ir 292 final

What is the most important determinant of the number of jobs created by an economy?

macroeconomic policy

What is Total Factor Productivity?

A measurement of the quantity of output per unit of input. Increases in TFP mean that overall productivity has improved and that a given level of inputs will create more output, hence our technology or enterprise organizations must have improve.

What is global economic integration?

the unification and influence of economic policies between different states,

In what ways has the world become more integrated

technological innovations, open trading systems, increased methods of transportation and communication, culture and food from other nations is available to most other nations. etc.

What is Comparative Advantage

When a country can sell a good at a lower opportunity cost in production of the good than those of its trading partners

How can countries still benefit from trade when they have lower overall productivity levels

if they have a large enough workforce they can still benefit from trade despite low productivity

what does it mean when we say that there are "Gains from Trade" and does it mean everyone will be better off

Gains from Trade is that more people gain than lose. Not everyone is better off but the nation as a whole will grow even if some domestic industries lose.

What does the H-O model argue

countries will export products that use their abundant and cheap factors of production and import products that use the country's scarce factors, these factors are what influence the difference in productivity

what does the H-O model assume

multiple inputs (labor, capital, farm land) and variations in the quality of inputs

how does opportunity cost behave under the H-O Model

each country has a rising opportunity cost for each type of production

what does the Stopler Samuelson Model measure

measures the relationship between production and labor vs capital intensive goods, a fall in the price of a good lowers the income of factors and an increase in the price of a good increase the income of factors

what (5 things) does Stopler Samuelson Model assume

1. labor earns wages proportionate to skill level,2. owners of capital earn profits, 3.landowners earn rents,4.the amount of income earned per unit of input depends on both the demand for inputs and the supply of inputs5. if an output is in high demand, its price is high and the inputs used to produce it receive higher returns

who gains and loses in Stopler/Samuelson

an increase in the price of a good raises the Y earned by factors that are used intensively in its production, the reverse is also true

Historically, what was the most common reason for a country to impose tariffs

government revenue

what is consumer surplus

the difference between the value of a good to consumers and the price they have to pay.

what is producer surplus

the difference between the minimum price a producer would accept to produce a given quantity and the price it actually receives

how is consumer surplus measured

the area above the price line but underneath the demand curve

how is producer surplus measured

on the S/D graph it is the areas under P and above the supply curve

how do consumer and producer surplus change after a tariff or quota is implemented

Consumer surplus shrinks after a tariff is implemented, but producer surplus increasesthere is still deadweight loss overall

what are the costs of tariffs and other forms of domestic protection

reduction in imports, fall in domestic consumption, increase in domestic production. retaliation, rent-seeking, and effects on innovation

what is Mancur Olson's Logic of Collective Action and how does it apply to tariffs

the cost of policy are spread out over a great many people and the benefits are concentrated, therefore those benefitting from the tariff have much more incentive to keep the tariff than those hurt by it

Globally speaking, in what economic sector are tariffs most common

agriculture, clothing, and textiles have the most common tariffs

what is rent seeking?

an activity that uses resources in order to capture more income without actually producing a good. examples/ political lobbying, legal challenges, and bribery.

why does rent seeking inhibit economic growth

it is a net loss to the nation because it uses resources (labor and capital) but does not add to national output

under what conditions is rent-seeking most likely to occur

countries that have a greater degree of corruption in their political systems will have a harder time allocating resources efficiently, Protectionist policies

what are positive and negative externalities

externalities are costs borne by those who were not participants in the original transactionpositive example: education systemnegative example:pollution

what are economies of scale

decreasing average costs over a relatively large range of output , can lead to an agglomeration economy where ,many similar firms produce in the same region

why might they [economies of scale] be used to justify industrial and commercial policies

economies of scale can allow for knowledge spillovers, coordination opportunities, easily available labor inputs, and a dense network of suppliers and distributors which can support industries

what is intra-industry trade

exports and imports are traded of the same category of goods and services, not based on comparative advantage

what are the gains from intraindustry trade

lower prices, increase in the number of firms, increase in consumer choice

what two factors are needed for intra industry trade to occur

economies of scale (a decline of average cost while the number of units produced increases) and product differentiation (each firm produces a slightly different product)

what is monopolistic competition

competition between differentiated products, unlike a pure monopoly, competition among many firms exists. however, competition is attenuated by the practice of product differentiation, as the number of firms increase the prices fall and the avg cost of production for each firm increases

what is the product cycle? what are the main phases?

a cycle that suggests there is a fixed patter to the evolution of manufacturing and technology,3 main phases

what is phase 1 of the product cycle?

