sleds to produce 1 clarinet). Another potential answer could be that Brazil has a comparative advantage in sleds because it gives up less clarinets to produce 1 sled.
(Session 15 The Asian Model) Compare the ISI strategy that most Latin American countries followed after World War II with the East Asian model of development (indicate similarities and differences)
ISI strategy: The Brazilian government had little faith that the private sector would create and expand these critically important industries. Instead, policymakers determined that the state would have to play a leading role. Beyond creating these basic industries, the Brazilian government also sought to create domestic capacity to produce complex consumer goods. To achieve this objective, Brazil, in contrast to many other developing countries, drew heavily upon foreign investment to promote the development of certain industries, [such as the auto industry]. The government responded to this crisis by adopting protectionist measures to limit imports, [in a strategy known as "import substitution industrialization" (ISI) or "inward looking development"]. [The ISI strategy consolidated in the 1950s]. The government restricted imports tightly with the so called law of similar, which effectively prohibited the import of goods similar to those produced in Brazil. East Asia: Protection to infant industries, but tariff reduction on key intermediate goods and machinery to enable domestic producers to acquire inputs at world (cheaper) prices.
(Session 13 ISI in Latin America) The economic reform that put an end to the ISI, how was related with the rise of neoliberalism (have also a look at session 12)?
In a sense, the ISI period succeeded in industrializing the large economies of the period, and contrasts favorably with the record of the succeeding paradigm of neoliberalism. This research note seeks to raise questions about the way we look at the historical period of ISI2, and suggests that a more open-minded perspective could lead to a more effective and sustainable political economy paradigm for the region in the future. Neoliberalism = intervention of the state in legal and economic matters; Brazil´s intervention in its economy.
(Session 2 Institutions and Economic Growth) India's caste system, is a formal or an informal institution? Why?
India´s caste system is an informal institution because it includes self-imposed codes of behavior determined by culture, religion, and ethics. VS Formal institutions are those that are based on: - Political systems - Economic systems -Legal systems
(Session 13 ISI in Latin America) Why did many Latin American governments introduce the ISI strategy after World War II? Why didn't they promote, for instance, free trade?
Industrialization in Brazil quickly run into constraints caused by inadequate transportation system, shortages of electric power, and the underdevelopment of basic heavy industries such as steel, petroleum, chemicals and nonferrous metals. Building up those industries thus became the focus of the government's development policies. The Brazilian government had little faith that the private sector would create and expand these critically important industries. Instead, policymakers determined that the state would have to play a leading role. Beyond creating these basic industries, the Brazilian government also sought to create domestic capacity to produce complex consumer goods. To achieve this objective, Brazil, in contrast to many other developing countries, drew heavily upon foreign investment to promote the development of certain industries, [such as the auto industry].To ensure that such foreign investments were not simple assembly operation in which the foreign company imported all parts from its suppliers at home, the Brazilian government instituted local rules that required the foreign automakers operating in the country to purchase 90% of their parts from Brazilian firms. To induce foreign automakers to invest in Brazil under these conditions, the government offered subsidies. Relying on this strategy, Brazilian auto production rose from close to zero in 1950 to almost 200,000 cars in 1962. Brazil's ISI strategy helped transform the country's economy in a remarkably short time. [For example,] imported consumer durables fell from 60% of total consumption to less than 10% of total production by 1959. Imports of capital goods also fell, from 60% of total domestic consumption in 1949, to only 10% by 1964. Whereas manufacturing accounted for only 26% of total Brazilian production in 1949, by 1964 accounted for 34%.
(Session 2 Institutions and Economic Growth) How could you encourage growth?
Institutions can encourage growth and development by developing an inclusive institution to: - Create incentives to motivate people and firms to invest in new sectors, invest abroad, take high studies, etc. - Invest in higher structures and education. - Reducing uncertainty by designing clear and stable rules of game.
(Session 9 Embedded Liberalism: the Keynesian Compromise) What was agreed at Bretton Woods? Explain the consequences of this agreement for international finance and trade.
