Econ Final Review

Front 1

Rationale for devt planning

Back 1

Market failure
Resource mobilization and allocation
Attitude (need support)
Makes you more appealing to foreign aid

Front 2

Problems of plan implementation and plan failure

Back 2

Deficiencies in plans and their implementation

Insufficient and unreliable data

Unanticipated disturbances like the oil crisis

Institutional corruption

Front 3

In order to have a functioning market economy, these SOCIETAL PRECONDITIONS

Back 3

-Trust
-Law and order
-Security of people and prop
-Division of resp and diffusion of power
-Balance comp. and coop.
-Community altruism, safety net
-Social mobility, ambition
-Materialistic values
-Deferred gratification, saving
-Rationality over tradition
- Honesty in govt
-Efficient forms of comp, not monop.
-Freedom of info, protection of privacy
-Flows of information

Front 4

In order for functioning market econ, these LEGAL & ECON. PRACTICES

Back 4

- Property rights
- commercial laws and courts
-Freedom of entryin all sectors
-Stable currency
-Public supervision
-All industries have adequate info
-Autonomous tastes
-Public management of externalities
-Instruments for executing monetary and fiscal policies
-Safety nets
-Encouragement of innovation

Front 5

Washington Consensus

Back 5

10-point list of what you need to develop

Front 6

Santiago Consensus

Back 6

New set of points that is market frindly, considers govt, and makes provision for health and edu

Front 7

Self-interest standard of rationality

Back 7

Economic reform benefits most people, but only a little, so may not be adopted if it harms the losers a lot more than it benefits the winners

Front 8

Path dependency

Back 8

The past condition of an economy affects future conditions

Front 9

Total factor productivity

Back 9

The portion of the overall rate of economic growth which cannot be explained by the growth of the stock of capital or the increase of labor

Front 10

Immersizing Growth

Back 10

A situation where econ growth can result in a country being worse off. If export-based, it will lead to a fall in terms of trade of exporting country

Front 11

Managed or "dirty" float

Back 11

foreign exchange regime where the central bank intervenes by selling or buying foreign exchange when the natl currency appreciates or depreceates too much

Front 12

Net investment

Back 12

Increase in the stock of capital over a given period

Front 13

Tell me about China's Money

Back 13

The Yuan is pegged to the US$, and is thereby undervalued. By doing this, the central bank has to buy the excess supply of foreign exchange. This can lead to inflation by increasing the money supply.

Front 14

Initial conditions for factor endowments theory to work

Back 14

1. Countries have to have different factor endowments
2. Factors of production must be mobile nationally and immobile internationally.
3. Must be no barriers to trade.

Front 15

Debt-for-Equity Swap

Back 15

Mech used by indebted LDCs to reduce the real value of external debts by EXCHANGING EQUITY IN DOMESTIC COMPANIES (STOCKS) or BONDS for private foreign debt at large discounts.

Front 16

Debt-for-Nature Swap

Back 16

Exchange of external debt by an org. for more domestic debt that will be used to preserve a natural resource of the enviro in the debtor country

Front 17

Financial liberalization

Back 17

The elimination of various forms of government intervention in markets, allowing supply and demand to determine the level of interest rates, for example

Front 18

WB Second Window

Back 18

the provision of concessional loans to developing countries. These loans are are extended on terms much more generous than market loans through lower-than-market interest rates, grace periods, and/or longer maturity periods. These loans are not self-financing because the terms are so generous

Front 19

Four preconditions to Financial Liberalization

Back 19

1. "Kill the expectations" of devaluation or depreciation so that investors will not invest abroad (capital flight)
2. Balance the maturities of assets and loans for private banks ( so the banks don't go bankrupt once the interest rates go up)
3. Ensure that there is comp between banks
4. Decrease gov't deficit
-->By aiming to bring the repressed interest rate to the equilibrium rate of interest, it is likely that the deficit of the country will increase as banks will have t pay higher interest rateson their deposits. Thus is is essential to decrease govt deficit as much as possible

Front 20

IMF Conditionality

Back 20

Policy measure fro, the SAPs of the 70s and 80s. To get a loan from the IMF, you must meat certain conditions to overcome econ problems and promote effective econ dev't.

For example:
Cutting expenditures
Reducing trade barriers
deregulating the market
privatization of natl industries and enterprises

Goal to reduce imbalances, but often increased inequalities and damaged social projects. Lead to discordant and inefficient privatized projects

Front 21

Import Domestic Price

Back 21

Price of a dom prod good in comparison to a good prdouced elsewhere.

