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40 Cards in this Set
- Front
- Back
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Protectionism
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The theory of or belief in the advantages of restricting trade so as to encourage or benefit domestic producers
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Quotas:
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In international trade, a quota is a limit on the quantity of a good that may be imported over a certain period. Contrary to tariffs, quotas are difficult to get around -- the price of the good can't be reduced to avoid them.
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Recession:
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A decline in economic activity within an economy, usually characterized by higher unemployment and less investment in new plants and equipment
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Stagflation:
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Where economic stagnation meets inflation. Stagflation occurs in an economy with high inflation and low growth. This phenomenon rarely occurs, because inflation is usually the product of an overheated economy, not one that is stagnating. Stagflation is a worst case scenario where inflationary pressures are so strong that even an economic downturn is unable to quell the pressure toward rising prices.
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What are some pros of Private Foreign Investment
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Fill resource gap between targeted investment and locally mobilized savings
Fill foreign exchange or trade gap (alleviates deficit in balance of payments) Fill gap between targeted government tax revenue and locally raised taxes Fill gap in management experience, entrepreneurial abilities, and tech skills (MNCs educate local managers) |
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What are economic arguments against Private Foreign Investment
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-PFI lowers domestic savings and investment rates by stifling competition through exclusive agreements, failure to reinvest domestically, generating income for groups with lower savings propensities, and inhibiting indigenous firms by purchasing intermediate products from overseas affiliates
-Overseas repatriation of profits, interest, royalties and fees may reduce foreign exchange earnings -Liberal tax concessions, transfer pricing, disguised public subsidies, and tariff protection provided by host government limit public revenue from corporate taxes on MNCs -Management/entrepreneurial/tech skills and overseas contacts provided by MNCs have little impact on local sources of these skills and indigenous entrepreneurships is stifled by MNC dominance |
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What are ideological arguments against Private Foreign Investment
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MNCs reinforce dualistic economic structures and exacerbate income inequality
-Promote interest of small number of managers and modern-sector workers against the rest by widening wage differentials -MNCs produce inappropriate and consumption patterns that produce little employment -As a result local resources are allocated for socially undesirable products, aggravating imbalance between rich/poor and urban/rural -MNCs use power to influence government policy that is unfavorable to development -MNCs suppress domestic entrepreneurship (unable to compete), through privatization of public corporations and debt for equity swaps to reduce debt burdens -MNCs gain control over local assets and jobs and gain influence over political decisions -MNC’s and portfolio investors follow growth, not lead it |
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How are remittances Good for developing countries?
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-Remittances from low skilled workers to poor families have greatest poverty reduction advantage → build houses, keep kids in school etc. → provide significant pathway out of poverty
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How are remittances BAD for developing countries?
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-Migration hampers development due to Brain Drain → Remittances balance this concern
Exploitation and abuse are a common problem, need improved protection for those with “irregular status” -Recipients can become depend on money creating incentives not to work o World Bank study shows that remittances both discourage participation in labor pool and people work less hours a day -Remittances may reduce export competitiveness |
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What is foreign aid?
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Public funds in form of loans or grants directly from one government to another (bilateral assistance) or indirectly through a multilateral agency (World Bank)
-Non-commercial from donor POV -Concessional terms → terms more favorable to borrower than in standard financial markets |
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Why do countries give foreign aid?
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Donor countries give aid because it is in their political, strategic, or economic self-interest to do so
-In short-term can be motivated by moral or humanitarian desires (first decade of 21st century), but no historical evidence for this -Political/Strategic motivations: Marshall Plan in post WWII Europe, Alliance for Progress in LA both to prevent spread of communism -Economic motivations: earn interest, gain leverage, force recipient to buy exports |
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What is different about LDCs financial systems
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• Two important aspects that developing countries lack. First the ability of developed country governments to expand and contract their money supply and to raise and lower the costs of borrowing in the private sector is made possible by the existence of highly organized, economically interdependent, and efficiently functioning money and credit markets
o Financial intermediaries are thus able to mobilize private savings and efficiently allocate them to their most productive uses • Markets and financial institutions in LDCs are highly unorganized, often externally dependent, and spatially fragmented. Many LDC commercial banks are merely overseas branches of major private banking institutions in developed countries • The ability of LDC governments to regulate the national supply of money is further constrained by the openness of their economies, in some cases the pegging of their currencies to the dollar • Because of limited information and incomplete credit markets, the commercial banking system of many LDCs lacks transparency (full disclosure of the quality of loan portfolios) and often restricts its activities almost exclusively to rationing scarce loanable funds to medium and large scale enterprises in the modern manufacturing sector that are deemed more creditworthy • Thus most LDCs have operated under a dual monetary system o A small and often externally controlled or influenced organized money market with severly binding legal restrictions on nominal interest rate ceilings, catering to the financial requirements of a special group of middle and upper class local and foreign businesses in the modern industrial sector, and a large but amorphous unorganized money market, uncontrolled, illegal, and often usurious, to which most low-income individuals are obliged to turn in times of financial need |
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What is the role of central banks in developed nations?
