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132 Cards in this Set

  • Front
  • Back
World Trade Organization
the hub of international political system under which governments agree to accept commonly negotiated and enforced rules to govern world trade. It's role includes administering trade agreements, providing a forum for trade negotiations, helping governments settle trade disputes, and reviewing national trade policies.
market liberalism
one of the two core principles of the WTO, provides its economic rationale: asserts that an open, or liberal, international trade system raises the world's standard of living. Gains from trade are the greatest when goods can be bought and sold freely, without government barriers, across borders.
nondiscrimination
second core principle of the WTO: ensures that each WTO member faces identical opportunities to trade with other WTO members. No favoring trade with one country over another
most favored nation (MFN)
form 1 of 2 of nondiscrimination: prohibits governments from using trade policies to provide special advantages to some countries and not others.Simply requires that WTO members treat all WTO members the same way they treat their favorite trading partner.
generalized system of preferences (GSP)
allows advanced countries to set lower tariffs for goods originating in developing countries
exceptions to WTO's nondiscrimination rule
(1) regional trade agreements
(2) generalized system of preferences
national treatment
second form of nondiscrimination in WTO: prohibits countries from using taxes, regulations, and other domestic policies to provide an advantage to domestic firms at the expense of foreign firms. Treat domestic and foreign versions of the same product similarly once they enter the domestic market. The US cannot establish different fuel efficiency standards to foreign cars than domestic ones.
intergovernmental bargaining
WTO's primary decision-making process and it focuses on negotiating agreements that directly liberalize trade and indirectly support that goal.
tariffs
taxes governments impose on foreign goods entering their country
nontariff barriers
health and safety regulations, government purchasing practices, and many other government regulations.
WTO Ministerial Conference
the highest level of the WTO decision-making. Meeting for 3 or 4 days, governments establish an agenda detailing the issues that will be the focus of negotiation and set a target date for the conclusion of the round
Doha Round
ninth bargaining round in WTO, started in 2001, was initially scheduled to end in 2005, growing complexity of issues and diversity making decision-making harder.
WTO dispute settlement mechanism
ensures that governments comply with the rules they establish, by providing an independent quasi-judicial tribunal that investigates disputes.
hegemonic stability theory
a hegemon, defined as a country that produces a disproportionately large share of the world's total output and leads in the development of new technologies, has an economic interest in creating an open and liberal international trade system. As the hegemon's dominance declines, so does the free trade system.
reciprocal trade agreements act (RTAA)
1934 - Congress authorized Roosevelt to reduce US tariffs by as much as 50% in exchange for equivalent concession from other countries
intellectual property
creations of the mind: inventions, literary, and artistic works, as well as symbols, names, images, and designs used in commerce. A challenging new concept to protect in international trade
service
an economic activity that does not involve manufacturing, farming, or resource extraction. Accounts for 60% of economic activities in advanced countries and 22% of world trade. Liberalizing trade in services usually requires changes to national policies.
Trade-Related Investment Measures (TRIMs)
limits the ability of governments to regulate certain aspects of MNC activities
regional trade arrangements
trade agreements between two or more countries, usually located in the same region of the world, in which each country offers preferential market access to the other. Come in two forms: free-trade area and customs unions.
free-trade area
like NAFTA, governments eliminate tariffs on other member's goods, but each member maintains independent tariffs on goods entering their market from nonmembers
customs unions
A form of regional trade agreement in which member governments eliminate all tariffs on trade between members of the union and create a common tariff that is imposed on goods entering any member country of the union from countries outside of the union.
distributional consequences
Decisions about resource allocation will influence how income is distributed between groups within countries and between nations in the international system
explanatory studies
oriented toward explaining the foreign economic policy choices of governments. Attempt to answer the “why” questions
Evaluative studies
– oriented toward assessing policy outcomes, making judgements about them, and proposing alternatives when the judgement made about a particular policy is a negative one.
ideas
mental models that provide a coherent set of beliefs about cause-and-effect relationships. What matters in not whether a particular idea is true or not, but whether people in power believe it to be true.
