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114 Cards in this Set

  • Front
  • Back
Mercantilism
Increase trade surplus by
1. import barriers
2. export subsidies
Export Subsidies
lowering the price of goods we send overseas
b/c we subsidize it with the wealth of our own people
Neomercantilism
the more recent strategy
countries using trade policies to run favorable balances of trade
(and/or accomplish social or political objectives)
Absolute Advantage
It is better for countries to specialize production in something they are good at
Free trade is better
Comparative Advantage
You’re still better off trading even though one country is better at both goods
Hecksher-Ohlin Theory of Factor Endowments
Countries should specialize in what they have a lot of
(Labor, Minerals, etc.)
The Leontief Paradox
Replaced Hecksher-Ohlin Theory

“It’s not just your resources, but it’s the productivity of your resources.” - US is better at labor than India, b/c we have tractors

Labor absorbs capital – “if you’re richer, you’re richer still, as long as you keep spending your resources on productive resources.”
Reasons for trade
Diversification
Economies of Scale
Costs of Technology Tech
Product Lifecycle
Product Lifecycle
Every country you introduce a product to will have the same curve. By introducing it to not all countries at once, you stretch out your curve, and spread out your curve to make more money.
Economies of Scale
If you make it big enough, building one factory that can supply the rest of the world makes sense. Trade so everybody isn’t building a $4 billion factory.

a production process in which an increase in the scale of the firm causes a decrease in the long run average cost of each unit.
Diversification
if you spread your risks across countries, you lower your risk.
Costs of Technology
Development
We spent 14 billion to have a cure for aids. Why should they re-spend? We build in one, trade to others.
The Porter Diamond
there are 4 things you must have to win in international trade (national competitive advantage is embedded in four determinants):

