POL SCI 124A Final Study Guide

Conditions for cooperation among sovereign actors

(in the absence of 3rd-party enforcer) - repeated interaction - reciprocity strategy (ex: tit for tat) - sufficient value of future payoffs --> these conditions can but don't necessarily lead to cooperation

structural adjustment policies included 3 of the following:

- Deregulation and privatization - Trade liberalization - Higher producer prices in agriculture

comparative advantage

- enables mutual gains from trade - One country can produce a product at a lower opportunity cost (in terms of other products foregone) than another country

European monetary system

EU system designed to create a zone of monetary stability in Europe, control inflation, and coordinate exchange rate policies of EU countries - Fixed but adjustable system in which governments established a central parity against a basket of EU currencies called the European Currency Unit - revolved around German monetary police - offered the possibility of a credible commitment to low inflation because it was centered on the German central bank, the most independent central bank in the EU

economies of experience

When efficient production requires specific skills that can only be acquired through production in the industry. (moving down learning curve)

economies of scale

When unit cost of producing falls as the number of units produced rises.

Actors of (Embedded) Liberalism (in the West)

individuals

Actors of Classical Liberalism

individuals

public goods

non-excludability and non-rivalry - once the good has been supplied, no one can be prevented from enjoying its benefits - consumption by one individual does not diminish the quantity of the goods available to others

club goods

nonrival and excludable

Horizontal Integration

when a firm creates multiple production facilities, each of which produces the same good or goods. - In the international economy, these types of integrated MNCs produce the same product in multiple national markets - Firms integrate horizontally when a cost advantage is gained by placing a number of plants under common administrative control - Cost advantages that provide incentives for this often arise when intangible assets are the most important - Locational advantages and intangible assets result in this - Unilever is this

Locational incentives

packages host countries offer to MNCs that either increase the return of a particular investment or reduce the cost or risk of that investment - The willingness of governments to offer this and the size of the typical package have both increased rapidly during the last 20 years - growing use of this suggests that host countries are at a disadvantage when bargaining with MNCs over manufacturing investments - Governments offer them to induce MNCs to invest in their country rather than another

Interests of Mercantilism

power

Unholy trinity

recognition that governments have three policy goals, each of which is desirable in its own right: (1) a fixed exchange rate, (2) autonomy of monetary policy (using monetary policy to manage the domestic economy), and (3) capital mobility (allowing financial capital to flow freely into and out of the domestic financial system) - a government can achieve only two of these three goals simultaneously -->If a country wants to maintain a fixed exchange rate and control over its monetary policy, it must implement capital controls to prevent market forces from affecting its currency value. -->If a country wants to allow free capital flows and maintain a fixed exchange rate, it must relinquish control over its monetary policy, often aligning it with the currency to which it is pegged. --> If a country wants to control its monetary policy and allow free capital flows, it must allow its exchange rate to float and be determined by the market.

Vertical integration

refers to instances in which firms internalize their transactions for intermediate goods (an output of one production process that serves as an input into another production process) - each stage of the production process was contained within a single corporate structure - strong incentives to integrate this way when firms earn a substantial share of their revenues from: Specific assets, such as natural resources and specific assets, such as specialized factories that manufacture component parts - results in this when is locational advantaged and has specific assets

Macroeconomic policy: Monetary

refers to the actions of a central bank, aimed at managing the money supply and interest rates to control inflation, stabilize currency, and foster economic growth - Central banks' policies can have far-reaching effects beyond their borders, influencing global capital flows, exchange rates, and financial market stability - For example, the U.S. Federal Reserve's decisions can impact global financial markets and liquidity - a need for coordination of monetary policies among major economies, especially to prevent "currency wars" where countries competitively devalue their currencies

Idea of (Embedded) Liberalism (in the West)

regulated trade promotes prosperity (Keynes)

fixed but adjustable rate system

the system that lay at the center of the post-World War II monetary system and the European Union (EU)'s regional exchange-rate system between 1979 and 1999 - A system in which governments establish a central or official rate for their currency against some standard, as in a fixed exchange-rate system, but are also allowed to change the official rate occasionally, usually under a set of well-defined circumstances.

industrial policy

the view that government - using taxes, subsidies, and regulations - should nurture the industries and technologies of the future, thereby giving these domestic industries an advantage over foreign competition

