UNL POLS/GLST 160 EXAM 2 SPRING 2019

Trade

the flow of goods and services across borders

Finance

the flow of capital i.e. money across borders

Development

economic, political and socio-cultural stability and integration

Most trade happens between

the global North; NA, EU, and Japan account for 60% of global trade

Trade over the past 20 years

North-North trade is declining while South-South trade is increasing

Comparative advantage

under a system of perfectly free commerce, each country naturally devotes its capital and labor to such employments as are most beneficial to each; states have a natural advantage to produce goods and services; depends on natural resources, labor force, tech, geography

Mercantilism

a "zero-sum" approach to trade; there is a finite amount of wealth in the world and states must compete to get the biggest share of the wealth; government policy should maximize exports and minimize imports; tariffs, quotas, subsidies

Economic liberalism

the market always knows the right price based on supply and demand; states should stay out; emphasis on absolute gains

Free trade

international trade left to its natural course without tariffs, quotas, or other restrictions.

Import substitution industrialization

instead of importing goods and services, everything should be domestically produced to create jobs and reduce dependencies

-loans started to be given out for domestic people to create goods
-but they had to import the technology to do so
-very expensive loans had to default, the government is in shambles
-goods made have no competition and therefore no advancement

Import substitution industrialization disadvantages

developing economies still end up importing expensive goods (technology) and often don't have a market for the goods they have produced

Protectionism

governments should protect domestic industries from foreign competitors through a series of policy choices (tariffs, quotas, subsidies)

Mercantilism, protectionism, and import substitution industrialization all focus on

relative gains; domestic goods should be made cheaper than imported goods

Economic liberalism (The Washington Consensus)

free trade is more profitable for everyone, global trade is promoted

Nontariff barriers

quotas, subsidies, restrictions, and regulations

Tariff

taxes imposed on imported goods

Smoot Hawley Act

implemented protectionist trade policies sponsored by Senator Reed Smoot and Representative Willis C. Hawley and was signed into law on June 17, 1930; tariffs on 20,000 imported goods

Subsidies

common as agricultural subsidies; loans or financial stipends to lower cost of production, tax breaks, guaranteed prices for certain goods

Quota

a limit on the amount of goods/services that can be imported from one country

Restrictions and regulations

remove foreign competitors from the market

Invisible Hand

Adam Smith; supply and demand will help reach equilibrium

Most Favored Nation

WTO extends most favored nation deal to all members of the WTO to reduce barriers to trade (i.e. equal tariffs for all countries on certain goods)

Dumping

flooding the market with a product below market value; Canada dumps maple syrup into u.s. at a much cheaper price putting domestic producers out of business

GATT/WTO

General Agreement on Trade and Tariffs/World Trade Organization

NAFTA

North American Free Trade Agreement; allows open trade with US, Mexico, and Canada.

Cartels

price fixing groups; oil, drugs, etc.

Monopoly/oligopoly

one or few company control over certain goods (cell phone carriers, airlines, diamonds)

Corruption

consumer unknowingly pays for other services needed to get the product into the market

Sanctions

prevention of purchasing goods from certain states

Why do governments intervene?

national security, ward off predatory efforts; meet political demands, protect new industries, protect domestic industries

Institutions to protect free trade

World Trade Organization (formerly GATT), NAFTA and Regional Arrangements, BFTAs

Labor rights: Race to the bottom

manufacturers and producers are going to move to the places where protections and restrictions of workers are minimal so that they can pay them less and work them more

Free trade and environmental protection

production is concentrated in poor neighborhoods, making poor neighborhoods have to relocate and magnifying environmental consequences; factory gas emissions

Nationalism, economic

economic globalization moves jobs outside of the country

Nationalism, political

economic globalization coincides with cultural and politicals shifts, challenging some community values

National security concerns

who is producing what and who has the resources available to produce industries vital to national security/interest

What is international finance?

essentially just an extension of trade; the flow of currency across borders

Money

a unit of account, replaces barter system; store of value, holds value for accumulation; tradeable commodity

Currency

sale legal tender of a country; the national currencies are of no inherent value in another country but can be exchanged for another; countries tend to hold reserves of foreign currencies and gold as back-ups/safety

International finance

the movement of money/currency across state borders

Who determines how much money exists in an economy?

Central banks

Who determines how much a currency is worth (it's exchange rate)?