1. Factor endowments
2. demand conditions
3. related and supporting industries
4. firm strategy, structure, and rivalry

All four determinants are interlinked and generally must be favourable for a given national industry to attain global competitiveness.
Factor endowments
necessary resources,
which you need to have to succeed
demand conditions
you have to have a strong market for your good in your own country
Mercantilism
"Increase trade surplus by
Export Subsidies
lowering the price of goods we send overseas b/c we subsidize it with the wealth of our own people
Neomercantilism
"the more recent strategy
Absolute Advantage
"It is better for countries to specialize production in something they are good at
Comparative Advantage
You’re still better off trading even though one country is better at both goods
Hecksher-Ohlin Theory of Factor Endowments
Countries should specialize in what they have a lot of (labor, minerals)
The Leontief Paradox
"Replaced Hecksher-Ohlin Theory
Reasons for trade
"Diversification
Product Lifecycle
"Every country you introduce a product to will have the same curve. By introducing it to not all
Economies of Scale
"If you make it big enough, building one factory that can supply the rest of the world makes sense. Trade so everybody isn’t building a $4 billion factory.
Diversification
if you spread your risks across countries, you lower your risk.
Costs of Technology Development
We spent 14 billion to have a cure for aids. Why should they re-spend? We build in one, trade to others.
The Porter Diamond
"there are 4 things you must have to win in international trade (national competitive advantage is embedded in four determinants):
Factor endowments
necessary resources, which you need to succeed
demand conditions
you have to have a strong market for your good in your own country
related and supporting industries
Industries are not alone. You need supporting industries
firm strategy
companies need a good strategy in the industry
structure
it has to be built right
rivalry
When countries compete, technology improves
Global Strategic Rivalry Theory
"gain competitive advantage/create a monopoly by:
Experience Curve
It takes a lot of people with very specialized knowledge to create an industry
Foreign Direct Investment
building a factory in somebody else’s country
Why Foreign Direct Investment
Supply Factors
Demand Factors
Political Factors
Why Governments Intervene – Economic Arguments
" Unemployment
Unemployment
"We’ve got unemployment problems and we need to protect our people’s jobs.
Infant industry argument
Countries wanting to grow in an industry they’re not good at
Putting up barriers to protectt countries form coming in and wiping out
l                               Industrialization argument
"Countries saying they don’t have any industrialization the rest of the world has.
l                               Economic relations argument
"Country vs. country, trying to gain advantage over each other
Balance of payment adjustment. - argument
Getting a country to lower tariff barriers on us arguing that our balance of payments is unequal
Comparable access- argument
We’ll say to the rest of the world, “we’re this big open country. We have all these open markets. We think that’s great but you’re not doing that for us, and that’s just not fair.
Restrictions as a bargaining tool- argument
We threaten to block you out of our market if you don’t lower your barriers.
Price control objectives- argument
Using tariffs on goods to keep prices high – putting subsidies on this good to keep the price real low.
Why Governments Intervene – Noneconomic Arguments
"not about money we’re trying to make our country, but other things we’re trying to do)
Maintenance of essential industries- argument
"Every country says, there’s something special about our country that we want to protect. So we set up all kinds of barriers to make it hard to get into or our industry.
Prevention of shipments to “unfriendly” countries - argument
Every country has friends. Every country has enemies, who they try to mess with
Maintenance of sphere of influence argument
We want to be friends with surrounding countries. If you want to win the sphere of influence, set up trade policies with neighbors that work well
protecting national identity
"They say “there is something special about us. There are some industries we really like, that make us important, we’re going to try to protect these industries.
Tools of Trade Control (how governments mess with trade
"Tarriffs
Tariffs
Tax on a product when it comes across the border. We do this when we don’t want the imports.
Subsidies
You give your industries free money.
Aid and loans
Loaning industries money, without charging them interest
Customs valuation
When you send a TV from Japan to the US, how do you know what it’s worth? So at customs, you ask the company. What’s the price? When they say, 100 you say, no 130. You increased tariffs by 30% - hard to argue
Quotas
Instead of Japan sending 1 mil cars a year, we tell them they can only send 800,000
Buy Local” legislation
1) Government saying they’re only going to buy from local services
- US Government will say if you’re operating on grant
money, you have to buy from within the US.
2) Putting made in USA labels on products, trying to convince people to buy that product, even with a higher price
Standards
Banana standard. EU requires a certain curve in a banana so apples will sell better.
They subsidize their industry by driving up costs overseas.
Labels
Chek Republic requiring a work Visa, then they give you the run around, 2 offices need to be open on the same day, but they aren’t. They set up permissions requirements which make it hard for people to get through.
Good way to block out goods, and increase price.
Specific permissions requirements
They say, yes, we’ll get to it. Give us your paperwork; we’ll eventually get back to you.
Administrative delays
“we’re going to let your products in, but we’re a poor country so instead of letting you take our money out, we’re going to make you take a comparable amount of our product out.”
Reciprocal requirements
“we’re going to let your products in, but we’re a poor country so instead of letting you take our money out, we’re going to make you take a comparable amount of our product out.”
Restrictions on services businesses
You try to keep service businesses form being able to succeed in your country. A service business primary resource is people. You mess with them by blocking Visas, or making them hard to get.
Level of Regional Integration
 Customs Union
 Common Market
 Complete economic integration
Free trade area
tariff system so countries can’t play us against each other anymore
customs union
No internal tariffs - Same external tariffs
You have agreed upon tariffs within the countries, and to outside countries as well.
Ex) If you’re inside the EU, this is your tariff, this is your rate. If you’re outside, this is your rate.
Problem: Distortions inside free trade union. Some counties have low labor costs, some have high, which create benefits to shifting labor to lower rate countries.
common market
Custom union plus factors of production free to move