Phillips Curve

trade-off between unemployment and inflation - suggests that a government can reduce unemployment only by causing more rapid inflation and can reduce inflation only by causing higher unemployment - ex: in the years when inflation was low, unemployment was high, whereas in years when unemployment was low, inflation was high - Monetary policy may not be effective in encouraging job creation if inflation is not high enough to reduce real wages - Central bankers brought an end to this by raising interest rates when inflation is about to rise, and lowering interest rates when inflation is about to fall - The tradeoff between inflation and unemployment is now seen to hold only in the short run (acceleration principle)

global trade agreements

- World Bank - International Monetary Fund - GATT

Marxism

- originated in the work of Karl Marx as a critique of capitalism - argues capitalism is characterized by two central conditions: the private ownership of the means of production (or capital) and wage labor - the value of manufactured goods was determined by the amount of labor used to produce them. - capitalists did not pay labor the full amount of the value they imparted to the goods they produced. - capitalists who owned the factories paid workers only a subsistence wage and retained the rest as profits with which to finance additional investment - predicted that the dynamics of capitalism would lead eventually to a revolution that would do away with private property and with the capitalist system that private property supported Three dynamics: 1) there's a natural tendency toward the concentration of capital; economic competition would force capitalists to increase their efficiency and increase their capital stock and capital would become increasingly concentrated in the hands of a small, wealthy elite 2) argued that capitalism is associated with a falling rate of profit; investment leads to a growing abundance of productive capital, which, in turn, reduces the return to capital; as profits shrink, capitalists are forced to further reduce wages, worsening the plight of the already impoverished masses 3) capitalism is plagued by an imbalance between the ability to produce goods and the ability to purchase goods; large capital investments continually augment the economy's ability to produce goods, whereas falling wages continually reduce the ability of consumers to purchase the goods being produced --> as the dynamics interact over time, society becomes increasingly characterized by growing inequality between a small wealthy capitalist elite and a growing number of impoverished workers --> eventually cause worker

solution to enforcement problem

- penalties for noncompliance - increased transparency and accountability - strong legal frameworks - monitoring systems/mechanisms

Locational advantages

- provide the economic rationale for a firm's decision to internationalize its activities - arise from a country's underlying comparative advantage - create a compelling motivation for a firm based in one country to engage in economic transactions with a foreign country - one of the three factors that determine where an MNC will expand to - leads to horizontal integration when there's intangible assets - leads to vertical integration when there's specific assets - influences a firm's decision about whether to conduct international transactions through the market or to internalize these transactions depends on an interaction between When neither specific nor intangible assets exist, firms: - purchase their inputs from independent suppliers and sell their products through international trade - enter subcontracting arrangements with firms located in the foreign country and owned by foreign residents Examples: - Presence of natural-resource deposits - Large consumer markets that are expected to grow rapidly - Lower cost of the factors of production used intensively in the production of a specific product

capital account

- records financial transactions for investment purposes, separate from transactions related to the current account - considers financial transactions like the purchase of stocks or real estate, which can be autonomous or related to official transactions - Capital outflows (assets) are registered as negative items and capital inflows (liabilities) are registered as positive items - outflows are set against inflows to produce a capital-account balance - To calculate the overall balance-of-payments position, simply add the current account and the capital account together - a deficit means that the country's total expenditures in a given year—all of the money spent on goods and services and on investments in factories and houses—are larger than its total income in that year

Mercantilism

- rooted in seventeenth- and eighteenth-century theories about the relationship between economic activity and state power three central propositions: 1) classical mercantilists argued that national power and wealth are tightly connected; national power in the international state system is derived in large part from wealth; wealth, in turn, is required to accumulate power. 2) classical mercantilists argued that trade provided one way for countries to acquire wealth from abroad; wealth could be acquired through trade, however, only if the country ran a positive balance of trade, that is, if the country sold more goods to foreigners than it purchased from foreigners. 3) classical mercantilists argued that some types of economic activity are more valuable than others; mercantilists argued that manufacturing activities should be promoted, whereas agriculture and other non-manufacturing activities should be discouraged Modern version: - Economic strength is a critical component of national power. - Trade is to be valued for exports, but governments should discourage imports whenever possible. - Some forms of economic activity are more valuable than others. --> Manufacturing is preferred to the production of agricultural and other primary commodities, and high-technology manufacturing industries such as computers and telecommunications are preferable to mature manufacturing industries such as steel or textiles and apparel

current account

A broad category that includes imports and exports of both manufactured goods and services, as well as payments such as interest and profits, and foreign aid and remittances - current account imbalances in the United States during the Reagan administration were due to cutting taxes and raising military spending - In order to attract capital flows from current account surplus countries in the early 1980s, the United States had to maintain relatively high interest rates - records all current (non-financial) transactions between American residents and the rest of the world - deficit: when a country imports more goods and services than it exports - surplus: when a country exports more goods and services than it imports subcategories: - trade account - service account - income account

Export-oriented strategy

A development strategy in which emphasis is placed on producing manufactured goods that can be sold in international markets - adopted by the East Asian newly industrialized countries in the late 1950s to early 1960s after the gains from easy import substitution industrialization had been exhausted - During the late 1980s, this strategy and the apparent Asian success based on it provided the foundation for the "Washington Consensus."