interests
goals or policy objectives that the central actors in the political system and in the economy want to use foreign economic policy to achieve. Players always prefer foreign economic policy that will increase their incomes/welfare. Material interests and ideas shape what a person’s interests are.
liberalism
o Attempted to separate politics from economics – economy works best when the government intervenes the least.
o The purpose of economic activity is not to enhance state power, it is to enrich individuals.
o Countries gain from trade whether they are running trade surpluses or deficits.
o Countries should produce what they have a comparative advantage in – what they can produce at relatively low costs and trading them for goods that can only be produced at home with high costs.
o Markets are a sufficiently efficient way of allocating resources in the economy, better than government economic policy.
o But government is allowed to interfere to fix market failures
market failures
instances in which voluntary market-based transactions between individuals fail to allocated resources to socially desirable activities.
material interests
One’s position in the economy powerfully shapes one’s preferences about foreign economic policy
political institutions
people’s interests are transformed into policy through political institutions. They establish the rules governing the political process. By establishing rules, they enable groups to reach and enforce collective decisions. These institutions determine which groups are empowered to make choices and rules, provides the rules that groups use to make decisions, and help enforce collective decisions. At domestic level, and international level → WTO and IMF. Enforcement more difficult in international system.
welfare consequences
decisions about resources allocation have welfare consequences – that is they determine the level of societal well-being
welfare evaluation
– interested primarily in whether a particular policy choice raises or lowers social welfare.
Partial Equilibrium model
highlights howproduction and consumption of a single commodity change in response to trade. It allows us to see exactly what is meant by gains from trade
General Equilibrium model
It highlights how production and consumption of all goods in an economy change in response to trade. Besides gains from trade, it also illustrates the concept of comparative advantage
consumer surplus
aggregates all consumer gains from trade. Total consumer surplus is equal to the area below the demand curve and above the price line.
producer surplus
aggregates all these individual producer's gains from trade. Illustrated by the area below the demand curve and under the price line.
voluntary export restraints
quota negotiated between trading countries. Rent goes to foreign producers.
Quota rents
the above-market returns for each good foreign exporters sell.
marginal rate of transformation
the slope of the PPF line, that tells us exactly how much of one good a country forgoes for the production of another
consumption indifference curves
combination of two goods that consumers would like to consume. there can be several, and a consumers are indifferent about which one to chose.
marginal rate of substitution
slope of indifference curves, which is usually downwards. This tells us how much of one good the consumer is willing to give up for the other.
Hecksher-Ohlin model
argues that comparative advantage arises from differences in countries' factor endowments, capital or labor
factor endowments
a country's abundant factor will be cheaper to employ in the production of goods than its scarce factor
enforcement problem
In the anarchic international state system, governments cannot be certain other governments will comply with the trade agreements that they conclude. As a consequence, governments are reluctant to enter into such agreements. This problem complicates all forms of international cooperation and has been used to understand the need for the World Trade Organization.
Pareto suboptimal
refers to an outcome in which it is possible for at least one actor to improve its position without any other actor being made worse off. Seen in prisoner's dilemmas.
Nash equilibrium
is an outcome at which neither player has an incentive to change strategies unilaterally.
factor-price equalization
(or the Stolper-Samuelson theorem) In open economies, international trade will cause the price of the factors of production to equalize. In a two-country world, the price of each country's scarece factor will fall, whereas the price of each country's abundant factor will rise. Eventually, the price of labor will be the same in both countries and the price of capital will be the same in both countries.
factor model
suggests that the debate over globalization is a conflict over the distribution of national income between American labor and American business
sector model
argues that trade politics are driven by competition between industries. Trade pits the capitals and workers in one industry against the capitalists and workers of another, the industries that gain and lose from trade.
absolute advantage
the principle upon which Adam Smith first claimed that free-trade benefits all countries. It holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country. By specializing in the production and export of this good and importing goods whose production costs are higher than in other countries, the country can consume more of both goods. In trade theories, this principle was later replaced by the principle of comparative advantage.
accelerationist principle
a central component of monetarist theories and first stated by Milton Friedman in the 1960s, it claims that a government can keep unemployment below the natural rate of unemployment only if it is willing to accept a continually increasing rate of inflation. That is, the principle claims that there is no long-run Phillips Curve trade-offs between inflation and unemployment. Such as trade-off exists only in the short run. This principle became widely accepted by governments and central bankers in the advanced industrialized countries during the 1980s, leading to the demise of Keynesian strategies of macroeconomic management.