The countries which are being avoided b/c of their higher labor rate free factors of production: labor, natural resources, money. You make it so all these things flow across the borders. Makes sure the wealth is flowing freely.
Complete economic integration
USA - Common market plus policy, money
Good Effects of Integration
 Increases regional trade
 Better environmental policies
 Better legal systems?
Bad Effects of Integration
 Where decreases global Trade
 Increases conflicts
Goals of WTO
 Promote trade - by encouraging non-discriminatory, predictable trade policies
 Reduce trade barriers - through multilateral negotiations
 Establish impartial procedures – (World trade court) for resolving trade disputes. Problem with the court: The court doesn’t do anything when you lose.
Types of Currencies
Fully convertible
Externally convertible
Non-convertible
Fully convertible
You can take that money anywhere in the world, go to that market, and exchange. You can be sure of the currency rates.
Externally convertible
Some countries prefer for their currencies to not be fully convertible – They don’t want them exchanged substantially. They put rules on exchange rates inside their country.
Non-convertible
Companies that strictly don’t want their money outside the country. Country want to be isolated, don’t want to exchange. You can’t get their currency. Have to barter.
Currency markets
Over the Counter
Exchange Traded
Over the Counter (OTC)Currency Market
Go to the booth/bank, switch your money
Exchange Traded
(commodities markets)
Usually have prices established
Open pit trading. You go into a room, and people bid on what to exchange for. They scream and yell at each other to trade their money. It’s people from banks trying to get the best deal on their exchange. They try to get the perfect price.
Trade Time Frames
 Spot (within 2 days)
 forward 3 or more days 30/60/90
 Outright forward contract
 FX Swap
 Currency swap
 Options
Outright forward contract
currency at a specified rate on a specified date
FX Swap
 Foreign exchange swap
 “simultaneous spot and forward transaction”
 You’d want to do this when conducting business overseas.
 You set it up at once. You buy rubber from Germany Day 1 (convert dollars to Euros - (spot transaction)) - sell the tires day 90, and transact money back into US dollars. Agreement to exchange in on day 1 and exchange out at day 90. Fixes prices to know how to transaction will occur and how the profits will be
Currency swap
you agree to exchange currencies at a time in the future but agree to exchange interest also.
Options
 “right to buy or sell”
Construction example
You pay an insurance premium form somebody who thinks the rates will change. You pay them to cover the contract, in case currency changes for more than agreed upon if it changes in that period. Locks you into a currency rate!
Currency Arbitrage
 The ability to make risk free profits from international trade in currencies
 Developing opportunities in countries who’s currencies change against one another
ypes of Currency Arbitrage
Geographic arbitrage
Cross rate arbitrage
Geographic arbitrage
They make different decisions based upon what information they know. Different places may make different decisions, and effect currency. Buy in London, sell in Chicago
Cross rate arbitrage
 You turned £1 into ¥200 b/c you jumped countries.
 Happens b/c several currencies are trading in different markets at different rates against each other
Eurocurrencies
 Eurodollars
 Eurocurrencies
 Foreign Bonds
 Eurobonds
Eurodollars
 dollars held outside the US – money outside the country
came from WW2 when we sent money to rebuild. People traded dollars for currencies.
 Eurocurrencies
 other currencies held outside their home country – currency outside its home market
 If you take a euro to Japan, it’s a Eurocurrency.
Foreign Bonds
 bonds sold outside of your home country
 bond that is sold outside the country of the currency in which they are denominated
 US government sells a US treasury bond. When they sell to another government, it’s not called a foreign bond. US dollar based bond in China.
Eurobonds
 bonds sold by a country or entity using a different currency then their home currency
 government denominating its bonds in something other than its own currency
 When countries can’t get anybody to buy their bonds they sell bonds, denominated in dollars. We’ll sell you this bond for a promise to pay you back in dollars.
What's Different about International Money?
 Most nations have unique currencies
 Trades between nations must be valued in someone's money
 Value of different nations money change in relation to one another
Bretton Woods System
 U.S. dollar fixed to Gold
 Other Nations currency fixed to U.S. Dollar
 Set up IMF and IBRD
Set up IMF and IBRD
to hold currencies, maintain ratios and make loans Built to create stability in the currencies.
IMF
- International monetary fund
- Central bank for the world
- Tried to organize the currencies for the world
- Fixed currencies to the dollar
- made sure we have enough dollars to make the world
work
IMF
Purpose, How, Why?
To promote (exchange rate stability)/to enforce power rights
Increase the flow of currencies across borders
To gain trust
Purpose of IMF
 1 - To facilitate the international flow of currencies and hence the balanced growth of international trade
 2 - To promote international monetary cooperation
 3 - To establish a multilateral system of payments
 4 - To make resources available to member nations experiencing balance-of-payments difficulties
IBRD
Now the world bank
Special Drawing Rights
 an artificial international reserve asset, to supplement IMF members’ existing reserves of gold and foreign exchange
 What the IMF gives, not cash
Exchange Rate Types
types of currencies, in their way they trade with the rest of the

 Pegged
 Banded Peg
 Free Floating
pegged
They try to keep it pegged to this value
banned pegged
“our currency is between 3.5 to 4.5 to the dollar”
free floating
Currency that goes into any market, and trades like crazy
Central Banks – How do they work to try to maintain their currencies
 Set policies for currency manipulation
 Buy and Sell currencies to try and affect value
 Hold reserves in Gold, SDR or other currencies
Purchasing Power Parity (PPP)
 PPP predicts the exchange rate
 This is what drives currency values against each other
 Explains the future of a currency
Fisher Effect
[links interest rates and inflation]

Nominal interest rate (rate charged at a bank) =
real interest rate + inflation
Nominal interest rate is built of
1) Inflation Rate: varies from countries
2) Real interest rate: what you want to get paid for letting them have your money (same around the world)
International Fisher Effect Theory (IFE
links interest rates and exchange rates]
The currency of the country with the lower interest rate will strengthen in the future
Three major responsibilities of the European Parliament
Legislative power
Control over the budget
Supervision of executive decisions
Exchange rate
is the price of a currency
Reasons for Trade
Diversification
Economies of Scale
Cost of Technology
Product Life Cycle