Foreign Direct Investment

A form of cross-border investment in which a resident or corporation based in one country owns a productive asset located in a second country - made by multinational corporations - involve the construction of a new, or the purchase of an existing, plant or factory - can be when a firm in one country builds a new plant or factory in a second country, and a firm in one country purchases an existing plant or factory in a second country - for the last 30 yrs, this has flowed from advanced industrialized countries to other advanced industrialized countries

managed float exchange rate systems

A form of floating exchange-rate system in which governments occasionally intervene in foreign exchange markets to try to influence the value of their currency - Such interventions are voluntary and sometimes involve coordinated intervention by more than one country - perhaps most accurately characterizes the current international monetary system - govts don't allow their currencies to float freely, they intervene in the foreign exchange market to influence their currency's value against other currencies - usually no rules governing when such intervention will occur, and governments do not commit themselves to maintaining a specific fixed price against other currencies or an external standard

rents

A higher-than-normal return on an investment. - created by barriers to entry, which can result from monopolistic or oligopolistic market structures or government policies

nash equilibrium

A set of strategies in which no player has anything to gain by changing his/her own strategy unilaterally

World Bank

A specialized agency of the United Nations agency created to assist developing nations by making loans to countries for economic development, trade promotion, and debt consolidation guaranteed by member governments

fixed exchange rate system

A system in which governments establish a central or official rate for their currency, usually expressed in terms of some standard, such as gold or another currency - govts are required to use monetary policy and foreign exchange market intervention to maintain their currency within a band around the official rate - government then maintains this fixed price by buying and selling currencies in the foreign exchange market - In order to conduct these transactions, governments hold stock of other countries' currencies as foreign exchange reserves.

Bretton Woods System

All national currencies are fixed to gold (and the dollar, which is fixed to gold) but can change the exchange rate if they face a fundamental disequilibrium, with approval from the IMF. Governments are allowed to restrict currency exchange to prevent foreign currency, resulting in exchange rate stability, but declining confidence in the dollar led to a liquidity problem - it was based on fixed-but-adjustable exchange rates in an attempt to provide a stable international monetary system and at the same time allow governments to use monetary policy to manage the domestic economy - The system collapsed in 1973 and represented the last time that governments attempted to create and maintain an international monetary system based on some form of fixed exchange rates - 980s saw the emergence of global imbalances and distributive conflict over the adjustment of these imbalances that echoed the political dynamics that triggered the collapse of this - represented the first time that governments explicitly made exchange rates a matter of international cooperation - attempted to establish a system of fixed exchange rates in a world in which governments were unwilling to accept the loss of domestic autonomy that such a system required - governments sought a system that would provide stable exchange rates and simultaneously afford domestic economic autonomy, but needed 4 things: greater exchange-rate flexibility, capital controls, a stabilization fund, and the IMF

Keynesian economics

An approach to macroeconomic policy that places primary emphasis on using fiscal and monetary policies to manage domestic demand in order to maintain full employment - Governments should cut taxes during times of unemployment in order to increase consumption, which will increase aggregate demand, which will motivate businesses to invest and create jobs to produce enough to meet demand - Governments should increase spending during times of unemployment in order to increase consumption, which will increase aggregate demand, which will motivate businesses to invest and create jobs to produce enough to meet demand - Governments should reduce interest rates during times of unemployment in order to increase borrowing for items such as cars and houses, which will motivate businesses to invest and create jobs to produce enough to meet demand - Because Keynes believed that the cause of persistent high unemployment ultimately lay in inadequate demand for goods, he proposed that governments use fiscal and monetary policies to manage aggregate demand - argued an economy could get stuck at an equilibrium characterized by underutilized production capacity and high unemployment - argued that governments don't accept persistent high unemployment, but could use macroeconomic policy—monetary policy and fiscal policy—to restore the economy to full employment - can get stuck at high levels of unemployment because of the fragility of investment decisions

Import Substitution Industrialization (ISI)

An economic development strategy adopted in many developing countries after World War II in which states attempted to industrialize by substituting domestically produced goods for manufactured items that had previously been imported - The strategy proceeded in two stages

International Monetary Fund

An international organization of 183 countries, established in 1947 with the goal of promoting cooperation and exchange between nations, and to aid the growth of international trade.

