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52 Cards in this Set
- Front
- Back
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What is Mercantilism? |
- Countries should max exports/limit imports - Accumulation of precious metals only way to increase wealth - Gov's restricted imports through bans, tariffs, and quotas - Development of large colonies to provide cheap raw materials - Exported finished goods to colonies at higher price |
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What are the Economic Benefits to Free Trade? |
Countries specialize in production of goods & services that are produced most efficiently - b/c of specialization, countries develop competitive advantage in particular goods and services Global competition allows for only the most productive firms to survive All countries benefit from lower prices for goods & services Trade in win-win |
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Win-Win Perspective: Benefits to Open trade and Investment |
Free trade perspective: best not to see world as us vs. them Instead, free trade theory suggests that everyone is better off over long run through free trade Better to open then to close borders |
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Zero-Sum Game |
Countries competing Ex. Poker Game (what you win = exactly what loser loses (sum =0)) |
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Pie Increase for Everyone |
Countries better off even if they don't trade the most (win-win) Ex. $1500 sandwich |
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Who came up with the Theory of Absolute Advantage? |
Adam Smith: Wealth of Nations (1775) |
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What is AA? |
Capability of 1 country to produce more of a product with some amount of input than another country Produce only goods where you are most efficient (trade for ineffieciencies) |
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Who came up with the theory of Comparative Advantage? |
David Ricardo (1817): Principles of Political Economy |
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What is CA? |
Produce and export those goods and services for which it is relatively more productive Import goods/services for which other countries are relatively more productive at producing |
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What does Ricardo describe CA as? |
- Extends free trade agreement - Efficiency of resource utilization leads to more productivity - Should import even if country is more efficient in the product's production than country from which it's buying Trade viewed as positive-sum game |
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What is the TPP? (Trans-Pacific Partnership) |
Trade agreement reached among 11 pacific countries on Oct. 5th 2015 - Includes Canada and USA - Lowers tariffs - Standardizes intellectual property rights, labour and environmental laws - Establishes investor/state dispute mechanism |
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What is the Redistribution-to-Efficiency Ratio of Free Trade? |
Gains from trade may be much less than redistribution of income - e.g. in economies like USA (avg tariffs below 5%) move to complete free trade would reshuffle more than $50 of income for each $ of efficiency (or net gain) created - Like giving $51 to Adam only to leave David $50 poorer - If tariffs were 40%, this ratio would be ~6:1 |
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What questions arise when considering large distributional changes caused by trade? |
How large are gains relative to potential losses to low-income or other disadvantaged groups that may have little recourse to safety nets? Does trade involve actions that would violate widely shared norms or social contract if carried out at home (e.g. child labour)? - If yes to both, legitimacy of trade in question |
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What are Economic Arguments for Intervention in Trade & Investment? |
Infant industries and Strategic Trade Policy |
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What are Infant Industries? |
- Oldest argument - Alexander Hamilton (1792) - Protected under the WTO - Only good if it makes industry efficient - Ex. Brazil automakers - 10th largest - wilted when protection eliminated |
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What is Strategic Trade Policy? |
- Government should use subsidies to protect promising firms in newly emerging industries with substantial scale economies - Nations benefit if government supports domestic firms during periods of economic crisis and change |
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What are Political Arguments for Intervention? |
-Protecting jobs & industries -National security -Retaliation/Punishment -Protecting consumers -Protecting HR and natural environment |
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What are example of Protecting Jobs & Industries? |
Bailouts and subsidies |
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What are example of National Security? |
Defence industries and energy companies (Unocal) |
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What are example of Retaliation/Punishment? |
Punitive sanctions |
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What are example of Protecting Consumers? |
Genetically engineered seeds & crops Hormone treated beef |
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What are example of Protecting HR and natural environment? |
Most Favoured Nation NAFTA and CAFTA |
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What are Instruments of National Trading Policy? |
Tariffs Subsidy Import Quota Local Content Requirement Antidumping Policies |
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What is a tariff? |
Tax levied on imports |
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What is a subsidy? |
Government payout to a domestic producer |
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What is an import quota? |
Direct restriction on the quantity of some goods that may be imported into a country |
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What is a local content requirement? |
Requirement that some specific fraction of a good be produced domestically |
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What is an antidumping policy? |
Selling goods in a foreign market at below their costs of production or below their fair market value |
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What are examples of Economic and Financial Integration? |
Removal of trade and investment barriers Sharing info, technology, and best practices across financial institutions Special financial instruments (e.g. interest rate swaps) Freedom of cross-border capital flows |
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Benefits of Integration |
Golden Strait Jacket Greater Investment and Growth Greater Competition and Efficiency Lower Cost of Capital Risk Sharing and Diversification |
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What is the Golden Strait Jacket? |
Competition among countries prevents radical economic policies |
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What is Greater Investment and Growth? |
Money will move from where its not needed to where investment opp's are greatest |
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What is Greater Competition and Efficiency? |
Domestic companies compete directly with foreign rivals |
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What is Lower Cost of Capital? |
Can access capital globally New financial instruments (e.g. interest rate swaps) |
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What is Confidence? |
Willingness to accept money in exchange for goods and services - Collapse in confidence causes breakdown in financial system |
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What is confidence maintained by in domestic markets? |
-Government -Banks -Insurance Companies -Escrow -Others |
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How is confidence maintained in international markets? |
IMF |
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What is the IMF? |
International Monetary Fund: created by Bretton Woods Agreement in 1944 |
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What is it's aim? |
To try to avoid a repetition of the chaos (worldwide financial collapse, competitive devaluations, trade wars, high unemployment, hyperinflation in Germany and elsewhere, general economic disintegration that occurred between 2 world wars) through a combo of discipline and flexibility |
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What crises has IMF managed? |
Currency Crisis Banking Crisis Foreign Debt Crisis |
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What is a Currency Crisis? |
Asian Financial Crisis - When a speculative attack on a currency's exchange value results in a sharp depreciation of the currency's value or forces authorities to defend the currency |
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What is a Banking Crisis? |
Icelandic Banking Crisis - Loss of confidence in the banking system leading to a run on the banks |
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What is a Foreign Debt Crisis? |
Greek Sovereign Debt Crisis - When a country cannot service its foreign debt obligations |
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What were the internal cause of the Greek Financial Crisis? |
- Exports not competitive - Heavy gov borrowing to finance public sector jobs, pensions, and other social benefits |
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What were the external cause of the Greek Financial Crisis? |
- As a member of Eurozone, Greece could not devalue currency - Global economic downturn (2008) |
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What happened in 2010 when the Greek gov faced default? |
- Sought bailout from other EU countries (particularly Germany) and IMF - Argued bailout would prevent contagion on Euro continent - Austerity measures in return |
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What need to be considered with the Future of the Eurozone? |
- Dissolution of Eurozone openly debated - Eurozone may need tighter integration for Euro to survive - Uncertain whether Europe has willpower to take these measures - Dissolution may lead to political and economic crisis |
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What are some factors regarding the Dissolution of Eurozone openly debated? |
- Some countries - cost of membership may be too high - Others mad that these countries drag down Euro value and take funds from their coffers - Some countries, but not others, want to debase Euro to remain competitive |
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What are some factors regarding the Eurozone may need tighter integration for Euro to survive? |
- Require members to submit budgets to scrutiny - Impose penalties on states with high debt - Unify tax and spend policies - Form political union |
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What are some factors regarding the Uncertain whether Europe has willpower to takethese measures? |
- Would require members to surrender sovereignty |
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What are some factors regarding the · Dissolution may lead to political and economicchaos? |
- May lead to sharp devaluation in some of the new currencies |
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