Antidumping
government investigations to determine whether a foreign firm is selling its products in international markets at a price that is below its cost of production. Under the rules of the international system, a positive finding in such an investigation allows the government to impose tariff to offset the margin of dumping.
backward linkages
a term applied to the industrialization process that refers to instances when the creation of a domestic industry increases a demand in domestic industries that supply inputs to the original industry. For example, the creation of a domestic auto industry may increase the demand for domestic auto parts such as batteries, glass, tires, etc.
baker plan
proposed in 1985 by Secretary of the U.S. Treasury James A. Baker III, this plan attempted to resolve the developing-country debt crisis through a combination of economic adjustment and additional lending. Of a particular significance, the plan linked access to financial assistance from the IMF, World Bank, and private lenders to the willingness of debtor governments to adopt structural adjustment programs
balance of payments
an accounting device that records a country's international transactions. The balance of payments is divided into two broad categories: the current account and the capital account.
balance-of-payments adjustment
the use of government policies to correct a balance of payments deficit or surplus
Brady plan
Proposed in 1989 by the Secretary of the U.S. Treasury Nicholas J. Brady, this plan attempted to brig the developing-country debt crisis to a close. It encouraged commercial banks to negotiate debt reduction agreements with debtor governments. To make the proposal attractive to commercial banks, the advanced industrialized countries and the multilateral financial institutions advanced $30 billion with which to guarantee the principal of the Brady bonds, as the new debt instruments came to be called.
Bretton Woods System
The international monetary that was created in 1944 at Bretton Woods, New Hampshire. 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.
Calvo Doctrine
Named after the Argentinean legal scholar Carlos Calvo, who first stated it in 1868, this doctrine argues that no government has the right to intervene in another country to enforce the private claims of the government's citizens. The doctrine was invoked by Latin American governments during the late 19th and early 20th century to challenge the right of governments to use diplomatic pressure and military force to protect foreign investments made by their citizens.
Capital Account
One of the two principal components of the balance of payments, it records all financial flows into and out of a particular country. Such financial flows include bank loans, equities (stocks and bonds), foreign direct investment, US official reserves, and other government assets. Black markets provide income and spending in the economy, but these are not registered.
Central-Bank Independence
The degree to which a country's central bank can set monetary policy free from interference by the government. Typically considered to be a function of three things: the degree to which the central bank is free to decide what economic objective to pursue, the degree to which the central bank is free to decide how to set monetary policy in pursuit of this objective, and he degree to which central-bank decisions can be reversed by other branches of government. Contemporary economic theory argues that independent central banks are better able to deliver low inflation than are central banks controlled by the governments.
Collective Action Problem
Applies to instances in which the action of a number of individuals is required to achieve a common goal. The problem arises because people will not voluntarily invest time, energy, or money to achieve a common goal, but will instead allow others to bear these costs. That is, each free rides on the efforts of others. Because all members of the interested group act in the same way, insufficient time, energy, and money are dedicated to the achievement of the goal, and the goal is therefor not achieved. In international political economy, it has been used to understand interest-group formation, and in particular, why consumer interests are underrepresented in trade policy.
Common Agriculture Policy (CAP)
a set of policies used by the EU to protect European farmers from farm products produced outside the union. These policies include production and export subsidies to support European farmers, as well as tariffs and quotas to limit imports of foreign agricultural products. The CAP is one of the most controversial aspects of the US-EU trade relationship.