Infant industry case for protection

Argues that there are cases in which newly created firms will not be efficient initially but could be efficient n the long run if they are given time to mature - Tariffs can help firms in new industries by providing them with a guaranteed domestic market - if established (foreign) firms have advantage over new (domestic) firms, new firms are at a disadvantage - assumes market is perfectly competitive Potential advantages of established firms: -- Economies of scale -- Economies of experience - policies used to promote this are known as industrial policy Private capital market are unlikely to finance these if: --> the private capital market is inefficient, the firm is expected to become efficient in the future due primarily to economies of experience, and the firm is not expected to become efficient in the future

Institutions of (Embedded) Liberalism (in the West)

Bretton Woods

opportunity cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

rent seeking

Efforts by private actors to convince politicians to enact policies that create rents they can capture. - efforts by private actors to achieve higher-than-market returns by corruptly using the political system - EX: bribing officials to acquire import licenses

strategic trade theory

Expansion of infant industry case for protection; asserts that many high-tech industries are characterized by oligopolistic competition. - Zero sum game - Creates First Mover advantage - claims that targeted government assistance can overcome first mover advantage Beliefs: - There are cases in which newly-created firms will not be efficient initially but could be efficient when they become mature - Firms operating in oligopolistic markets can earn profits greater than could be earned in equally risk investments in other sectors of the economy - Some industries are characterized by oligopolistic competition the location of high-technology industries is primarily determined by: - Economies of scale and experience - Timing of market entry

Obsolescing bargain

Explains how a multinational corporation (MNC) and a host country government divide the income generated by an MNC investment in the host country - asserts that the MNC has a bargaining advantage in the pre-investment negotiations - the initial investment agreement will direct a larger share of the resulting income to the MNC and a smaller share to the government - once the investment is made, however, the government gains bargaining power at the expense of the MNC - the government uses its enhanced bargaining power to renegotiate the initial agreement and claim a larger share of the investment income - the initial bargain is thus rendered obsolete by post-investment changes in relative bargaining power. - happens when technology has been significantly transferred to the host country workers - MNCs enjoy more bargaining power than host countries in low-skilled labor-intensive manufacturing investments - technology in many manufacturing industries changes rapidly and therefore is not easily transferred to the host country

Foreign reserves

Government holdings of other countries' currencies - if the dollar is selling below its fixed price against the yen in the foreign exchange market, the U.S. government will sell yen that it is holding in its foreign exchange reserves and will purchase dollars. These transactions will reduce the supply of dollars in the foreign exchange market, causing the dollar's value to rise - If the dollar is selling above its fixed price against the yen, the U.S. government will sell dollars and purchase yen. These transactions increase the supply of dollars in the foreign exchange market, causing the dollar's value to fall

Institution of Mercantilism

Imperial trade

European Union

It was established after World War II, initially to foster economic cooperation with the idea that countries that trade together are more likely to avoid conflict - has since evolved into a powerful entity influencing many aspects of its members' economies, societies, and laws - one of the largest economic blocs in the world, with a single market allowing free movement of goods, services, capital, and people - a major global trading power, negotiating trade agreements as a bloc, which gives it substantial leverage - regulatory standards often become global norms because companies adopt these standards worldwide to access the large EU market - has a monetary union, the Eurozone, where 19 of the 27 member states have adopted the euro as their common currency - financial institutions, like the European Central Bank and the European Investment Bank, play critical roles in the global financial system

Institutions of Classical Liberalism

Pax Britannica, free trade agreements, gold standard

Structural adjustment program

Policy reforms designed to reduce the role of state and to increase the role of the market in the economy - sought to change those aspects of developing economies that were most unlike conditions in Asia - govts were encouraged to create a stable macroeconomic environment (create budget surpluses), to liberalize trade, and to privatize state-owned enterprises --> govts were encouraged to liberalize imports by dismantling import-licensing systems, shifting from quota-based forms of protection to tariffs, simplifying complex tariff structures, and reducing tariffs and opening their economies to imports - had a dramatic impact on average incomes (fell sharply) in the short run and the distribution of income in the long run --> governments redistributed income: export-oriented producers were benefited from these policies, whereas people employed in the import-competing and nontraded-goods sectors saw their incomes fall. Context: - administered by IMF and World Bank as a result of financial crisis, ISI imbalances, and success of East Asian Tigers

Actors of Mercantilism

States

Terms of Trade

Price of a country's exports to the price of its imports - Developing countries' terms of trade deteriorate over time, as primary commodity prices fall relative to manufactured goods prices, according to the Structuralist Singer-Prebisch theory - An improvement means that the price of its exports is rising relative to the price of its imports, but a decline means that export prices are falling relative to its import prices' - as this improves, a country can acquire a given amount of imports for a smaller quantity of exports --> an improvement makes a country richer, but a decline makes it poorer - Most research (Oatley) disputes the claim that developing countries face a continuous decline in this

enforcement problem

Refers to the fact that governments cannot be certain that other governments will comply with trade agreements that they conclude