innovation incremental improvements in a basic design; no longer a revolutionary product

what is phase 2 of the product cycle

standardization production begins to shift to countries with low labor costs; consumption in high income country exceeds its production

what is phase 3 of the product cycle

common product now consumed on a mass scale

what is dumping

selling goods in a foreign market for less than "fair value", according to the WTO it is when an exporter sells a product at a price below the one it charges in its home country

what are the three main options when it comes to setting economic standards

harmonization, mutual recognition, and separate standards

what is the harmonization of standards

two or more countries share a common set of standards in an area of concern (labor, environment, etc)

what is the mutual recognition of standards

countries keep their own product and process standards but accept the standards of others as equally valid and sufficient

what are separate standards

countries keep their own standards and refuse to recognize those of anyone else

where is child labor most common (what region of the world and which economic sector)

highest absolute \# in Asia, highest % in Sub Saharan Africamostly agriculture (60%) but also services (26%)and industry (7%)

what is a pollution haven

countries that compete by offering foreign firms a reduced set of environmental compliance requirements, but there is strong evidence that nations do not economically benefit or gains n advantage from reducing environmental standards

how does this [pollution havens] tie into the idea of a "Race to the Bottom"

pollution havens are nations that would compete against each other by lowering standards in order to incentive production in their countries, however in order to stay competitive nations would need to reduce standards until they hit "bottom"

what are the main components of the balance of payments

the balance of payments is the international transactions of a nation, only keeps track of money that is flowing into and out of the country, made up of the current, capital and financial accounts

what is listed under the Current Account

goods, services, and income consumers or producers received in the current financial period, happening right now

what is listed under the Financial Account

investments in assets that an be redeemed at a later date, stocks and bonds and longterm investments

what is listed under the capital account

record of some specialized types of relatively small capital flows

how do you determine between a credit and a debit

if money crosses borders and enters your country its a credit (+) and if it leaves your country its a debit (-)

what are the main differences between FDI and Portfolio Investnment

FDI: the purchase of physical assets and FPI: the purchase of financial assets both are claim in a foreign economy's future output

what are capital controls

national controls on the inflow or outflow of funds, inflow restrictions tend to work better than outflow ones because they reduce the inflow of short run capital which would ass to the stock of liquid, possibly volatile capital,outflow restrictions may help reduce the impact of a crisis when it occurs

why might a country decide to impose capital controls

countries may impose capital controls to help stop a crisis by artificially reducing the demand for foreign exchange currency, this would prop up the value of the domestic currency and eliminate expectations of a large decline in domestic currency value

what are the 3 main reasons for exchanging currency

Trade and Investment purposes, Interest Rate Arbitrage, and Speculation

what is exchange rate risk? how can it be mitigated?

Exchange rate risk is the risk that your exchange rate may devalue or decrease over timeBy using the forward market, you are able to agree on the current exchange rate and then trade later at the agreed upon rate regardless of changes

what is covered interest arbitrage

the use of a forward market by an interest rate arbitrages against exchange rate risk

what is purchasing power parity and what does it correct for

the equilibrium value of an exchange rate that allows a given amount of money to buy the same quantity of goods abroad as it would at home, corrects for the differences in value between domestic and foreign currency

what are the two main pre-requisites for a successful single currency area

the business cycle must be synchronized (meaning that economies must enter recessions and expansions at more or less the same time) and there has to be a high degree of labor and capital mobility between the member countries (which allows for compensation in differences in business cycles and greater efficiency)

what are the 3 types of financial crisis

debt, exchange rate, banking

what are some policy actions that governments can take to resolve each type of crisis

Capital controls and contractionary monetary policy, want to control inflation and how much money is going out of the country.

what are the two main causes of financial crises

macroeconomic imbalance and volatile flows of financial capital

what are the main components of the basel capital accords

formed in 1989, a set of recommended practices to help countries avoid banking and financial crises, emphasizes capital requirements, supervisory review of enterprises, and information disclosure

what is NAFTA

North American Free Trade Agreement, formed by Canada USA and Mexico in 1994, eliminated tariffs on 1/2 of goods between US and Mexico, specified content requirements for goods subject to free trade, and established a system of free trade dispute

what are the goals of NAFTA

President Salinas of Mexico proposed this agreement in order to solidify Mexico's reforms in an international way and attract foreign capital to increase the low domestic savings of Mexico

how were environmental standards determined under NAFTA

environmental standards were defined as side agreements in NAFTA because environmental groups feared that polluting U.S. and Canada firms would move to Mexico and pollution would increase on the U.S./ Mexico Border

what is one major problem facing NAFTA that is not typically shared by other trading blocs

Usually trading blocs have similar economies and sizes.The comparative advantages of Canada and U.S. line up more than Mexico leading to an imbalance.

why did most economists believe that the effects of NAFTA on the US economy would be relatively small

Tariff changes didn't affect the US as much because their economy is so much bigger!

why has Mexican immigration to the US slowed over the past decade

the U.S. border has been harder to cross, political and economic environment in the U.S. is more difficult for immigrants, and the demography of Mexico is changing in ways that are reducing the number of potential migrants

What is the European Coal and Steel Community? (1951)

a 1951 agreement among the six countries that eventually created the EEC, creating free trade in the coal and steel industries

what is the treaty of Rome (1957)

the funding document of the EEC, signed by 6 nations, the first document in forming the EU

what is the European monetary system (1979)

An exchange rate system started in 1979 that linked the currencies of each member of the European Community. EMS was replaced by the Euro in 1999

What is the Single European Act (SEA or SMP) 1987

the act that created a common market among the members of the European Community.