Comparative Advantage
First fully stated by David Ricardo in the early 19th century, this concept hols that a country has a comparative advantage in a good if it can produce that good more cheaply than it can produce other goods. By specializing in the production of goods which it holds a comparative advantage and importing the other goods, the country can consume more of all goods. In contrast to Adam Smith, therefore, this principle states that a country need not have an absolute advantage in any good to benefit from trade. The principle provides a powerful justification for liberal international trade by asserting that all countries benefit from such trade.
Conditionality
Property applied to the terms of governing transactions between the International Montary Fund and member governments. In order to gain access to IMF financial resources, a government must agree to a set of policy changes desgined to correct its balance of payments deficit. Typically, governments must tighten the money supply and reduce government spending. In more extreme cases, governments are also required to undertake structural reforms.
Countervailing-Duty Investigation
A government investigation used to determine whether a foreign government is subsidizing its national firms' exports directly or indirectly. Under the rules of the international trade system, a positive finding in such an investigation allows the government to impose tariffs to offset the subsidy.
Current Account
One of the two principal components of the balance of payments. It records all payments between the country and the rest of the world. The balance is a sum of the following categories:

(1) Merchandise trade
(2) Services (tourist spending, insurance, consulting, etc.)
(3) Investment income/earnings (dividends, rent, interest, like rent collected by US companies from FDI in other countries)
(4) Unilateral transfers (foreign aid, guest workers)
Debt-Service Capacity
The ability of a country to make payments of interest and principal on foreign debt. Because debt service, especially in developing countries, must be made with foreign currencies, export earnings are a good measure of a country's debt-service capacity.
Debt-Service Ratio
The percentage of a country's export earnings that must be devoted to payments of interest and principal on foreign debt. A high debt-service ratio means that a large share of the country's total export revenues must be used to make debt payments.
Devaluation
A reduction in a currency's value within a fixed or fixed-but-adjustable exchange-rate system. Should be distiguishable from depreciation, which is a change in a currency's value caused by foreign exchange market transactions. Thus, a floating currency may depreciate, but cannot be devalued.
Domestic safeguards
Clauses in the GATT that allow governments to temporarily suspend tariff reductions they have made previously when a domestic industry is being threatened by a sudden surge of imports.
Dumping
The act of selling a good in a foreign market at a price that is either below the cost of production of the good or below the price at which the good sells for in the home market. Dumping is illegal under GATT rules, and governments are allowed to counter the practice by raising tariffs.
East Asian Model
A model in which economic development is conceptualized as a series of distinct stages of industrialization. In the first stage, industrial policy promotes labor-intensive light industry, such as textiles and other consumer durables. In the second stage, the emphasis of industrial policy shifts to heavy industries, such as steel, shipbuilding, petrochemicals, and synthetic fibers. In the third stage, governments target skill-intensive and R%D-intensive consumer durables and industrial machinery, such as machine tools, semiconductors, computers, telecommunications equipment, robotics, and biotechnology. Governments design policies and organizations to promote the transition from one stage to the other.
Economies of scale
Reductions in the unit cost of producing a good caused by increases in the number of goods produced. Economies of scale often arise form the knowledge acquired in production. The existence of economies of scale in certain industries can provide a justification for welfare-enhancing industrial policy, as well as rationale for strategic trade theory.
Engel's Law
Law asserting that people spend smaller percentages of their total income on food and other primar commodities as their incomes rise. It was a central component of the Singer-Prebisch theory that formed a part of structuralism
Eurodollars
Literally, dollar-denominated bank accounts and loans manged by banks outside of the United States. More broadly, the term refers to bank accounts denominated in currencies other than the currency issued by the government of the country in which the account is held.
European Monetary System (EMS)
Founded by European Community governments in 1979, the EMS was fixed-but-adjusted exchange-rate system in which governments established a central party against a basket of EU currencies called the European Currency Unit (ECU). Central parties against the ECU were then used to create bilateral exchange rates between all EU currencies. EU governments were required to maintain their currency's bilateral exchange rate within 2.23 percent of its central bilateral rate. In January 1999, monetary union replaced the EMS.