Supply and demand

Central banks

In the U.S. the CB is the Federal Reserve; central banks can lend money to other banks ONLY, earn interest on loans, and allow deposits, and are political institutions

Central bank functions

Control over monetary policy, including how much money is printed, how much foreign currency is in reserve, how much gold is in reserve, exchange rate management; they also manage fiscal policy (deficits) and discount rate (marginal lending rate)

The end of Bretton Woods

1971; 3 causes: European and Japanese recovery, U.S. overspending on the Vietnam war, U.S. dollars going to buy oil

If the currency is devalued, exports will also be below market value

Violation of economic liberalism principles

Why do exchange rates matter?

currency market trades 4.1 trillion daily; political interference in exchange rates affect prices; currency instability can lead to/exacerbate financial crises

Currency reforms

changing the current pattern of monetary action

Sources of capital for economic development

1. domestic taxation and spending reduction 2. trade and currency policy 3. aid, loans and capital investments

PPP

purchasing power parity (how much does it take to buy the same basket of goods in different currency markets)

Bretton Woods Institutions

IMF, GATT, World Bank

The IMF

International Monetary Fund, goal is to stabilize exchange rates and provide short-term loans

Structural Adjustment Programs (SAPS)

The conditions that the IMF puts on loans to "help" other economies mirror the Washington Consensus

Ways governments get more capital

export goods, borrow from private banks, aid/loans from other countries, FDI, reduce budget deficits

Critiques of SAP

1. "One size fits all" 2. Adjustment costs too high 3. Moral Hazard

Moral hazard

When a state is bailed out, the lesson learned is that the IMF will bail states in trouble out (and not otherwise of how to improve economy)

World Bank

provides loans (often low interest or interest-free) to support specific development projects

ODA(Overseas Development Assistance)/Foreign Aid

loans from one state to another

FDI

private investment, project-based; usually in long term infrastructure/industry projects; provides capital, expertise, jobs; slow moving, outside influence, short-term loans for long-term projects

The Oxfam Model

small GRANTS to individuals or to villages; deliberately "micro"-level development work; very successful, creates long-run growth and less dependence on aid; probably would not work on a large scale, affects relatively very few people

Microfinance

Really small LOANS to individual families/small business people to start a business; super small interest rates; often given out in groups/co-ops + a focus on women, hard to scale

Remittances

money sent back home from workers abroad; can be a major revenue stream at the macro and micro level; can cause brain-drain, doesn't build local institutions or financial knowledge

Development requires cash, which comes from

capital flows, trade, currency regime stability, austerity, and taxation

Human capital also matters

the abilities of the workforce and there is a need for investment in PEOPLE too

Imagine that a domestic interest group protests any regulations that the gov. imposes on business, arguing that govt intervention is the economy will harm the country's prosperity. This group is articulating key themes of which approach?

Economic liberalism

Mercantilism

strong government position due to a finite amount of wealth in the world

Marxism

strong government intervention due to a command economy

fair trade

ethically and sustainably sourced

Which of the following distort the price of a product?

Dumping and quotas, regulations, corruption, and tariffs

Which of the following is most likely to be part of IMF loan conditionality?

Reducing government spending

You are president of imaginary Huskerstan. A decision by your country to join a certain international organization will generate anger by the socialist and environmentalist factions, who will accuse you of harming workers' rights and the environment - the same arguments made by critics of this organization in the real world. What is this organization?

The World Trade Organization

The WTO embodies...

the principle of free trade, which leads to the non-distinguishing of foreign and domestic made goods on the shelf, which leads to cheaper labor/work conditions, etc

ICC

International Criminal Court

Currencies

Have no intrinsic value outside of their home country and are tradeable commodities

The US currently spends

less than 1% of GDP on foreign aid

Foreign aid is a...

political issue!

LDCs can be wary of

western states taking over their land/culture/economy due to their history of colonization which makes them more inclined to accept loans from non-western institutions/states (China)

Development Steps

Capital Accumulation
Rising per Capita Income
Falling Birthrates
Skilled populations
Adoption of new technology
Social Progress

Measuring development

GDP/capita (average "salary")

Gini Coefficient

a measure of income inequality between countries using a 100-point scale, in which 1 represents complete equality and 100 represents the highest possible inequality

Human Development Index

Indicator of level of development for each country, constructed by United Nations, combining income, literacy, education, and life expectancy

Sustainable Development Goals (SDGs)

Goals resulting from a UN-led effort to end extreme poverty by focusing on 17 key indicators, the top five of which are no poverty, zero hunger, good health, quality education, and gender equality, with key benchmarks for 2030.

Three pillars of development

Trade, finance, and "getting the domestic house in order"

austerity measures

severe and rigid restrictions, especially those brought about by difficult economic times; making sure time/money is spent on focusing to develop economy