Front 22

Economic stabilization Policy

Back 22

A macro-policy measure that attempts to
1. reduce inflation
2. improve balance of payments
3. Cut budget deficits

This is done by
1. Decreasing reserves to finance an increase in govt spending
2. Decreasing govt spending, increasing taxation, reforming financial institutions
3. Controlling exchange rates and promoting exports

Trade-off between facing depletion of reserves and facing inflation. Needs to be a balance, a mixture between the two tactics.

Front 23

T/F: Concessional loans must finance only health and edu. projects

Back 23

False - don't need to generate comm. benefits, but do not solely finance health and edu projects

Front 24

T/F: Grant element of loans made to deving countries is not part of ODA

Back 24

False - ODA consists of aid given in capital by natl gov or intl inst. which can include loans and grants

Front 25

T/F: In 2008, Norway reached the foreign aid target of 0.7% of GNI

Back 25

Yes. Norway, Luxembourg, Netherlands, Denmark, and Sweden

Front 26

Club of Paris

Back 26

Debt rescheduling by foreign govts and other pub bodies

Front 27

London Club

Back 27

Debt rescheduling by private creditors and banks

Front 28

T/F The recurrent operational and maintenance costs of a capital project, which is financed by foreign aid, are usually not met by the govt of the aid recipient country

Back 28

True - they should, but it's rare.

Front 29

T/F When a country adopts a crawling peg foreign exchange regime, the objective is to avoid a decrease in the real foreign exchange rate

Back 29

False

Front 30

Two-Gap model - structuralist or neoclassical?

Back 30

Structuralist

Front 31

What happens to a country with a savings gap in the two-gap model?

Back 31

Two-gap model is a structuralist model, whereby foreign exchange and savings are seen as perfect complements. Evolved from the Harrod-Domar model.
When a country has a savings gap, it means the country is at full employment, but the citizens are not saving their earning, are rather spending it on expensive luxury goods. Country is unwilling to divert expenses from consumption goods to capital goods. Savings gap seen in oi-exporting countries in 70s.
Foreign aid, and other foreign exchange is likely to be spent on luxury goods. Technical and manegerial assistance may be of greater aid to a country that is suffering from a savings gap to encourage savings gap. A neoclassicalist view would say to devalue the currency to solve the savings gap.

Front 32

Mistake on 798

Back 32

This assumes LDCs can affect the world price. In reality, the exporting country uses the international price. When the good is imported by EU and there is no tariff on good, importers will see price for import is same as world price. If they import good from a rich country, they will pay higher than world price. Now, the buyers in the developed country will buy more from developing country, which benefits from treatment. More income from exports will be not be from tariffs but from higher demand.....

Front 33

What problems arise when a country signs a preferential trade agreements with another country, excluding trading partners?

Back 33

Efficiency

Front 34

Currency board advantages and disadvantages

Back 34

First, currency board = exchange rate arrangement where ER is fixed to an anchor currency and the central bank operates with a simple rule that prevents mon authorities from issuing money until they receive an equal amount of int'l assets to back it.

PROs
-Cheaper than common currency
-Allow countries to keep fixed ex rate without giving up net revenue of dom curr
- Tool to fight inflation
CONS
-As inflation has decreased over time, so has the use of curr boards

Front 35

Financial Repression

Back 35

is when the excess demand created by interest rate ceilings leads to the rationing of credit. Investment is limited by a shortage of savings from low interest rates (see figure 15.1). This leads to fewer, larger loans, which leaves smaller entrepreneurs to borrow from the unorganized money market where they pay rates above the market-clearing price

Front 36

Rotating savings and credit associations (ROSCAs)

Back 36

A number of people who do not have/are not granted access to loans or credit, so they form ad hoc groups. Each meeting each member submits the same amount to the pool. The pool if given in its entirety to one member. Every meeting, a different member. Interest-free, but the org is paid back by end of full rotation

Front 37

Scarcity rent generated by an import quota

Back 37

THe additional rent charged for the use of a good or resource that is in fixed or limited supply. This limit in supply can be created by an import quota.

Front 38

T/F: Loans made to developing countries at concessional terms are used to finance extraction activities
on mining concessions.

