Economic Topics Module 19-21

What are the chief indicators of increased globalization since WWII?

• dramatic growth in international trade volume

• decreased transportation costs

• reduced tariff barriers

• increased capital flows across borders

• integrated global supply chains

• expansion of multinational corporations.

What is comparative advantage in international trade?

the ability of a country to produce a good at a lower opportunity cost than another country. It explains why countries benefit from specialization and trade even when one country can produce all goods more efficiently than another.

What is the Ricardian model of trade?

demonstrates how countries benefit from specializing in goods they can produce with relative efficiency and trading for other goods, increasing total production and consumption beyond what would be possible in isolation, leading to aggregate welfare gains.

Why is there political resistance to globalization despite economic benefits?

Resistance occurs because while trade increases aggregate wealth, the benefits and costs are distributed unevenly. Some industries and workers experience job loss and wage depression while others gain, creating domestic political opposition from negatively affected groups.

What is the Heckscher-Ohlin model of trade?

explains that countries export goods that intensively use their abundant production factors and import goods that use their scarce factors. This creates distributional consequences where owners of abundant factors gain from trade while owners of scarce factors lose.

Why did the US launch a trade war against China in 2018?

The Trump administration launched the trade war citing: China's unfair trade practices, intellectual property theft, forced technology transfers, the large US-China trade deficit, national security concerns, and to protect American manufacturing jobs in politically important regions.

What is an exchange rate and how do shifts affect trade?

the value of one currency relative to another. When a currency appreciates, exports become more expensive and imports cheaper. When it depreciates, exports become cheaper and imports more expensive, affecting trade flows and domestic industries.

What is the Mundell-Fleming Trilemma?

 countries cannot simultaneously achieve all three policy goals: monetary policy autonomy, fixed exchange rates, and free capital movement. They must sacrifice one to achieve the other two.

What is a trade deficit and how is it related to foreign capital inflows?

A trade deficit occurs when a country imports more goods and services than it exports. It is mathematically linked to capital inflows, as foreign countries use dollars from US purchases to invest in US assets, financing US consumption through foreign investment.

What is the political significance of the dollar's reserve currency status?

The dollar's reserve status gives the US unique advantages: lower borrowing costs, ability to run persistent deficits, insulation from exchange rate risk, immunity from balance of payments crises, and significant geopolitical leverage through financial sanctions and monetary policy.

What emergency actions did the Federal Reserve take during the COVID-19 pandemic?

The Fed:

• cut interest rates to near zero,

• established currency swap lines with foreign central banks,

• purchased massive amounts of government and corporate debt,

• provided emergency lending facilities to maintain market liquidity and prevent global financial collapse.

What is the Bretton Woods economic order?

the post-WWII international economic system established by the US to promote free trade, currency stability, and economic development. Key organizations include the IMF, World Bank, and GATT (later WTO).

What is the WTO and how does it differ from GATT?

The WTO (World Trade Organization) replaced GATT in 1995. Unlike GATT, the WTO is a formal organization with binding dispute settlement mechanisms, broader scope covering services and intellectual property, and greater enforcement capabilities.

What is the International Monetary Fund and its main functions?

The IMF promotes international monetary cooperation, exchange rate stability, and orderly payment systems. Its main functions include monitoring economic policies, providing technical assistance, and lending to countries experiencing balance of payments problems with conditions for economic reform (conditionality).