'A history of economics' - Tentamen 1

Globalisation, international trade theories, governmental interference, suprainternational bodies, grammar and FDI.

What is FDI?

All capital transferred between a non-banking firm and its new and established foreign affiliates. It is distinguished only by the control acquired by a foreign entity. It is a key element in international economic integration because it creates long lasting links between economies.

What are the methods of FDI?

Merging and acquisition. Acquiring 10% of voting stock in a foreign company. Joint vnetures and starting a subsidiary of a domestic firm in a foreign country.

Horizontal FDI

Funds are invested abroad in the same industry

Vertical FDI

Funds are invested within the supply chain, but not directly in the other industry.

Conglomerate FDI

Funds are invested aborad in a completely different industry.

What are the motivations of FDI?

Maximise returns, reduce costs and secure supply, technological/managerial innovation and the urge to dominate.

What are the factors of production?

Land (natural resources), labour, capital and entrepreneurship.

Relative scarcity

The resource is scarce in relation to the public demand. There is a shortage of the resource due to slow distribution or limited supply. The resource exists.

Absolute scarcity

There is not enough of a resource to go around, and this cannot be solved by increasing supply or improving distribution. Demand has little impact; the resource is gone, or nearly gone, and cannot be increased.

Normative statement

It reflects opinions, beliefs, or preference and cannot be tested or validated through empirical evidence.

Positive statement

An objective and fact-based assertion that can be tested and validated through empirical evidence.

Product Possibility Model

A model that factors in scarcity, trade-offs and economic choices. The slope of the curve represents the opportunity cost.

Opportunity cost

The potential benefits that you miss out on when choosing one alternative over another.

Market economy

An economic system managed by individuals or businesses. The economic decisions are taken by the market and the prices/production of products are managed by the law of supply and demand.

Command economy

A system where the economic decisions are taken by the government (such as price, supply, etc.).

The invisible hand

The "invisible hand" is a concept introduced by Adam Smith, which describes how individuals pursuing their own self-interests unintentionally contribute to the overall economic well-being of society. This self-regulating nature of the market leads to efficient allocation of resources without the need for central planning. Demand and supply, as well as equilibrium are its key elements.

What is globalisation?

The speeding up of movements and exchanges of human beings, goods, services, capital, technologies and cultural practices - all over the planet.

The pros of globalisation

Increased trade
Increased competition
Increased labour and capital mobility
Economies of scale

The cons of globalisation

Monopoly power of multinationals (MNC)
Structural unemployment (shift in employment)
Easier to avoid taxes

Free trade

Refers to a situation where the government does not attempt to influence what its citisens can buy from other countries, or what they can produce and sell to another country.

Mercantilism

The nations wealth and power increases by reducing imports and increasing exports. Wealth is static, and gold represents power and wealth. Trade is a zero-sum game.

Absolute Advantage - Adam Smith

A country should produce what they are best in producing. In other words, when a producer can provide products in greater quantity for the same cost, or the same quantity at a lower cost, than its competitors.

Comparative Advantage - David Ricardo

Countries should produce/specialise in products with a lower opportunity cost than other countries. In other words, produce the goods they are efficient in producing and buy goods that is produced less efficiently from other countries.

Challenges in comparative advantage

Developing countries at a disadvantage
Promotes unfair/poor working conditions elsewhere
Can lead to resource depletion
Risk of over-specialisation

Factors Proportion Theory - Hecksher and Ohlin

Factor endowments (land, labour, captal) decides the country’s specialisation. Export products that use abundant & cheap factors of production. Import products that require resource in short supply. E.g., countries that are labour-intensive import products from capital-intensive countries, and vice versa.

International product life cycle - Raymond Vernon

3 stages:
1. New product stage
2. Maturing product stage
3. Standardised product stage

New products are initially produced in the innovating country and exported to other advanced nations. As the product matures and demand grows, production shifts to advanced/developing countries where labour is cheaper (because of the price sensitive market). Eventually, the innovating country imports the product from these developing countries as domestic production might decrease/disappear.

New Trade Theory - Paul Krugman

Via economies of scale, trade can increase the variety of goods and decrease the average cost of those products. Further, the ability to capture economies of scale is an important first-mover advantage.

Economies of scale and network effects impact the international trade patterns. North-North trade is observed: Similar countries trade similar products with each other.

First-mover advantage (New Trade Theory)

Being the first company to enter an industry brings a economic and strategic advantage. In this way, a country may dominate in the export of certain products because it has a home-based firm with a first-mover advantage.

Network effects (Paul Krugman)

The phenomenon where the value of a product or service increases as more people use it.