What is the Maastricht Treaty (1992)

Includes the single currency program that began in 1999. created an economic union among the members of the EU

What are the 4 freedoms of the EU

Freedom of movement for goods, services, capital, and labor

what are the 3 main governmental bodies of the EU

The European Commission, the Council of the EU, and European Parliament

which one functions of the executive body

The European Commission, each country has one vote and it serves as the guardian of the treaties

which of the two legislative bodies is "Primary" under current EU law?

The Council of the EU, enacts the Commission's proposal into law, composed of ministers from each EU nation

which one elects its representatives directly through the people?

The European Parliament, representative of popular opinions in the EU, passes laws, supervises institutions, passes the final EU budget

which branch requires a Qualified Majority to pass legislation?

The Council of the European Union

what two programs represent the bulk of total EU spending

Agricultural support and cohesion funds (used to support less developed regions within the EU)

what are the (3) biggest challenges facing the EU if it continues to expand eastward

1. The EU budget contains a shrinking, but still extensive set of farm support programs2. EU governance structures were not designed for 27 members and additional members add pressure to the voting system4. income gaps between the richest and poorest exacerbate the sense of social and economic distance between members

what are the five main convergence criteria for entering the EU

1. maintain currency within the ERM band2. reduce inflation to less than 1.5% above the avg of the 3 lowest rates3. bring long term interest rates within 2% of the 3 lowest4. reduce deficit to less than 3% of national GDP5.reduce debt to less than 60% of national GDP

why does the EU maintain these criteria? (5 reasons)

1. stabilize exchange rates2. control inflation3. harmonize long term interest rates4. manage government deficits5. manage government debt

why are the EU convergence criteria criticized?

many of the countries in the EU, especially the original members, don't actually meet the criteria

what is Import Substitution Industrialization

an economic development strategy that emphasizes the domestic production of goods that substitute for imports. ISI policies decrease imports and exports

what are terms of trade

(index of export prices)/(index of import prices)

what is the theory behind export pessimism (Prebisch-Singer Thesis)

over time, as world incomes rise, prices for commodities fall faster than prices for manufactured goods. Thus, countries who export commodities and import capital intensive goods will see their Terms of Trade decline over time.

From the early 1900s to the late 1960s, how did Latin American real GDP growth compare to the rest of the world

Latin American countries were able to provide a lot of raw materials to the war efforts without being dragged into the conflict. they were able to gain from wartime industry without losing populations or capital

what types of problems did Latin America's ISI policies run into during the 70s and 80s (5 big things)

1. government involvement in production decisions caused a misallocation of resources,2. exchange rates were overvalued, 3. policies were too biased in terms of urban areas,4. income inequality worsened5. ISI fostered rent seeking and corruption

when was Latin America's lost decade? why did it occur when it did (4 reasons)

the 1980s, there was insane inflation. It occurred during the 1980s because of 1. a collapse of world oil prices2. increase in international interest rates3. longstanding political mismanagement4. high rates of lending in 1974-1982

how did Latin America reform its policies beginning in the late 1980s

most reforms consisted of stabilization policies to control inflation, privatization of government owned parts, and open trade policies and less discrimination against exports

what was the washington consensus

A set of policies prescribed for developing countries by the U.S. government, the IMF, World Bank, and think tanks in D.C. Policies favored neoliberal economics, free market forces instead of government intervention

what was the brady plan

A 1989 plan of U.S. Treasury Secretary Nicholas Brady intended to provide modest debt relief

what is an export oriented growth strategy

a development strategy where a nation changes their comparative advantage to produce goods that are in high demand. Nations change their comparative advantage (from agricultural and labor intensive to consumer goods and capital intensive goods) by opening up global trade and capital flows and targeting industries.

how does EO differ from ISI

ISI focuses on producing for the domestic market, E-O growth focuses on producing for the global marketISI offers blanket protections for domestic manufacturers, E-O growth offers targeted assistance to key industries,ISI discourages FDI and E-O encourages it with some restrictions

what are some advantages and disadvantages of EO

advantages: more adaptable, historically more successfuldisadvantages: dependent of world demand for exports

what are some advantages and disadvantages of ISI

advantages: more self sufficientdisadvantages: having to import technology for domestic industrieshaving to pay off debts leads to exports which does not leave enough resources for domestic consumers

why is EO growth generally associated with faster economic expansion

Export Growth causes faster GDP growth if there is something that production that is absent from domestic production and the export speeds up the adoption of international best practices, and the overall capacity of the economy to grow faster than if production was focused on goods for the domestic market. E-O growth also encourages the acquisition of new technologies and capital.

how did stable macroeconomic environments lead to economic success in East Asia

HPAEs kept budget deficits and foreign debt in limits of the government so they wouldn't have to print money or borrow excessively, low inflation rates helped to keep interest rates stable, which incentivized long term investment and growth

how did high savings and investment rate lead to economic success in East Asia

Rapid income growth caused by high savings led to high rates of investment which boosted industries, which fed back to more income increases creating a cycle of investment

how did Asia's demographic transition lead to high savings and investment rates

Asia's demographic transition after WW2 was a shift from high birth and death rates to low birth and death rates. There are fewer children below working age and a larger % of the population in the work force leading to higher saving. Old people save more