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• Issuer of currency and manager of foreign reserves → Print money, distribute notes and coins, intervene in foreign-exchange markets to regulate the national currencies rate of exchange with other currencies, and manage foreign-asset reserves to maintain the external value of a nations currency
• Banker to the government → Provide bank deposit and borrowing facilities to the government while simultaneously acting as the government fiscal agent • Banker to domestic commercial banks → Provide bank deposit and borrowing facilities to commercial banks and act as a lender of last resort to financially troubled commercial banks • Regulator of domestic financial institutions → Ensure that commercial banks and other financial institution conduct their business prudently and in accordance with relevant laws and regulations. • Operator of monetary and credit policy → Attempt to manipulate monetary and credit policy instruments (the domestic money supply, the discount rate, the foreign-exchange rate, commercial bank reserve ration requirements) to achieve major macroeconomic objectives such as controlling inflations, promoting investment, or regulating international currency movements |
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What is the role of central banks in developeding nations?
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• The principle task of a central bank is to instill a sense of confidence among local citizens and foreign trading partners in the credibility of the local currency as a viable and stable unit of account and in the prudence and responsibility of the domestic financial system
• Central banks in most the LDC simply do not possess the flexibility or the independence to undertake the range of monetary macroeconomic and regulatory function performed by their developed-country counterparts |
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Why do LDCs create interest ceilings on credit allocation?
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• Artificial interest rate ceiling are often set by LDC governments seeking to finance their budget deficits through the sale of low-interest bonds to private commercial banks
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What effects to interest ceilings create?
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• These banks then have to ration the available credit beyond the normal credit rationing observed in developed economies as a response to adverse selection
• With interest ceilings the demand for loanable funds greatly exceeds the available supply • Excess demand leads to a need to ration the limited supply → Financial repression → Investment is limited by a shortage of savings, which in turn results from administered real interest rates below what would occur in a market setting • The net effect of government controls over lending rates is that even fewer loans will be allocated to small investors |
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What is an exchange rate?
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the price of a currency in terms of another
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Why hold a currency?
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Trade and Investment
Competitive Import/exports |
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What is currency intervention and does it work?
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Central banks control exchange rates by devaluing its own currency by dumping it for dollar andd euros driving up cost of those currencies
Highly unlikely that it ever works |
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What is an interest rate differential
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Borrow funds at lower rate and investing where higher interest rates in another country
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What effects the values of currencies?
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Inflationary expectations
capital flows Political change fiscal policy central bank policy |
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low central bank independence = ?
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high inflation
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high degree of central bank independence =
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low inflation
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Should a central bank try and float its currency
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NO IT WILL SPEND ALL SAVINGS
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What is PPP?
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Purchasing Power Parity --> used to explain exchange rates and see if a currency is under/overvalued
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What does the Big Mac index show
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Chinas currency is heavily undervalued
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What is the holy trinity?
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Fully open capital accounts
Control its interest rate Fix its exchange rate |
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what is Sterilization
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the use of open market oporations (buying and selling of government securities) to soak up extra capital to keep inflation flat
Takes counter-action to mitigate impacts of sudden inflows into an economy |
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What are some of the problems with an all inclusive Euro bond?
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Liability would be on all countries creating incentives for countries like Greece to not balance their budget.
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What is a sovereign wealth fund?
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Basically a government investment fund. Stake holders are citizens of that country, however don't have shares. Norway is the gold standard of sovereign wealth funds, best represent their citizens, transparency. Alaska has one. All inclusive, but direct say only through elected representatives. Stakeholders receive direct and indirect benefits such as checks/lower taxes
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What are two types of sovereign wealth funds?
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Commodity based (mostly oil)
Non-commodity based – Asia – Singapore, China |
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Are SWFs a positive or a negative when it comes to the world economy? What about for developing countries?
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-I.M.F. Concluded that SWFs helped reduce interest rates by 100 basis points (1%) (postive effect, 1% drop in rates is huge savings if you're billions in debt).
-IMF also concluded that SWFs have no impact on financial markets that are well developed (i.e. not likely to cause a problem in countries like the US and Germany). However will have an impact on financial markets from developing countries (LDCs), for the opposite reason i.e. lacking financial tools to deal with influx of capital *****Exam |
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VI. Opposition to Sovereign Wealth Funds
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Lack of the private motive, government owned (no private motive, no Adam Smith)
-Fear is that political motives are driving investment decisions. -Capital flows → How they can wreck exchange rates and hurt economies -Impact on exchange rates |
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Q: Are Sovereign Wealth Funds so large so that they can dominate world capital markets?
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No. They are not really that large in the big scheme of things.
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what are some of the critiques of sovereign wealth funds
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lack of transparency, due mostly to politics, lot of corruption and theft so keep it hidden, transparency means must be more accountable (big problem for say Saudi Arabia). Also people get violet when they feel excluded.
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Net Worth =
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Capital = Assets - Liabilities (what the owners of banks have)
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Open Market operations
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the buying and selling of government securities to regulate the money supply (inflation means there is too much money chasing to few goods)
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Discount rate
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it is the rate of interest charged by the central bank to other banks (normally when rates are low banks take out lots of loans)
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Reserve Requirements
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the fraction of each deposit that is kept in cash at the bank
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Liquidity =
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the ease and speed at which assets can be converted to cash
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