It was a new system of international cooperation. 1. International trade has to be fostered through the development of a system of fixed exchange rates. 2. The USD would be the only currency convertible into gold on demand (the gold-dollar standard). 3. In order to guarantee the stability of this monetary system, trade liberalization and cooperating among countries had to be promoted. 1. International Monetary Fund = lend to members in USD currency so they could join and follow fixed exchange rates. 2. The World Bank = give long-term loans at lower interest rates for reconstruction of Europe. 3. General Agreement on Tariffs and Trade (GATT) = reduce barriers to international trade; not always observed and tended to favor developed nations.
(Session 4 The Economic Liberal Perspective in Practice) Discuss the advantages and disadvantages associated with free trade for a backward (agrarian) economy (such as Latin America during the first globalization). How could governments mitigate those disadvantages?
Latin America focused primarily on primary goods whereas some economies like Britain focused on industrial products. Latin America had a lot of land and increasing labor force thanks to migration. Specialization in their comparative advantage in primary goods led to fast growth. However, Latin America witnessed disadvantageous specialization in low-innovation, low-value added sectors and an increasing dependence on foreign markets. Additionally, Latin America saw that its infant/new industries necessitated temporary protection to consolidate, until they could have achieved economies of scale to compete against leaders. Governments could have mitigated these disadvantages by using the money obtained from agrarian goods to encourage an efficient industrial policy or, by redistributing the gains derived from globalization towards economic diversification and social welfare.
(Session 7 Money and Exchange Rate Systems) What's the main advantage of a fixed exchange-rate system? And the main disadvantage? (a fixed exchange rate is a regime applied by a government or central bank that ties the country's official currency exchange rate to another country's currency or the price of gold, helps keep country´s currency within a narrow band)
Main advantages: - Competitive devaluation, or to reduce the value of domestic currency to boost exportation (also a traditional reaction to economic crises). - Overvalued exchange rates serve as a symbol of power. This causes imports to be relatively cheap and make exports expensive. - Stability + growth. - A decrease in foreign exchange risk (don´t have to worry about external changes in exchange rates) Main disadvantages: - Preventing adjustments for currencies that become under- or over-valued. - Limiting the extent to which central banks can adjust interest rates for economic growth. - Requiring a large pool of reserves to support the currency if it comes under pressure. - Govt. was so focused on price stability to avoid exchange rate fluctuations that it could not use the monetary policy for other goals like employment creation. - A return to the gold standard could give countries w/ large gold production the ability to influence macroeconomic activities.
(Session 10 Keynesian Economics) What is known as a "mixed economy"? Explain the role of the state in mixed economies.
Market economy + state regulation or a managed social-market economy. Utilize explanation for Keynesian State.
(Session 10 Keynesian Economics) What is known as the "Keynesian State"?
Market economy + state regulation. A mixed economy, or a managed social-market economy. States went on being responsible for the preservation of law and the enforcement of private contracts and markets. To promote growth, modernization, and social stability: - Counter-cyclical policies: expansionary policies when private demand drops - Welfare State as a piggy bank - Promotion of human capital (research + education) - Creation of large state-owned enterprises in strategic industries - Long-term planning
(Session 10 Keynesian Economics) Who criticized the most Keynesian economics? Why?
Milton Friedman stated that state intervention is against individuals´ freedom to choose, he stated ¨how can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect?¨
(Session 7 Money and Exchange Rate Systems) How were exchange rates determined within the gold standard?
Monetary system based on gold with fixed exchange rates. The currency issued, or the money base, was backed by gold reserves. The currency was constituted by commodity money and commodity-backed money. Coins and banknotes could have been converted to gold on demand at central banks according to the mint ratio or currency parity established. Exchange rates were fixed according to the weight of gold of each currency.
(Session 3 The Economic Liberal Perspective) According to the "new trade theory", why do countries have incentives to trade with other countries?
