Polisci110G Midterm notes extended
Polisci110G Midterm notes extended Polisci110G
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This 9 page Study Guide was uploaded by Erica Evans on Wednesday February 3, 2016. The Study Guide belongs to Polisci110G at Stanford University taught by Kenneth Scheve in Fall 2016. Since its upload, it has received 49 views. For similar materials see Governing the Global Economy in Political Science at Stanford University.
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Polisci110G Midterm Study Guide: Important terms 1/31/2016 Terms: 1. Trade integration: the unification of economic policies between different states through the partial or full abolition of tariff and non-‐tariff restrictions on trade Quantity measures of trade integration: import and export totals. Relative magnitude: imports/GDP, exports/GDP, total/GDP à normalized by the size of the economy. Price measures: the relative prices of identical goods, the cost of cross-‐border transactions compared to domestic transactions etc. Policy measures: specific tariffs, ad valorem tariffs, non-‐tariff barriers, import quotas, limitations on imports, export restraints, export subsidies, local content requirements. Absolute advantage: the ability of a party (an individual, or firm, or country) to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources. Comparative advantage: an agent has a comparative advantage over another in producing a particular good if they can produce that good at a lower relative opportunity cost. Opportunity cost: the loss of potential gain from other alternatives when one alternative is chosen Consumption indifference curves: a graph showing different bundles of goods between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another. The line is curved because when you get a lot of one thing, the other good becomes more valuable. One can equivalently refer to each point on the indifference curve as rendering the same level of happiness for the consumer. Production possibilities frontier: A curve depicting all maximum output possibilities for two or more goods given a set of inputs (resources, labor, etc.) The Ricardian Model of Trade: There are two countries producing two goods using one factor of production, usually labor. The model is a general equilibrium model in which all markets are perfectly competitive Economies of Scale: the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output. 2. Static gains from trade: increase in social welfare as a result of maximized national output due to optimum utilization of country's factor endowments or resources Dynamic gains from trade: benefits that accelerate economic growth of the participating countries. Or in other words, the economy growing more over time. Infant industries: a new industry, which in its early stages experiences relative difficulty or is absolutely incapable in competing with established competitors abroad à a reason for trade protection. Spillover effects: economic events in one context that occur because of something else in a seemingly unrelated context. For example, having a strong computer industry might have other effects that are beneficial: like more innovation. So a country might choose to protect the computer industry. Strategic trade policy: protection can alter terms of competition to favor domestic over foreign firms and shift excess returns in monopolistic markets from foreign to domestic firms. Consumer surplus: the difference between what people pay and with they would be willing to pay. The area below demand curve and above the price line. Producer surplus: the difference between what they would be willing to sell it for and the price. (The opposite of consumer surplus – when one goes up, the other goes down). Majoritarian model: In the case that there is democracy, what benefits the majority will dictate policy. Prisoner’s dilemma: A model that shows why two parties might not cooperate even when it is in both of their best interest to do so, because there are incentives for both to defect and let the other person pay the entire cost of the work. Nash equilibrium: A solution to the prisoner’s dilemma in which each player is knows the equilibrium strategies of the other players, and no player has anything to gain by changing only their own strategy. For the prisoner’s dilemma, the Nash equilibrium is no cooperation. Collective action: When a group has a common goal to reach a certain objective. Asymmetry within groups: If some firms in an industry are big, and some are small, this is an advantage for policy lobbying because there is a focal point. The large firm has a greater incentive to provide the group good and also has the power to do it themselves. Their benefit is disproportional. 