Exchange-rate system
A set of rules that together specify the amount by which currencies can appreciate and depreciate in the foreign exchange market. Under a fixed exchange-rate system, the rules require governments to restrict currency movements to a narrow range around some central rate. In a floating exchange-rate system, governments can allow their currencies to move by as much as they desire.
Exchange restrictions
Government regulations controlling the private use of foreign exchange. Used extensively by governments in the advance industrialized countries under the Bretton Woods system to limit capital outflows.
Export-orientated 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 NICs in the late 1950s to early 1960s after the gains from easy ISI had been exhausted. During the late 1980s, this strategy and the apparent Asian success based on it provided the foundation for the "Washington Consensus."
Export-processing Zones
Industrial estates where the government provides land, utilities, transportation infrastructure, and in some cases, building to the investing firms, usually at subsidized rates. They are often established by developing countries to attract foreign direct investment by MNCs.
Externality
Market failures that arise when the parties to a given transactions do not bear the full cost of or realize the full benefit from their transaction. Externalities can be negative (when you hire a DJ to play load music at your all-night party, your ealy-to-bed roommate suffers costs) or positive (when you hire a service to clean your room, your never-clean-up toommate realizes some of the benefits). When individuals do not bear the full costs of their transactions, they will engage in more of that activity than society desires. (You could afford to hire fewer DJs if you had to pay for your roommate's hotel room each time you had a party.) When individuals do not capture all benefits from a transaction, they engage in less of that activity than society desires. (You could afford more frequent visits by the cleaning service if your roommate paid for the benefit she gained from cleaning.)
Factor Endowments
The amount of land, labor, and capital a country has available. Countries have different relative factor endowments, and in the Heckher-Ohlin model of international trade, these differences are the source of comparative advantage.
Factor mobility
The ease with which factors of production can move from on industry to another. All factors are mobile in the long run, but many are relatively immobile in the short run. Different assumptions about the mobility in the long run but many effectively immobile in the short run. Different assumptions bout the mobility of factors underlie two different political theories of trade politics. The factor model assumes a high degree of factor mobility, whereas the sectoral model assumes that at least one factor is immobile in the short run.
Factors
the basic tools of production, including labor, land, and capital.
Fiscal policy
The use by the government of tax and spending policies to manage domestic demand. An expansionary fiscal policy will boost domestic demand, thereby raising economic output; a restrictive fiscal policy will reduce domestic demand, thereby lowering economic output.
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. Governments are required to use monetary policy and foreign exchange market intervention to maintain their currency within a band around the official rate.
Fixed-but-adjustable exchange-rate system
A system in which governments establish a central or official rate for their currency, usually expressed in terms of some standard, as in the fixed exchange-rate system, but are also allowed to change the official rate occasionally, usually under a set of well-defined circumstances.
foreign aid (official development assistance)
Financial assistance provided to developing countries' governments by the advanced industrialized countries and by multilateral financial institutions such as the World Bank and the regional development banks in order to finance development projects. Foreign aid can be supplied as a grant (requiring no repayment) or a loan (requiring repayment). Loans can be offered on concessional terms (below-market rates of interest) or nonconcessional terms (at market rates of interest).
Foreign Direct Invest
A form of cross-border investment in which a resident or corporation based in one country owns a productive asset located in a secod country. Such investments are made by multinational corporations. FDI can involve the construction of a new, or the purchase of an existing, plant or factory.
Foreign exchange market
The market in which national currencies are traded. It is through transactions in this market that the market exchange rates of the world's currencies are established. According to the Bank of International Settlements more than $1 trillion worth of currencies are traded each day.
foreign exchange reserves
government holdings of other countries' currencies
Free-trade area
A regional trading arrangement in which governments eliminate all tariffs on goods imported from other members, but retain independent tariffs on goods imported form nonmembers.