Hegemonic stability theory

Rests on logic of public goods provision, hegemon will provide public good; will bear full cost of setting up international trade system because it has the most to gain - when the global economy is dominated by one hegemonic power (such as the UK or the USA), that dominant country tends to encourage trade liberalization in other countries so they can all freely trade with one another - often advanced to explain why the system shifts between periods in which it is open and liberal, and periods in which it is closed and discriminatory

Washington Consensus

The collection of policy reforms advocated by U.S. officials and by the International Monetary Fund and World Bank staff as the solution to the economic problems faced by developing countries - caused by sovereign debt crises in several Latin American countries and ended with the collapse of the Berlin Wall and political and market reforms in Eastern Europe --> thought developing countries must implement this to ensure a return to growth - The emphasis is on stabilization, structural adjustment, privatization, and market liberalization. - policies included: Deregulation, privatization, trade and financial liberalization

Structuralism

The shift of resources from agriculture to manufacturing would not occur unless the state adopted policies to bring it about - argued that market imperfections inside developing countries posed serious obstacles to the reallocation of resources from agriculture to manufacturing industries - argued that markets would not bring about the necessary shift of resources because developing economies were too inflexible - belief that the market would not promote investment in manufacturing industries - pointed to complementary demand and pecuniary external economies that would limit investment in manufacturing industries - enabled governments to transform the protectionist trade policies that benefited their principal political supporters into comprehensive state-led development strategies - claimed higher standards of living could be achieved only through industrialization, and according to what was then the dominant branch of development economics - played an important role in shaping developing countries' trade and development policies - claimed that trade based on GATT rules would only make industrialization harder to achieve

Big Push

The state would plan and coordinate a substantial large investment to solve the market failures that structuralists believed inhibited rapid industrialization in developing societies. - proposed by structuralists as a solution to the coordination problem since coordination problems would prevent investment in manufacturing (in the way of industrialization) - believed that what the market could not bring about, the state could achieve through intervening in the economy

Floating exchange rate system

The value of one currency in terms of another is determined entirely by the activities of private actors as they purchase and sell currencies in the foreign exchange market - govts do not maintain a fixed price for their currencies against gold or any other standard, nor do govts engage in foreign exchange market intervention to influence the value of their currencies - no limits on how much a currency can move in the foreign exchange market - under this system, decreasing a currency's value means depreciation - under this system, increasing a currency's value means revaluation - under this, currency gets stronger when a country exports more goods, more foreign investors deposit money into its' banks, more foreign firms purchase factories in it - these rates make it easier for a government to stimulate the economy by lowering interest ratesgovernments do not maintain a fixed price for their currencies against gold or any other standard. Nor do governments engage in foreign exchange market intervention to influence the value of their currencies

Pareto sub-optimality

There is at least one Pareto Improvement available

GATT (General Agreement on Tariffs and Trade)

a United Nations agency/international trade organization created by a multinational treaty to promote free trade by reducing tariffs, import quotas, and other trade restrictions - Sectors: most manufactured goods (not textiles) - Issues areas: tariffs and quotas - Members: developing countries given waivers/extra time - Enforcement: weak

hegemon

a country that produces a disproportionately large share of the world's total output and that leads in the development of new technologies. - due to being large and technologically advanced, the benefits that it gains from trade are so large that it is willing to bear the full cost of creating international trade rules - recognizes that the public good will not be provided in the absence of its contribution, so the free-riding problem largely disappears, and stable regimes are established, during periods of this leadership - as this declines in power, it becomes less willing to bear the cost of maintaining trade rules and world trade becomes less open

Stabilization fund

a credit mechanism consisting of a pool of currencies contributed by member countries - Each country that participated in the Bretton Woods system was assigned a share of the total fund (called a quota), the size of which corresponded to its relative size in the global economy - each country then contributed to the fund in the amount of its quota, paying 25 percent in gold and the remaining 75 percent in its national currency - held a total of $8.8 billion - A government could draw on the fund when it faced a balance-of-payments deficit - managed by the IMF by limit abuse - tragedy of the commons: Easy access to this fund might encourage governments to run large balance-of-payments deficits. Countries could import more than they exported and then draw on the stabilization fund to finance the resulting deficit. --> IMF limited such opportunistic behavior by having authority over exchange-rate changes and access

Pareto optimality

a distribution of things such that no one can be made better off without someone becoming worse off

Production possibility frontier (PPF)

a graph that shows all the combinations of goods and services that can be produced if all of society's resources are used efficiently