More than half of the international trade takes place among nations which have similar factor endowments (i.e. rich to rich, non-rich to non-rich). Why does this happen? Well, trade happens due to increasing returns of scale. Countries reduce production costs by focusing on producing large quantities of specific products. Firms can also increase their economies of scale by focusing on certain products and geographically concentrating their production and differentiating their products from competitors. Hence, comparative advantage is a reason for doing so, but specialization is also a factor.
(Session 3 The Economic Liberal Perspective) Do you agree with the following statement: "A country should specialize in and export the good for which it has absolute advantage"?
No, a country should specialize in and export the good for which it has a comparative advantage. A country has a comparative advantage in producing a good if the cost of producing an additional unit of that particular good relative to the cost of producing another good is lower than another country´s cost to produce the same two goods. (When a country produces a good or service for a lower opportunity cost than other countries).
(Session 2 Institutions and Economic Growth) Do you agree with the following statement: "Any institution encourages economic growth in the long term"?
No, because inclusive institutions lead to long-term growth and extractive institutions lead to short-term growth. By looking at society directly, we can see cases in which both institutions operate in and see first hand that inclusive institutions lead to more prosperity.
(Session 12 Neoliberalism) What have been the geopolitical consequences of the rise of Asia?
Not directly stated in the PowerPoint, but could be: - Speed and magnitude of growth (competition) - Geopolitical influence on a massive scale - Export superpowers - Excess of cheap labor = outsourcing for other countries
(Session 4 The Economic Liberal Perspective in Practice) An increase in trade flows, is it enough as to talk about globalization?
Not really sure what the f*** this means. Yes, because by 1913, per capita foreign trade was 25 times higher than 1800. Large countries like the USA and Argentina were able to expand thanks to an increasing labor force (emigrants) and foreign capital (Europe). Pretty much every country participated in the first globalization wave. If this increase in trade flows is associated with other nations, then technically these two nations are geared towards globalization and free trade.
(Session 7 Money and Exchange Rate Systems) Which type of money do we use nowadays? Which type of money was used in times of the gold standard?
Nowadays, we use fiat money. This signifies that the value of the currency is given by governmental regulation, or that the governments establish it as ¨legal tender.¨ During the gold standard, commodity money and commodity-backed money were used. Commodity money is where the value of the commodity comes from the material of which it is made (gold/silver) whereas commodity-backed money is where bank-issued notes are equivalent to some quantity of gold/silver.
(Session 6 National Accounting) Real GDP
Or GDP at constant prices; is adjusted for price changes. Real GDP is preferably used to compare GDP at different times. It also takes inflation into account. Nominal GDP > Real GDP
(Session 6 National Accounting) Nominal GDP
Or GDP at current prices; includes both production and price evolution. Nominal GDP > Real GDP
(Session 11 The End of the Bretton Woods System) Explain which changes had taken place by the early 1970s in world economic leadership and how this affected the Bretton Woods System.
President Nixon announced suspension of $ convertibility into gold, which ended the gold dollar standard. The institution created in the Bretton Woods remained, such as the IMF. Nixon did this to increase exportations because a trade deficit had become recurrent.
(Session 2 Institutions and Economic Growth) What's the impact of the development of property rights on economic growth?
Private property rights serve a key function in market economies because they allow people to utilize a certain property and benefit from it via contracts and law-based enforcement. Property rights also allow others to innovate and compete with other individuals. Buyers also do not want to pay for goods if they cannot possess the right to own them.
(Session 14 Command Economy) Compare how decisions are taken within a market economy and a command economy.
Producers and consumers regulate a market economy. However, it is the government which governs a command economy. The price mechanism is used in the market economy and not in a command economy, as the prices as set by the state. Hence the price level in a command economy is low, whereas in a market economy it is high.
(Session 3 The Economic Liberal Perspective) Why do nations benefit from specialization?