GATT Part IV
Added to the GATT in 1964 in part as a result of developing countries' pressure. Contains three articles that focus on developing countries' trade problems. The three articles call upon the advanced industrialized countries to improve market access for commodity exporters, to refrain from raising barriers to the import production that are of special interest to the developing world, and to engage in "joint action to promote trade and development."
General Agreement on Tariffs and Trade (GATT)
An international agreement concluded in 1947 establishing rules that regulate national trade policies. Between 1947 and 1995, GATT also was the principle international trade organization, providing a forum for trade negotiations, administering trade agreements, helping governments settle trade disputes, and reviewing national trade policies. In 1995, the last roles was taken over by the WTO. Today the GATT continues to provide the core rules regulating national trade policies.
generalized system of preferences (GSP)
Part of the GATT concluded in the late 1960s under which advanced industrialized countries can allow manufactured exports from developing countries to enter their markets at preferential tariff rates. The GSP is therefore a legal exception to the GATT principle of anti-discrimination.
Global division of labor
One of the economic consequences of an open international trade system. Over times, trade will cause countries to specialize in producing goods that make intensive use of their abundant factors of production. Eventually, each country will produce goods in which it has a comparative advantage and shed industries in which is has a comparative disadvantage.
What can you do when you are spending more than what you are earning, that is to say, when you have a current account deficit?
(1) internal spending adjustments (through consumers and government)
(2) financing
(3) external adjustments of trade balance (through exchange rate, trade barriers, export subsidies, etc.)
price specie-flow mechanism (under gold standard)
economic growth rate goes up; but money supply (tied to amount of gold reserve) is fixed in the short run, hence downward pressure on prices (same amount of moey but now more goods are available) → exports go up → BOP cuurent account surplus → gold flows in → money stock goes up → prices of goods go back up → exports come down → BOP current account surplus will diminish.

• Thus monetary expansion and contraction automatically hinge on BOP conditions, rather than in response to domestic economic conditions; domestic price stability is subordinated to exchange rate stability. Domestic prices fluctuate wildly under fixed system.
advantages and disadvantage of the gold standard
ADVANTAGES
- externally-imposed discipline on monetary supply - tied to gold supplies

DISADVANTAGES
- domestic prices fluctuate - very unpopular with the people during economic hard times
- the supply of gold could not keep up with expansion of production and trade. Banks start printing money without having the gold to back it up.
Bretton Woods System
Essentially a fixed exchange rate system, where the US govt was obliged to maintain a dollar-gold rate (1 ounce of gold = $35), while other governments were obliged to maintain the rate between their respective currencies and the dollar ($1 = 360 yen)
- avoids competitive devaluation problems
- but countries do not have freedom in changing domestic monetary policy.
Capital controls
restrictions on currency exchanges, currencies not freely convertible - this inhibits investments, purchase and sale of goods and services internationally). But they protected BOP accounts - any imbalance would largely be due to trade imbalances rather than capital flows, and the scale of the imbalance would be small. Capital controls were lifted in early 1980s - now currencies are freely convertible, capital moves freely across borders.
debate over the stabilization fund
Keynes wanted the fund to be as big as possible. The fund would be used to help countries fund BOP imbalances, which are necessary sometimes to help a country expand. A small fund might limit growth.

White wanted it to be as small as possible to avoid moral hazard. If you insure your economy too much, corporations become to big to fail, and will take more risky decisions, because they are insured against failure by this fund. Countries will not be as concerned over efficiency because they will be insured by this stabilization fund.
Keyne's idea of the "bancor"
A global currency, and the IMF would be the the central banks of central banks, holding IMF money as a reserve currency. Was not adopted.
problems with Bretton Woods System
- became weaker and weaker over time
- First had dollar shortage problem - as Europe was reconstructing after WWII, they needed lots of hard currency --> dollars needed to flow from the US to Europe through aid and military spending, and later through private capital flows, but this was not enough. US allowed Western Europe to export products to the US, while not opening up for US imports, allowed them to build up dollar reserves
- Then there was a dollar glut problem --> the whole world needed dollars to trade, but the more dollars the US printed, the less confident people became - Triffin's paradox - contradiction between liquidity and confidence.
- then the dollar overhang - foreign claims on American gold became larger than the amount of gold the US government held.
- US became a deficit nation
- Nixon removed the gold standard in 1971
Special Drawing Rights (SDRs)
Response to dollar overhang, a reserve asset managed by the IMF and allocated to member countries in proportion to the size of their quotas. Is not backed by gold or any other standard, cannot be used by private individuals and is not traded in private financial markets. Its sole purpose is to a source of liquidity that governments can use to settle debts with each other arising from BOP deficits.
financial globalization accelerated in the 1980s thanks to:
(1) Eurodollar markets began to pop in order to meet the demand for dollars - USSR needed access to dollars in a market beyond US reach
(2) information technology advances - ability to do transactions with a click of the mouse
(3) investors big and small began to exploit interest rate differentials - more people allured to dollar markets beyond national confines.
advantages and disadvantages of the fixed exchange-rate system
ADVANTAGES
- monetary policy autonomy - able to pursue national goals through policy (seek low unemployment rate, low inflation rate)
- more protection from exogenous shock-induced recession
- exchange-rate misalignment not as acute as it used to be

DISADVANTAGES
- market tends to overshoot; currencies tend to be either very over or undervalued.
- volatility makes it harder to conduct international trade and discourages inward and outward foreign direct investment
- misalignment between currencies fostered trade protectionism - countries can intervene in the market to keep their currency form appreciating - this creates animosity between trading partners - ex. China and USA.
the electoral model of exchange rate policy
Governments will stimulate the economy right before elections so that the ruling party will be in good favor. Criticisms: central bankers may be independent, fiscal policy is hard to play with, may take too much time, governments don't always get to choose when they have elections.
partisan model of exchange rate politics
Governments will cater to the interests of different social groups; business vs. labor, right vs. left.
the sectoral model of exchange rate politics
Governments adopt policy that their social support bases want them to; trade-off b/w autnomy and stability hinge on political balancing of the four sectors: import-competing producers (undervalued fixed), export-oriented producers (fixed), non-tradable goods sector (either), and the financial service sector (float).
Group of 77
A coalition of developing countries established at the conclusion of the first UNCTAD conference in the early 1960s. Seventy-seven developing countries' governments signed a joint declaration that called for reform of the international trade system. The Group of 77 subsequently led the campaign for reform of the multilateral trade system during the next 20 years.
Haberler Report
A study conducted under GATT supervision in the late 1950s and suggesting that the GATT-based trade system was relatively unfavorable to developing countries. The report altered the political dynamics of the international system by forcing advanced industrialized countries to take the demands for reform made by developing countries more seriously.
Heavily-Indebted Poor Countries Initiative
A plan initiated in September 1996 to reduce the debt owed by the world's poorest countries to multilateral lenders; Linked debt reduction to a two-stage conditionality process. The gaol was to bring a country's total foreign debt down to sustainable levels, defined as less than 150% of export earnings. HIPC was succeeded by the Multilateral Debt Relief Initiative in 2006.
Hecksher-Ohlin Model
A model of the determinant of comparative advantage that argues that the comparative advantage arises from cross-national differences in factor endowments. A country's CA will lie in goods produced through heavy reliance on its abundant factors. Capital-abundant countries have a comparative advantage in capital-intensive goods, and labor-abundant countries have a comparative advantage in labor-intensive goods.
Heterodox Strategies
An approach to macroeconomic stabilization adopted by some Latin American governments during the 1980s. Seen as an alternative to the orthodox approach advocated by the IMF, these strategies attempted to reduce inflation through government controls on wages and prices, rather than by restricting aggregate demand by reducing government budget deficits and slowing the rate of the growth of the money supply. In most instances they failed to stabilize the economy.
Horizontal Integration
a form of industrial organization that occurs when a corporation creates multiple production facilities, each of which produces the same good or foods. Many MNCs are horizontally integrated firms, producing the same product or product line in multiple factories based in different counties. Firms integrate horizontally to capture the full value of intangible assets they control.
Import Substitution Industrialization
An economic development strategy adopted in many developing countries after WWII in which states attempted to industrialize by substituting domestically produced goods got manufactured items that had previously been imported. The strategy proceeded in two stages. Under easy ISI, the focus was on creating simple consumer goods. In the second stage, the focus shifted to consumer durable goods, intermediate inputs, and the capital goods needed to produce consumer durables. Most governments have abandoned this approach since the mid-1980s in favor of an export-oriented strategy.
intangible assets
Something whose value is derived from knowledge or from skill or production processes of a firm. An intangible asset can be based on a patented process or design, or it can arise from production-specific know-how shared by workers in the firm. The inherent difficulty in selling or licensing this kind of asset provides an important rationale for horizontal integration.
Keynesianism
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. The approach was widely used in advanced industrialized countries following WWII, but lost favor in the 1980s.
Multilateral Agreement on Investment (MAI)
A document negotiated by the advanced industrialized countries in the OECD between 1995 and 1997 that laid out international rules governing the treatment of MNCs by governments. Designed to promote investment liberalization based on the principles of national treatment and most-favored nation, the MAI was never concluded, because negotiations proved fruitless.
Multilateral Debt Relief Initiative (MDRI)
A plan for 100 percent debt forgiveness announced by the G-8 governments, the World Bank, and the IMF in March of 2006. MDRI is based on the same conditionality programs as the HIPC Initiative, but provides full forgiveness of all debt to multilateral lenders for eligible countries. Funding for the program, and thus initial debt forgiveness, began in July 2006.
Nontraded-goods sector
Sector containing all economic activities that do not enter into international trade, either because the good is too costly to transport (houses, concrete), or because in some cases the good or service must be performed locally (railway system, public utilities, health care, auto repair, etc.).
Obsolescing bargaining
Explains how multinational corporations and host country government divide the income generated by an MNC investment in the host country. It asserts that the MNC hs a bargaining advantage in the preinvestment negotiations. Consequently, the initial investment agreement will diret larger share of the profits to the MNC and smaller share to the government. Once the investment is made, however, the government gains bargaining power at the expense of the MNC.
Phillips Curve
Curve that posits a trade-off between inflation and unemployment: Governments can reduce unemployment only by causing higher inflation, and vice versa.
Plaza Accord
A pact reached in September 1985 under which the Group of 5 agred to reduce the value of the dollar against the Japanese yen and the German mark by 10 to 12 percent. This agreement is the most recent episode of a concerted attempt by the Group of 5 to manage exchange rates.
Singer-Prebisch Theory
Developed during the 1950s by Raul Prebisch and Hans Singer, it claimed that, because developing countries faced a secular decline in their terms of trade, participation in the GATT-based multilateral trade system would hamper their industrialization. The theory provided an intellectual justification for ISI.
Sterilized Intervention
Foreign exchange-market intervention that is not allowed to have an impact on the country's money supply. If a government sells foreign exchange to buy its own currency, and the money supply contracts, it will then buy government securities, thereby expanding the money supply, and vice versa.
Structuralism
A body of development economics that dominated the field in the early post-war period. It held that the shift of resources from agriculture to manufacturing associated with industrialization would occur only if the state adopted policies explicitly designed to bring it about.
Syndicated loans
A loan in which hundreds of commercial banks each take a small share of a large loan made to a single borrower. This arrangement allows commercial banks to spread the risk involved in large loans among a number of banks, rather than requiring one bank to bear the full risk that the borrowing country will default.
The Washington Consensus
The collection of policy reforms advocated by US officials and by the IMF and the World Bank staffs as the solution to the economic problems faced by developing countries. The emphasis on stabilization, structural adjustment, privatization, and market liberalization.
Vertical integration
a form of industrial organization in which a single firm controls the different stages of the production process, rather than relying on the market to acquire inputs and sell outputs.