Balance of payments

a measure of the total flow of money into or out of a country - an accounting framework recording all international transactions between a country and the rest of the world - position: the sum of inflows and outflows of import spending, export revenues, payments and receipts such as interest and profits, and net inflows and outflows of foreign direct investment and other financial transactions - adjustment: the process by which a country brings its payments into balance when money flowing out due to imports, direct investment abroad, and so on does not equal the money flowing in due to exports, foreign direct investment inflows, and so on - includes the current account and financial account - records its international transactions over a fixed period

reciprocity

a strategy that enables a player to reward other players for cooperating and punish them for cheating - can be used to achieve cooperation in the prisoner's dilemma - tit for tat is an example of this

dominant strategy

a strategy that is the best reply to all of the other player's strategies

regional trade agreements

agreements among nations in a particular region to reduce tariffs, quotas, and other protectionist barriers between themselves and develop similar technical and economic standards

Extractive Institutions

allocate power very narrowly to a small ruling elite and systematically exclude other segments of society from access to power - Acemoglu and Robinson: it allocates power to a narrow ruling elite, leading to corruption and poor long-term economic growth - the elite's power is relatively unconstrained by electoral institutions or by a clear rule-of-law-based judicial system - Economic institutions also do little to reward the initiative of individuals - Property rights are often lacking, or where present are unevenly enforced - in this system, the elite use their power to extract income from those who are excluded from politics and use it to provide benefits to the narrow group that rules or to the subset of society that keeps the government in power - Systems characterized by corruption within the state and among the ruling elite, and by rent seeking at the level of the society - the balance between productive and unproductive activity tips in a direction unfavorable to sustained economic growth - societies can escape only if they can create more inclusive institutions, if they do change at will, then institutions aren't exogenous to state policy and probably do not have the substantial independent impact on economic development that institutionalists claim - nationalizations tended to happen in these kinds of industries and public utilities

Specific assets

an investment that is dedicated to a particular long-term economic relationship - an asset that cannot be shifted from one use to another without losing a substantial portion of its value. - create incentives for vertical integration because it is difficult to write and enforce long-term contracts - the existence of this creates possibilities for opportunistic behavior once the investment has been made: one party in the long-term relationship can take advantage of the specific nature of the asset to extract a larger share of the value from the transaction - by internalizing transactions involving this, vertical integration enables welfare-improving investments that would not otherwise be made - examples: natural resources, factories that manufacture component parts

Electoral model of macroeconomics

argues that exchange-rate policy reflects decisions that governments make concerning monetary policy - assumes that governments care most about monetary-policy autonomy and will maintain a fixed exchange rate only when the monetary policy required to do so corresponds with its domestic economic objectives - domestic economic objectives are in turn shaped by the need to win elections - assumes that every government values monetary autonomy more than exchange-rate stability --> All governments will thus maintain a fixed exchange rate only when the monetary policy required to do so is consistent with its domestic economic objectives

Positive externalities

arise when economic actors in the host country that are not directly involved in the transfer of technology from an MNC to a local affiliate also benefit from this transaction - When individuals do not bear the full costs of their transactions, they will engage in more of that activity than society desires - those that can be transferred thru FDI include: Technology, Managerial expertise, Marketing networks

Time consistency problem

arises when the best course of action at a particular moment in time differs from the best course of action in general - government's monetary-policy preferences are not consistent over time --> wage bargainers have little incentive to believe any inflation target that the government announces

private goods

benefits and services over which the owner has full control of their use; both excludable and rival in consumption - tend to be undersupplied relative to the value society places upon them (due to free riding)

Ideas of Marxism

capitalists exploit labor, within and across states

Foreign exchange markets

determines a currency's exchange rate due to the interaction between the supply of and the demand for currencies in this - the market in which the world's currencies are traded - Imbalances between the supply of and the demand for currencies in the foreign exchange market cause exchange rates to change

Monetary union

emerged from dissatisfaction with the distribution of costs within the EMS and gained momentum from the broader effort to complete the single market - An exchange-rate system in which governments permanently fix their exchange rates and introduce a single currency - The European Union created a monetary union on January 1, 1999, and introduced a single currency—the euro—on January 1, 2002 - EU's transition to this was shaped in large part by a desire to redistribute the costs of exchange-rate stability

Inclusive Institutions

have political and economic characteristics that encourage individual initiative and sustained economic growth - political characteristics: broad extension of the right to select and constrain governments, adherence to the rule of law and a strong but (by virtue of the rule of law) constrained state - economic characteristics: strong property rights and market structures that reward individual talent - likely to provide high-quality public services that are important to growth, such as public education that is available to all and infrastructure investments that facilitate market development - property rights and their defense in the rule of law system encourages investment in productivity-improving activities - since opportunities for economic activity are open to the broad public rather than restricted to the chosen few creates incentives for individual initiative - likely to generate economic growth that is sustained over time

