Exam 2 International Relations

International Political Economy

Specialization

suggests a division of labor where different segments of society focus on different economic activities.

Comparative Advantage

When a firm or nation produces a good more efficiently than other goods.

Absolute Advantage

The ability for a firm or nation to produce more of a good than other nations and firms.

The Heckscher-Ohlin Trade Theory 

suggests that a country will export goods that make intensive use of the resources the country has in abundance and import goods that make intensive use of the resources in which the country is scarce. 

Protectionism

The use of specific measures to shield domestic producers from the competition of imports.

Trade barriers

impediments to the importation of foreign goods. 

Tariff

a tax on imports levied at the border and paid by the importer.

Quota

limits on the quantity of a foreign good that can be sold domestically.

Nontariff barriers

regulations targeted at foreign goods. 

Stolper-Samuelson Theorem

Protectionism benefits the scarce factors of production, thus domestic groups with the scarce factors of production will want to avoid trade competition and push for protectionism.

Ricardo-Viner Model

Industries that face stiff import competition will favor protectionism.

Trade War 

occurs when State A imposes tariffs on goods from State B and State B retaliates with tariffs on goods from State A.

General Agreement on Tariffs and Trade (GATT)

First global trade institution member committed to reduce trade barriers.

World Trade Organization (WTO)

Succeeded GATT, added more structure, and oversees trade disputes.

Dispute Settlement Body

Makes rulings on alleged rule violations.

Information

crucial in trade negotiations because many agreements fail due to fears about unseen behavior.

Smaller numbers

make the monitoring and enforcement of trade agreements easier. 

Repeated interactions

can deter cheating and help trade cooperation. Governments may fear the discontinuation of future trade benefits.

Linking issues

can facilitate trade cooperation by allowing governments to give concessions in one area for concessions in another. For example: Steel for apparel or even trade for military cooperation.

International Finance

involves the flow of capital across countries.

Portfolio Investments

They give the investor a claim on some return, but no role in managing the investment. They can be loans, stocks, and bonds, or sovereign lending (loans to governments).

Foreign Direct Investments (FDI)

Made by multinational corporations that own and control facilities in another country. 

Default

When a debtor fails to make payments on a debt

Austerity

The implementation of policies that cut government spending, increase taxes, interest rates, and cut wages. These policies can result in recessions or even depressions

International Monetary Fund (IMF)

The international institution that oversees many aspects of international financial relations. 

Concessional Finance

Given at below-market interest rates, or even with no interest. Often overseen by the World Bank.

Multinational Corporations (MNCs)

Enterprises that control facilities overseas.

Bilateral Investment Treaties (BITs)

Agreements between two countries about the conditions for private investment across borders. 

Exchange Rate

The price of a national currency relative to other national currencies.

Appreciate

When a currency increases in value against another currency.

Depreciate

When a currency decreases in value against another currency. 

Consumers

prefer a strong exchange rate because it allows them to buy more of the world’s goods.

Producers

prefer a weak exchange rate because it makes their goods relatively more affordable.

Monetary Policy

Used by governments to affect macroeconomic conditions (unemployment, inflation, economic growth), and it often involves the manipulation of interest rates. 

Increasing interest rates

tend to make a currency more valuable.

Lowering interest rates

make a currency less valuable.

Fixed exchange rate

the government keeps the currency at a constant value in terms of another currency or commodity. Currency stability but no ability to have own monetary policy.

Floating exchange rate

Where a currency’s value is allowed to fluctuate in response to supply and demand. Control over monetary policy but international trade and investment is riskier.  

Domestic actors with international economic activities

have an interest in the stability of a fixed exchange rate.

Domestic actors with domestic economic activities

favor the freedom of a floating exchange rate.

International monetary regimes

A formal or informal arrangement that is widely accepted to govern the relations among currencies. They have two key features: 1. clarify whether currency values are expected to be fixed or floating (mixed) 2. Establish whether there exists a common base to which currencies can be compared. 

The gold standarc

From the 1870s to 1914 countries tied their currencies to gold.

The Bretton Woods system

From 1945 to 1973, the USD was tied to gold at a rate of $35 an ounce. Other currencies were tied to the dollar but could make occasional adjustments.

Today’s international monetary system

Is based on floating exchange rates among a few major currencies (US, EU, Japan, and Great Britain) 

Currency Crises

They occur when actors begin to fear that a government cannot maintain an exchange rate. These fears lead foreign and domestic investors to sell the currency, which drops its value. Debt rises and recession typically follows.

Economic measures of development:

Per capita income, economic growth, and distribution of income.

Quality of life measures of development:

Life expectancy, infant mortality, literacy, nourishment, access to clean water and sanitation. 

Less Developed Countries (LDCs)

Countries that have a relatively low level of economic development.

Infrastructure

Physical (roads, airports, ports, etc.), Economic (financial and monetary systems, etc.), and Social (public health, education, etc.)

Democracy vs. Non-democracy 

Democracies provide more public goods, and factors that promote democracies are key to economic development. Democracies facilitate/accelerate development.

The Resource Curse

argues the following: countries with rich natural resources have little incentive to encourage other productive activities; in contrast, countries with few natural resources must implement policies that will make a country more productive (build an infrastructure that develops human capital).

Colonialism

Many colonizers created institutions favorable to resource extraction but not development. Some question the impact of colonialism because many LDCs have been independent for a long time, and many countries that have never been colonized are underdeveloped.

Primary products

sold by LDCs, they are agriculture and raw materials. 

Bias of international institutions

Present institutions were established by developed countries and therefore prioritize their interests.

Import Substituting Industrialization (ISI)

A set of policies adopted by some LDCs in the 1930s. These policies include: Trade barriers to protect domestic manufacturers, tax credits, loans and subsidies to industries, government provisions of basic industrial services.

EOI

Countries encouraged manufacturers to produce goods for foreign (especially US) consumers through tax breaks, loans, and weakening the currency. 

Washington Consensus

A set of policies that LDCs were pressured to accept in order to receive loans from the IMF and World Bank. The policies include trade liberalization, privatization, lower government spending, and openness to foreign investment.

Non-Aligned

One of the first attempts at addressing the bias against LDCs. Initiated by LDCs across the globe in 1961, meetings every few years, avoid alliances with US and USSR, oppose imperialism, colonialism, and intervention.

Group 77

A coalition formed in the UN in 1964 no consists of 135 LDCs. Proposed the New International Economic Order.

New International Economic Order

Proposed restricting the rights of foreign investors in LDCs, revising trade agreements to favor products of LDCs, Increasing LDCs influence in international institutions.

Commodity Cartels

Groups of LDCs that try to increse the prices of their goods. Most succesful one is OPEC.

Foreign Aid 

Development is unlikely to spur from foreign aid because it is small, unpopular in the developed world, and not usually given to address poverty. Usually, it is given for geopolitical or military reasons.