Specializing increases labor productivity because of: - Learning by doing: we acquire skills as we do things and innovate/envisage. - Differences in ability: we can focus on things that we do better than others. - Economies of scale: producing a larger number of units of some good is often more cost-effective than producing a smaller number.
(Session 12 Neoliberalism) The 1970s crisis was characterized by stagflation. Stagflation puzzled policy makers for years. How did governments finally react? With which consequences in terms of income inequality within developed societies?
Stagflation means no growth combined with inflation. The New Policy Regime: 1. Restrictive monetary and fiscal policy: govt. tolerated high unemployment rates to lower inflation and have a balanced budget - Cut unemployment benefits to reduce spending - Change legislation to reduce trade union power 2. Deregulation and privatization of state-owned companies 3. Tax reduction to promote firm´s investment Results: - Economic stability = low and stable inflation; falling unemployment - Income redistribution from wages to profits - INCREASING INCOME INEQUALITY
(Session 11 The End of the Bretton Woods System) What caused the crisis of the 1970s?
The 1970s crisis was a supply-side crisis, because problems on the supply side of the economy depressed the profit rate, the rate of investment, and the rate of productivity growth. When the US announced the suspension of the dollar convertibility into gold, economies started to participate in a floating exchange rate system. Troubles increased because of sudden increases in oil prices and Western companies found it difficult to adjust to no monetary stability and rising energy and production costs.
(Session 8 Crisis and Financial Regulation) Why was Latin America so affected by the Great Depression?
The American funds lent or invested abroad were repatriated and Latin America was very dependent on American investments (production as well). Also, because of the falling prices of primary goods in the international markets and because of the protectionist measures adopted by the US.
(Session 11 The End of the Bretton Woods System) Which countries appear to have most benefited from international trade since the 1960s? What policies do these countries seem to have in common?
The Asian Tigers benefitted the most. For instance, Japan borrowed many technical innovations at a minimal cost in the late 1940s. Combined with an excess of human capital, it allowed the country to take advantage of superior technology in many industries. Combined with high levels of saving, investment, a stable govt. focused on export-led growth, and the just-in-time system, growth rates increased drastically. Other giants like South Korea and Taiwan also specialized in industries which required a large workforce and copied but also improved existing technologies. - Large-scale capital investment - Increasing economies of scale - Toyotism (just in time)
(Session 5 Mercantilism) According to the infant industry argument, protection to infant industries must be temporary only. Why?
The Infant Industry Argument has pushed governments of developing nations to provide protection or loans to domestic manufacturing activities and restrict the imports of manufactured goods. This strategy is known as import substitution industrialization. In other words, infant industries had to be temporarily protected from foreign competition, expand their scale of operations, and become at least as competitive as other competing firms. Perhaps, protection must only be temporary so that the development of these industries are fully protected, but their expansion into the competitive market is not as restricted or controlled.
(Session 12 Neoliberalism) What is "The Washington Consensus" and which kind of economic policy (Keynesian vs. liberal) does it promote?
The Washington Consensus demanded reforms in the same line in Latin America, Africa, and the former soviet bloc in exchange for economic aid. A set of economic policy recommendations for developing countries, and Latin America in particular, that became popular during the 1980s. The term Washington Consensus usually refers to the level of agreement between the International Monetary Fund (IMF), World Bank, and U.S. Department of the Treasury on those policy recommendations. All shared the view, typically labelled neoliberal, that the operation of the free market and the reduction of state involvement were crucial to development in the global South.
(Session 14 Command Economy) Why did central planning fail to encourage long-term growth?
The attempt to incentivize people was simply not enough. The impossibility of determining prices without free markets leads to the inevitable failure of the centralized planning of an economy. A socialist society could possibly achieve economic growth through central planning as long as it devoted enough brilliant mathematicians and economists to figuring out accurate prices and production values. In the solution of the problem, knowledge should be used that is dispersed among many people. 1. The system was costly and inefficient 2. Lack of incentive to work hard 3. System was used to enhance elite´s power
(Session 6 National Accounting) Balance of payments
The balance of payments is the total value of goods and capital flowing in and out of a country. it includes: 1. The current account: registers imports and exports of goods and services (trade account), net earnings from assets abroad (payments for royalties and licensing fees, profits), and unilateral transfers to other countries (donations). 2. The capital and financial account, which registers financial flows (inward/outward foreign investment, remittances, international loans, and and other transfers of wealth).