Liberalism

emerged in Britain during the eighteenth century to challenge the dominance of mercantilism in government circles 3 Arguments: 1) liberalism attempted to draw a strong line between politics and economics; liberalism argued that the purpose of economic activity was to enrich individuals, not to enhance the state's power. 2) argued that countries do not enrich themselves by running trade surpluses. Instead, countries gain from trade regardless of whether the balance of trade is positive or negative 3) countries are not necessarily made wealthier by producing manufactured goods rather than primary commodities. Instead, countries are made wealthier by making products that they can produce at a relatively low cost at home and trading them for goods that can be produced at home only at a relatively high cost --> thus, govts should make little effort to influence the country's trade balance or to shape the types of goods the country produces --> Government efforts to allocate resources will only reduce national welfare - in favor of a market-based system of resource allocation - argues that social welfare will be highest when people are free to make their own decisions about how to use the resources they possess - resources should be allocated through voluntary market-based transactions between individuals - a perfectly functioning market, individuals will continue to buy and sell resources until the resulting allocation offers no further opportunities for mutually beneficial exchange - judicial system must enforce these rights and the contracts that transfer ownership from one individual to another.

Secondary ISI

emphasis shifts from the manufacture of simple consumer goods to consumer durable goods, intermediate inputs, and the capital goods needed to produce consumer durables --> EX: In Argentina, Brazil, and Chile, for example, governments decided to promote domestic automobile production as a central component of this - promoted secondary ISI with three policy instruments: government planning, investment policy, and trade barriers - Throughout developing societies, the shift to this was accompanied by the emergence of the state as a principal, and in many instances the largest, owner of productive capacity

Ideas of Mercantilism

expand power by accumulating most wealth thru trade control

Mundell-Fleming model

explores the relationship between the exchange rate and macroeconomic variables like interest rate and output in the context of international capital flows - IS curve = represents the equilibrium in the goods market, showing combinations of interest rates and output where total spending equals total output (also considers net exports, which are influenced by exchange rate) - LM curve = represents the equilibrium in the money market, showing combinations of interest rates and output where the demand for money equals the supply - includes balance of payments Under Fixed Exchange Rate Regimes: --> the effectiveness of monetary policy is limited, as changes in interest rates lead to capital flows that require central bank intervention in the currency market to maintain the fixed rate --> fiscal policy is more effective under fixed exchange rates, as government spending or taxation changes can impact aggregate demand without being offset by changes in the exchange rate. Under Floating Exchange Rate Regimes: --> Monetary policy is more effective, as changes in interest rates affect the exchange rate, influencing net exports and thus aggregate demand. --> Fiscal policy is less effective, as government spending changes can lead to exchange rate adjustments that offset the impact on aggregate demand. - model considers different levels of capital mobility, with high capital mobility, fiscal policy is less effective under a floating exchange rate regime, and monetary policy is less effective under a fixed exchange rate regime - particularly useful for small open economies, where external factors like exchange rates and international capital flows significantly influence domestic economic conditions

Institutions of Marxism

firms vs. unions, etc

Easy ISI

focused on developing domestic manufacturing of relatively simple consumer goods, such as soda, beer, apparel, shoes, and furniture - eventually cease to bear fruit - the domestic market's capacity to absorb simple consumer goods would be exhausted, and the range of such goods that could be produced would be limited - will eventually need to shift away from this The rationale behind the focus on simple consumer goods was threefold: 1) there was a large domestic demand currently satisfied by imports 2) bc these items were mature products, the technology and machines necessary to produce them could be acquired easily from advanced industrialized countries 3) the production of relatively simple consumer goods relies heavily on low-skilled labor, allowing developing societies to draw their populations into manufacturing activities without making large investments to upgrade their skills. two broad benefits: - the expansion of manufacturing activities would increase wage-based employment as underutilized labor was drawn out of agriculture and into manufacturing - the experience gained in these manufacturing industries would allow domestic workers to develop skills, collectively referred to as general human capital, that could be applied subsequently to other manufacturing businesses - the management and entrepreneurial skills that would be gained by people who worked in and managed the manufacturing enterprises established in this stage

Ideas of Classical Liberalism

free trade creates wealth of nations (Smith, Ricardo)

EPZs (export processing zones)

industrial areas in which the government provides land, utilities, a transportation infrastructure, and, in some cases, buildings to the investing firms, usually at subsidized rates - foreign firms based in this are allowed to import components free of duty, as long as all their output is exported - Taiwan created the first one in East Asia in 1965, and South Korea created its first in 1970 - These assembly and export platforms attracted a lot of investment from American, European, and Japanese MNCs - They are often established by developing countries to attract foreign direct investments by multinational corporations

trade agreements

intergovernmental agreement designed to manage and promote trade activities for specific regions