Back 38

F

Front 39

T/F The grant element of loans made to developing countries is part of Official Development Assis-
tance.

Back 39

T

Front 40

T/F In 2008 Canada reached the foreign aid target of 0.7% of GNI.

Back 40

F

Front 41

T/F There is debt default when a country repudiates its external debt.

Back 41

F - Default means can't pay, repudiate means refuses to pay

Front 42

T/F The recurrent operational and maintenance costs of a capital project, which is financed by foreign
aid, are usually met by the government of the aid recipient country.

Back 42

F

Front 43

T/F There is chronic inflation when the government budget exhibits a deficit year after year, and there is
no real economic growth.

Back 43

F

Front 44

T/F When a country adopts a crawling peg foreign exchange regime, the objective is to avoid a de-
crease in the nominal foreign exchange rate.

Back 44

F

Front 45

What happens to a country which suffers from a foreign exchange gap, according to the two-gap model?

Back 45

Structuralist model, assumes that foreign exchange and savings are perfect complement and that a lack in either can explain lack of growth.

A country with a foreign exchange gap has excessive productive resources (labor) and all available foreign exchange is being used for imports. Have the savings, but not the foreign exchange.

Trade deficit exceeds the value of capital inflows, so output is limited

ountries with a foreign exchange gap aren't able to purchase machinery from other countries, and therefore aren't able to produce manufactured goods. Therefore, they won't be able to compete in global markets, and will mostly invest in local construction or projects, which won't necessarily progress its economy.

Foreign aid can help, because the country can undertake new investment projects. FA supplies external finance to import new capital goods and tech. assistance

Front 46

It is generally admitted that the Chinese yuan is undervalued. Why does China favour that undervalua-
tion and why do neighbouring counties, like Indonesia or Taiwan, feel compelled to maintain their own currency also undervalued?

Back 46

China undervalues its currency, so at that point the supply exceeds demand. To fill this gap, it buys the excess supply of $. This increases its reserves, which leads to an increase in money supply. The rise in money supply leads to excess demand which causes inflation.

Taiwan and Indonesia do the same so their currencies to maintain preferential terms of trade with China.

Front 47

Why are some developing counties reluctant to join free-trade areas?

Back 47

-Infant industry argument, intl competition. Believe they need protect to progress and gain a comp adv.
-Dumping
-Enviro

Front 48

A set of prior conditions should be met before a country adopts a policy of financial liberalization aiming at
bringing the prevailconditions?

Back 48

1. "Kill the expectations" of devaluation or depreciation so that investors will not invest abroad (capital flight)
2. Balance the maturities of assets and loans for private banks ( so the banks don't go bankrupt once the interest rates go up)
3. Ensure that there is comp between banks
4. Decrease gov't deficit
-->By aiming to bring the repressed interest rate to the equilibrium rate of interest, it is likely that the deficit of the country will increase as banks will have t pay higher interest rateson their deposits. Thus is is essential to decrease govt deficit as much as possible

Front 49

What are the possible sources of the Dutch disease and what are its consequences for an economy suf-
fering from that disease?

Back 49

Sources:
-Large increases in country's income
-Nat. resource discoery, or any large increase in foreign currency, FDI, aid, or increase in nat. resource prices
Consequences:
-Decrease in price competitiveness,a nd thus export, of man. goods
2. Increase in imports

Front 50

Foreign Aid curse

Back 50

While FA can help LDC's econ, also creates DEBT

Short term good, helps correct BOP deficits and can lead to econ growth in terms of GDP or projects. But LDC is expected to repay that debt, and if aid is tied aid, it must buy man goods or prods from creditor nation.

Foreign aid begins to sub for dom investment, instead of supplementing it. This creates a further reliance on aid for further econ dev't. **Continued reliance on aid worsens balance of payment problems, which are already bad, due to growing obligations of debt repayment.

Dev. is often focused on modern sectors of econ, which can exaggerate income inequalities and can exascerbate savings and foreign exchange gaps.

Can promote rent-seeking by bureaucrats and can foster a "welfare state"

Front 51

Eq'ns for INPR, DNPR, EPR, IVA, DVA

Back 51

INPR = P*-P**/P*
DNPR = p - p*/p*

EPR = DVA-IVA/IVA

Front 52

Your mother cooks great italian entrees

Back 52

Y + M = C+G+I+E

M-E = MK+R

Inflation = (Y2 - Y1)/Y1