(Session 7 Money and Exchange Rate Systems) Why is the gold standard still so appealing nowadays? Which geopolitical consequences might a return to the gold standard have?
The gold standard is so appealing nowadays because of its simplicity and because it avoided inflation and favors international transactions. However, some consequences could be: - Governments could not use this monetary policy for other goals such as employment creation (vs focusing on price stability to avoid fluctuations in exchange rates). - A return to the G.S. could give countries like China, Russia, and South Africa who have a large gold production a considerable ability to influence macroeconomic conditions
(Session 13 ISI in Latin America) Explain the main characteristics of the ISI strategy.
The government responded to this crisis by adopting protectionist measures to limit imports, [in a strategy known as "import substitution industrialization" (ISI) or "inward looking development"]. [The ISI strategy consolidated in the 1950s]. The government restricted imports tightly with the so called law of similar, which effectively prohibited the import of goods similar to those produced in Brazil. [People wanting to import something must first gain the permission of government authorities]. In 1952, the Brazilian government created the National Economic Development Bank (BNDE), an important instrument for industrial policy through which the Brazilian state could finance industrial projects. In the late 1950s, the government created a new agency, the National Development Council, to coordinate and plan its industrialization strategy.
(Session 8 Crisis and Financial Regulation) Why is the Great Depression considered a turning point in financial regulation?
There was no supervision at all of financial markets and banks´debt. With a small amount of money and no proof of creditworthiness at all, you could invest in Wall Street. The lessons were as follows: - Governments must use public policy to mitigate the effects of economic downturn (towards Keynesian revolution). - Banking system cannot collapse; policy makers have to quickly intervene to restore confidence in the capital market. - The financial system must be supervised pertaining to Roosevelt´s New Deal (Glass Steagal Act and Securities Exchange Act).
(Session 3 The Economic Liberal Perspective) The US and the UK produce two products, steel and cloth. Each country employs 100 workers in the steel industry and 100 workers in the textile industry. The Americans have newer plants, so they are more productive. Thus 100 US workers make 900 units of steel, while 100 British workers only make 400 units of steel. One hundred US weavers make 300 units of cloth, while 100 British weavers make only 200 units of cloth. a) Which country is the most efficient one in the production of each good? b) In case of specialization, in the production of which good must each country focus on? Why? c) Calculate the total production of each good if US shifts 10 workers out of cloth to steel, and UK shifts 20 workers out of steel to cloth. How is total production compared to the initial one (that is, before specialization)?
Too lazy, refer to example/methodology above.
(Session 15 The Asian Model) Have Asian countries taken advantage of their comparative advantages?
Yes, by exploiting their large quantity of labor and utilizing an export-oriented strategy in labor-intensive industries, these countries were able to achieve a stable macroeconomic environment. Governments also liberalized foreign trade, but introduced selective import liberalization.
(Session 5 Mercantilism) From your point of view, has the US government increased protectionism in the last years? Why and how?
Yes, the US has increased protectionism because its imports far outweigh exports to benefit consumers (economic liberalism). This can be an issue at times, especially when nations are growing and prospering (like China). Increasing dependence on others for importations can pose threats. So protectionism has increased, especially under the presidency of Donald Trump. Reasons for US protectionism: 1. National security reasons (defense, energy, communications). 2. Geopolitical reasons (to signal displeasure). 3. Environmental reasons (uphold international standards on labor rights and environmental emissions regulations). 4. Strategic reasons (consolidate domestic production). 5. Can lead to disadvantageous specialization; particularily in the case of agrarian economies like Latin America.