3. Factor of Production: labor, capital, land, anything that goes into producing a good. Sector of Production: basically means industry, like the automobile sector. Factor Mobility: How easy it is for factors of production to move from one sector of the economy to the other. Factor intensiveness of production: Are skilled or unskilled workers used more? Ex: for shoes, unskilled workers are used more than for computers. (Relative) factor abundance: Some countries have more factors than others. Some countries have more land. Heckscher-‐Ohlin Model: With two goods and two factors, each country will export the good that uses intensively the factor of production it has in abundance and will import the other good. Stolpher-‐Samuelson Model: Based on H-‐O model: a rise in the relative price of a good will lead to a rise in the return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the return to the other factor. Will skilled or unskilled workers benefit? Specific-‐factors Model: Focuses on industries rather than factors. So when the price of computers goes up, the winners are everyone in the computer industry. When the price of shoes goes down, the losers are everyone in the shoe industry. (No separation between skilled and unskilled workers.) RTAA 1934: Mandated that the president negotiate reciprocal trade agreements with their countries that reduce tariffs up to 50% in exchange for access to foreign markets. Reciprocity: the granting of mutual concessions in tariff rates, quotas, or other commercial restrictions. 4. American Internationalism: Since President Wilson, the U.S. had been more open to working with international institutions, but we still had protectionist trade policies for a long time. Smoot-‐Hawley Tariff: A tariff act in 1930 that raised U.S. tariffs on over 20,000 imported goods to record levels à an example of U.S. protectionism. International Trade Organization: This never existed but was an intellectual precursor of the World Trade Organization (WTO). During and after World War II, extensive efforts were made to bring it into being . GATT: Stands for General Agreements on Tariffs and Trade. This was a set of regulations for trade that was signed in 1947. It establishes that free trade is good. It also establishes reciprocity and nondiscrimination. Most favored nation: When you have to offer a trading partner as good or better trade agreement benefits that you offer other countries. WTO: More of an institutional version of the GATT -‐-‐ created during 1986-‐1994 Uruguay negotiating round. Included rules for dispute settlement. Also expanded the regulations to include agriculture, clothing and textiles, which had not been included before. WTO negotiating rounds: Uruguay round à established the WTO, extended to other goods, countries adopted a more holistic approach to trade barriers, reduced tariffs. Doha Round à ongoing, focusing on trade relations to help developing countries in particular. Dispute settlement: Part of the WTO – a kind of a court for when people cheat on trade agreements, a way to hold people accountable. International externalities: there could be externalities that suggest problems with trade protection aren’t just about what happens within one economy, but the way countries interact effects the outcome. Indefinite repeated interaction: International institutions help support cooperation by providing a mechanism for two parties to work together repeatedly and build trust. Tit-‐for-‐tat strategy: When one country responds to another’s actions with the same action – a pattern of mutual punishment for bad behavior. Beggar-‐thy-‐neighbor policy: an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries. Political hold-‐up: A situation where two parties may be able to work most efficiently by cooperating, but refrain from doing so due to concerns that they may give the other party increased bargaining power. With bargaining power, one country can threaten another to impose their political will. 6. Multi-‐national Enterprises: When a company has management or production facilities in at least 2 countries. These firms have to have managerial controls, decision-‐making power or influence in the foreign country. It doesn’t just mean owning a share somewhere. Foreign Direct Investment: when one firm builds a new plant or factory, or purchases one in a separate country. (Distinct from portfolio investment, which is a passive holding). Locational advantages: Increased efficiency based on local resources, markets or infrastructure. Intangible assets: Value derived from knowledge: the “know-‐how” or the management expertise. This is difficult to sell or license because no one will buy it until they know what it is, and as soon as they know what it is, they don’t need to pay for it anymore. à This is a reason for horizontal integration. Horizontal integration: When a firm duplicates its activities across the world. Vertical integration: If it is more efficient for me to buy parts from Cambodia, assemble them in Mexico and sell them in my home market -‐-‐ at every stage of production, you want to own the plants. These intermediate inputs lead to vertical integration. Specific assets: When a factory needs to be built to supply a specific firm. It has no value unless it sells to that firm in particular because it makes something so specific. It is difficult to write an enforced long-‐term contract with that firm though because world prices change and there are lots of other contingencies. Either side could default on the promise. Vertical integration eliminates the problem of specific assets by internalizing this in the firm. Alternative development theory: Some people argue that FDI is just bad for development. Even though it is investment, it is dependent investment and the profits go to the firm. Corporate income tax: The most important tax for attracting FDI. A country can use this as a bargaining tool to draw more firms to invest there. 