North-North Trade (New Trade Theory)

North-North trade typically involves the exchange of high-value, technologically advanced goods and services between developed countries.

Agglomeration effect (Paul Krugman)

Refers to the benefits of industrial clusters.

National Competitive Advantage - Michael Porter

Explains why a nation achieves success in a certain industy. Four reasons:
1. Factor endowments/conditions; advanced/basic factors
2. Demand conditions
3. Related and supporting industries
4. Strategy, structure, and rivalry

The role of the government and “chance events” affect these 4 elements.

What are the different types of regional integration?

1. Free trade area (NAFTA)

2. Common market (COMESA)

3. Customs Union

4. Political Union (EU)

NAFTA

North American Trade Agreement, now called: USMCA = The United States-Mexico-Canada Agreement

ASEAN

The Association of Southeast Asian Nations
Three branches:

1. the ASEAN Economic Community

2. the ASEAN Political-Security Community

3. the ASEAN Socio-Cultural Community

APEC

The Asia-Pacific Economic Cooperation

GCC

Gulf Cooperation Council
Trade and social issues

OPEC

Organisation of the Petroleum Exporting Countries

AU

African Union, the divisions:

1. The Assembly of Heads of State and Government

2. The Executive Council

3. The permanent Representative Committees

4. Specialised Technical Committees

5. Peace and Security Council

6. African Union Comission

Artic Council

Supraorganisation

Mercosur

South America

The spaghetti bowl

Refers to the web of overlapping trade agreements.

What is suprainternational bodies?

Organisations that spread beyond the borders of three or more countries, that seeks to promote economic, political or cultural unity.

UN

The United Nations, main bodies are:

1. the General Assembly

2. the Security Council

3. the Economic and Social Council

4. the Trusteeship Council

5. the International Court of Justice

6. the UN Secetariat

WTO

The World Trade Organisation
Objective: to make trade flows smooth, fair and free

Bretton Woods Insitutions

The World Bank and International Monetary Fund (IMF)

IMF

A cooperative institution that seeks to maintain an orderly system of payments and receipts between nations.

The World Bank

A development institution that seeks to promote economic and social progress in developing countries.

Full democracy

Countries where political freedoms and civil liberties are respected, and a supportive political culture exists. The government functions well, with independent and diverse media, effective checks and balances, and an independent judiciary.

Flawed democracy

Countries that have free and fair elections and where basic civil liberties are respected. However, there are some weaknesses in other aspects; problems in governance, infringements in media freedom, underdeveloped political culture and low levels of political participation.

Hybrid regimes

Elections are not fair and free, the government pressures the opposition parties/candidates. The weaknesses are more prevalent than flawed democracy. Corruption, weak civil society, rule of law is weak, and the judiciary is not independent.

Authoritarian regimes

State political pluralism is absent or heavily circumscribed. Elections are not free and fair (if they occur), media is state-owned and there is no independent judiciary. Basically dictatorship, or very close to this.

What are the instruments of trade promotion?

Subsidies, export financing, foreign trade zones (FTZ), special government agencies

What types of tariffs exist?

Export tariff, transit tariff and import tariff.

What are the subcategories of import tariffs?

Ad valorem tariffs: percentage of the stated price
Specific tariff: specific fee for each unit
Compound tariff: combination of both

What is an embargo?

Complete ban on trade (import and exports) in one or more products with a particular country.

What is a quota?

Restriction on the amount of a good that can enter/exit a country during a certain period of time.

What kinds of quotas exist?

Voluntary Export Restriction (VER): exportation quota, at the request of another nation.

Tariff quotas: lower tariff rate for a certain quantity, and a higher tariff rate for quantities that exceeds the quota.

What are the different types of trade restrictions?

Tariffs, quotas, embargoes, local content requirements, administrative delays, currency controls.

What are antidumping rules?

When a company exports a product at a price lower than the cost of production or lower than the price charged in its domestic market.

What do currency controls mean?

The restrictions on convertability of a currency into other currencies (e.g. amount). It is used to limit imports.

What is “local content requirements”?

Laws stipulating that producers in the domestic market must supply a specified amount of a product.

What is a FTZ?

Foreign Trade Zones:
A designated geographic region through which merchandise can pass with lower custom duties (taxes) or fewer customs procedures.

What is subsidies?

Financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks or product price support.

What does export financing mean?

Promoting exports by financing companies export activites. For instance, loans a company otherwise cannot obtain, lower interest rate and loan guarantees.

What is an emerging economy/market?

A country that was once a developing country but has achieved rapid economic growth, modernisation and industrialisation.