Macroeconomic policy: Fiscal

involves government spending and taxation decisions; used to influence a country's economic activity - manage economic performance, affecting domestic demand, which in turn impacts trade balances and global demand - High government spending can stimulate not only the domestic economy but also import demand, affecting other economies - austerity measures can have a ripple effect on global economic growth - concerning sovereign debt, trade imbalances, and coordinated fiscal responses during global economic crises

Macroeconomic policy: Exchange Rate

involves the management of a country's currency value in relation to others; a free-floating, fixed, or managed float regime - crucial for international trade and investment flows - a weaker currency makes exports cheaper and imports more expensive, potentially improving a country's trade balance but affecting others adversely - countries can be accused of manipulating their currencies to gain unfair trade advantages, leading to international disputes and negotiations

sectoral model of macroeconomics

links exchange-rate policy choices to competition between sector-based interest groups - doesn't assume that all governments value monetary autonomy more than exchange-rate stability - govt preferences reflect interest-group preferences - interest groups hold different preferences over the trade-off between domestic economic autonomy and exchange-rate stability - Exchange-rate policy is determined by the group that has the greatest influence domestic actors in four domestic interest groups or sectors: --> import-competing producers, export-oriented producers, non-traded good producers, and the financial services industry - each group has a preference regarding the degree of exchange-rate stability (fixed v. floating), and preference regarding the level of the exchange rate (strong v. weak currency) - Sectors that intensively use comparatively scarce factors prefer a floating exchange rate because a floating exchange rate enables macroeconomic stimulus - Export-oriented producers prefer a fixed exchange rate because they are heavily engaged in international trade - Sectors that intensively use comparatively abundant factors prefer an undervalued exchange rate - nontraded-goods and the import-competing sectors prefer a floating exchange rate - export-oriented and import-competing sectors both prefer a weak or undervalued currency - nontraded-goods sector prefers a strong or overvalued currency

partisan model of macroeconomics

links exchange-rate policy to the government's monetary-policy decisions - different political parties pursue distinct macroeconomic objectives: Some parties use monetary policy to reduce unemployment and are forced to float their currency. Other parties use monetary policy to limit inflation and can more readily maintain a fixed exchange rate - based on a trade-off between unemployment and inflation called the Phillips curve - reflect the interests of the different social groups represented by parties of the left and parties of the right --> Leftist parties traditionally have had strong ties to organized labor --> Parties of the right have traditionally had closer links to business interests, the financial sector, and the middle class - leftist parties are less likely to maintain a fixed exchange rate bc expansionary policies will reduce domestic interest rates and raise domestic demand - Conservative parties are more likely to maintain a fixed exchange rate bc restrictive monetary policies are less likely to generate capital outflows or to increase domestic demand - assumes that every government values monetary autonomy more than exchange-rate stability --> All governments will thus maintain a fixed exchange rate only when the monetary policy required to do so is consistent with its domestic economic objectives

Market-oriented investment

relates to locational advantages - One of the three types of foreign direct investment by a foreign firm in the local economy made in order to gain access to consumers within the host country - arise from large consumer markets that are expected to grow rapidly over time - Firms looking to sell their products in foreign markets clearly prefer countries with large and growing demand to those with small and stagnant demand - less indigenous competition there is in a particular foreign market, the easier it will be for the MNC to sell its products - investing inside the country, firms essentially jump over tariffs and non-tariff barriers on imports to produce and sell in the local market - Countries that have large and fast-growing markets, with a relatively small number of indigenous firms in the particular industry, and that are sheltered from international competition represent attractive opportunities for this type of investment

Efficiency-oriented investment

relates to locational advantages - arise from the availability at a lower cost of the factors of production that are used intensively in the production of a specific product - parent firms allocate different stages of the production process to different parts of the world, matching the factor intensity of a production stage to the factor abundance of particular countries

Natural resource investment

relates to locational advantages - arise from the presence of large deposits of a particular natural resource in a foreign country - The desire to profit from the extraction of these natural resources was perhaps the earliest motivation for international activities - desire to gain access to natural resources remains important - American and European oil companies have invested heavily in the Middle East because the countries of that region hold so large a proportion of the world's petroleum reserves

common-pool resources

rival and nonexcludable

Interests of Marxism

share of income

Actors of Marxism

social classes

Intangible assets

something whose value is derived from knowledge or from "a set of skills or repertory routines possessed by the firm's team of human (and other) inputs" - can be based on a patented process or design, or it can arise from "know-how shared among employees of the firm" - often give rise to horizontally integrated firms because those assets are difficult to sell or license to other firms at a price that accurately reflects their true value - The market failure arises because owners of knowledge-based assets confront what has been called the "fundamental paradox of information" - Because the same firm owns all of the production sites, it can realize the full value of its______ without having to try to sell it in an open market

Interests of (Embedded) Liberalism (in the West)

standard of living

Interests of Classical Liberalism

standard of living

absolute advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources