Econ 355 Final Prep

Front 1

What are corruption's 3 effects on efficiency?

Back 1

Corruption may help growth:

if the government has made the wrong choice, the one made possible by corruption is likely better.

Corruption is the grease for the squeaking wheels of a rigid administration

A rigid bureaucracy is damaging for economic growth

Front 2

Why are instances of corruption so different in different countries?

Back 2

1.Regulatory state with so many permits spawns corruption, counties where more regulation is present spawn more corruption=> however doesn't explain large corruption level increases in post communist Russia or in China after market reforms

2.Social norms are different; what is seen as corruption in Canada could be normal in Qatar

3.In developing countries gift-giving is a major social norm in business practices and personal allegiances are stronger than job ties even for public officials

4.Hypocritical concern; those who voice against corruption are still willing to abuse government resources for the gain of their friends

Front 3

What 8 policies could be enacted to curb corruption?

Back 3

Legalize the corrupt activity (get rid of sanctions that get broken)

Getting rid of all sanctions could be bad because some rules help those in vulnerable positions and switching to a market system is not a good alternative for those populations.

Reduce the monopoly power of those who issue permits (if there are more people in control of who gets permits, then it's harder for them to be corrupt)

Spring cleaning corruption checks: they have to be credible and sustained

Encouraging whistleblowers

Probing unlikely assets of officials

Making supervisors answerable for malfeasance by their subordinates

Working in teams

Well-defined career paths that don't depend on interpersonal relationships

Front 4

What are the moralist and fatalist views on corruption?

Back 4

Moralist; an upheaval of attitudes (ethic cleansing through moral reform campaigns) is needed so that corruption can be extinct

Fatalist : point of no return in many developing countries corruption is so deeply rooted there's no stopping it

Front 5

Describe how export earnings instability arises

Back 5

Low income elasticity of demand for primary products (developed country incomes⬆️ 1%, import of food stuffs ⬆️0.6%, while demand for manufacturing goods ⬆️1.9%) the net result of these low income inelasticities is a decrease in the relative price of primary products.

Price elasticity of demand is low, so shifts in demand and supply cause volatile changes.

These two factors together are export earnings instability. Low price and income elasticities lead to erratic movements in export prices

Front 6

Summarize the outcome of using Ricardian trade model, mention comparative advantage and specialization.

Back 6

Ricardo model is the static model which is only concerned with labour cost: Comparative advantage: producing something in which you have the lowest opportunity cost (ya Canada can make shirts, but India can't make defibrillators so the opportunity cost is too high for CAN to produce). In a competitive environment, countries will produce the good with which they have the greatest relative cost advantage.

Front 7

Summarize the Hecksher-Ohlin factor endowments model

Back 7

Theory postulates that a country will specialize in producing goods that make use of their naturally endowed factors of production (land labour capital). Different resource endowments means different production prices.

Different products require different combinations of resources

Different countries have different combinations of resources

Front 8

What are the 5 traditional arguments for free trade? (the results)

Back 8

Trade stimulates economic growth

Trade promotes equality

Trade rewards and promotes areas of comparative advantage

International prices and costs of production determining trade output volumes (not gov't)

Outward-looking policy is better than isolation

Front 9

Draw a graph illustrating the effects of an import tariff or Quota.

Back 9

Front 10

Summarize the import substitution strategy (IS) and list the 4 results

Back 10

Import substitution refers to countries producing their own Goods instead of importing. They do it in 2 stages: 1st stage: start producing simple consumer goods. 2nd stage: start producing more sophisticated manufactured items=>all while protected by trade sanctions (harder for residents to access cheap foreign goods)

Results: protected Industries get inefficent and costly (unsuccessful)

Foreign firms often benefit more (locate behind tariff walls, entering the country and taking advantage of all the local subsidies while sending remittances away from the country that sponsored them)

Subsidization of imports of capital goods tilts pattern of industrialization and contributes to balance of payments (BOP) problems (the country now relies on goods from abroad to produce domestically, but without exporting this will hurt the BOP account) Overvalued exchange rates hurt exports (they have basically lowered the domestic currency price of their imports while their export prices have increased) Does not stimulate self-reliant integrated industrialization (the government heavily subsidizes which decreases willingness to improve and expand, which was the point of the IS decision)

Front 11

Summarize the trade pessimist arguments

Back 11

1. Slow growth of demand for exports means that export expansion leads to lower export prices and thus, transfer of wealth from poor to rich nations.

2. Secular deterioration of terms of trade (developing countries have to grow slowly to avoid balance of payments and FX rises; they might not want to import as much as they export but there is pressure to do just that

3. Specializing in comparative advantage inhibits industrialization, entrepreneurship and skills accumulation (one export, nobody is going to be attracted there and specialization by definition inhibits diversification which is needed for countries to develop)

4. Trade liberalization under WTO is limited for the poorest developing countries; they don't have the lawyers or resources to pry open other nations like the rich nations do

Front 12

What are the trade optimist arguments?

Back 12

Free trade;

Promotes competition

Generates pressure for product improvement

Accelerates overall growth

Attracts foreign capital and expertise (scarce in developing countries)

Establishes relationships that would be useful if a country experiences a crisis and needs food

Eliminates distortions from governmental rent seeking activities and corruption

Promotes equal access to scarce resources

Enables developing countries to take full advantage of reforms under WTO

Front 13

Describe the origins of the 1980s debt crisis using the story of Petrodollar recycling

Back 13

OPEC countries made a lot of money by exporting oil. They deposited this money in U.S and European banks. The banks then loaned out the money to developing counties at low rates. Oil prices were high, economy was in recession and developing countries wanted to sustain their growth through borrowing. Commercial banks were happy to lend to developing counties on the cheap because nobody else was looking for capital in recession time. This combination led to developing countries doubling their borrowing; 180B in 1975 to 406B in 1979.

To

Front 14

In the IMF stabilization program, what are 6 tactics for debt relief?

Back 14

Debtors cartel; a group of countries in debt who can consolidate their debt and earn bargaining power as a result

Restructuring; changing of the debt conditions (extended time or lower interest rates)

Brady plan: debt reassessment by promisong to adhere to IMF recommendations (open markets to FDI, adjustment programs) still have to pay but maybe less

Debt for equity swaps; developing countries have debt forgiven in exchange for large assets like paper mills

Debt for nature swap; WWF purchases developing countries' debt, restructures it into local currency and uses that currency to preserve a natural resource

Debt repudiation; 1980s fear that developing countries wouldn't repay their debt

Front 15

Explain the 5 basic functions of the financial system?

Back 15

1. facilitate the trading, hedging, diversifying, and pooling of risk, (financial markets enable diversified asset holdings which minimizes risk)

2. Acquiring information for proper allocation of resources (single consumer cannot gain information as well as financial intermediaries)

3. monitor managers and exert corporate control (financial markets give structure that make managers accountable to the financiers' goals)

4. mobililize savings (using people's savings to provide loans for projects that can improve the economy)

5. facilitate the exchange of goods and services. (transaction costs⬇️specialization ⬆️innovation ⬆️growth⬆️)

Front 16

How do you read this table?

Back 16

Depth: measures size of financial intermediaries

[liquid liabilities/GDP]=>what % of earnings is kept in the bank? (strong link between real per capita GDP and DEPTH.

Bank: Central bank vs Commercial bank allocating credit. Bank=([bank credit]/[bank credit]+Central bank assets) How much credit is given

Private: credit issued private enterprises/total domestic credit

Privy: credit issued to private enterprises/GDP

Front 17

What is adverse selection and how do you solve it?

Back 17

Before transaction occurs, the most at risk people will be those who seek insurance.

How to solve: private production and sale of information, government regulation to increase information and collateral net worth

Front 18

What is moral hazard and what 4 ways can help solve it?

Back 18

After the transaction, the borrower has an incentive to do activities that will result in an inability to pay money back.

How to solve: put borrowers own money at stake, monitoring and enforcement of restrictive covenants; discourage undesirable behaviour and keep collateral, financial intermediaries (great monitoring skills)

Front 19

What 5 factors cause financial crises?

Back 19

Front 20

Address broader arguments for market and government failures

Back 20

Gov't failure: politicians maximize their personal utility, so even if economic theory shows that fiscal policy can correct market failures, self interested agents may not carry it out.

An analysis of incentives for government failure guides reform (have to know what caused market failures if we are to fix market failures)

Developing countries have high market and government failures; one is not necessarily undisputedly superior

Front 21

Give the assumptions, results and implications of the Harrod-Domar model

Back 21

HD model designed to show what domestic savings rate is necessary to achieve a certain level of growth I'M INCOMPLETE

Front 22

What 11 things does a market economy need in order to function well?

Back 22

Clear property rights

Laws and courts

Freedom to establish business

Stable currency

Public supervision of natural monopolies

Provision of adequate information

Autonomous tastes

Public management of externalities

Stable monetary and fiscal policy instruments

Safety nets

Encouragement of innovation

Security from violence

Front 23

Assume a closed economy, perfectly elastic labor supply, and linear technology. Suppose the incremental capital-output ratio (ICOR) is 3, the depreciation rate is 3%, and the gross savings rate is 10%. Use the Harrod-Domar growth equation to determine the rate of growth. What would the gross savings rate have to be to achieve 5% growth? Assuming a perfectly elastic labor supply, state one criticism of this model from an exogenous growth theory viewpoint and another criticism of this model from an endogenous growth theory viewpoint.3. What are the key assumptions of the Lewis model that give rise to its conclusions? How would the theory’s conclusions differ if these assumptions do not hold?4. During the past decade, India has invested about 22% of its GDP while China’s investment rate has been double that of India’s. India’s annual growth rate has been about 6% while that of China has been about 9%. What conclusions can you draw?

Back 23

Look it up

Front 24

Ch 11; Assume a closed economy. Suppose the incremental capital-output ratio is 3, and the depreciation rate is 4%. Using the Harrod-Domar growth equation, if the savings rate is 9%, what will be the rate of growth? What would the savings rate have to be to achieve 5% growth?

Back 24

Look it

Front 25

Provide a concise statement about the relationship between a developing country’s emphasis on the export of traditional commodities and: (a) export earnings stability; (b) comparative advantage; (c) terms of trade.

Back 25

Check it