7. 4 core labor rights: 1) Elimination of forced labor 2) No discrimination based on race, gender ethnicity or religion 3) Elimination of worst forms of child labor (controversial point because some see household productivity as a necessary stage of economic development) 4) Freedom of association and collective bargaining Race to the bottom idea: Everyone will continually lower their standards and their prices to attract investment until the value reaches zero. Subcontracting/outsourcing: Instead of direct ownership, a firm can outsource so that the brand name is not on the building and they are not held accountable for poor labor standards or other inadequacies. Directly owned: If there is direct ownership in a foreign country, we expect that good labor practices from the home country will spill over. There will be greater ease of monitoring and labor standards will improve. Market-‐seeking horizontal FDI: If a company is duplicating its operations abroad in order to seek new markets, this probably has no effect on labor standards. Efficiency-‐seeking vertical FDI: If a company is seeking to move operations oversees to make production more efficient, this might have a negative influence on labor resulting in abuses. Political risk and FDI: If there is a lack of steady legal environment or relationship of trust, countries investing in another never know if those investments will get expropriated (taken away) à this is a big deterrent for FDI. 8. Hegemonic Powers: Free trade is a global public good that requires sacrifices on the part of states in the world -‐-‐ so this is a collective action problem. But if there’s an asymmetric distribution of firms, we expect that industry to do better at attaining that collective good (see Mancur Olsen). The “hegemonic power” will play the main role in providing the good/ pushing for free trade policies. Hegemonic Stability Theory: (See Krasner) Trade Sanctions: Actions taken by countries o withhold trade privileges from others for political reasons. Bi-‐lateral sanctions: Sanctions from one country against another. Multi-‐lateral sanctions: When you get a whole coalition of countries to impose sanctions. Studies/Articles: Frankel and Romer 1999: They distinguish between trade that is a function of government policies, vs. trade as a result of geography. They look at trade caused by geography and find that a 1% increase in trade is associated with 2% increase in per capita income. Rodriguez and Rodrik 2001: Criticism for Frankel and Romer: geography may be correlated with higher incomes, but maybe not through trade. Climate and terrain and other factors may affect trade. Another point: trade that is geographically determined may cause growth, but policy-‐spurred trade might not induce growth. Mancur Olson’s Logic of Collective action: The size of group is important. In a large group, individuals feel less responsibility to cooperate. He calls these large groups ‘latent’ Example: the unemployed do not organize very often. They are large and dispersed. Large group anonymity – it’s difficult for them to forge a group identity. Groups may enforce some kind of punishment to generate incentive. In large groups it is hard to punish, takes more effort than it is worth. Small groups: more identity, more decisive, easy to punish. Small groups have a better chance. Asymmetry within groups matters. If some firms in an industry are big, and some are small, this is an advantage. There is a focal point. The large member has such an incentive to provide the group good, and have the power to do it themselves. Their benefit is disproportional. By-‐products: selective incentives to members that contribute may induce contributions. Alt and Giligan: (1994) Compares the Stolper Samuelson and Ricardo Viner Theories. • Excludability: you can ensure that only the people who fight for the good, enjoy the benefits (not true for political lobbying). • Unexcludability: leads to the free rider problem. • 3 Main factors to consider: 1) institutions (majoritarian vs. non-‐majoritarian model) 2) collective action, 3) economic stakes (mobile factors vs. specific factors) • The Stolper-‐Samuelson model requires collective action costs to be low. • The Specific Factors model makes more sense when there are varying degrees of collective action costs. Maggi and Rodriguez-‐Clare: lobbies pay governments of small countries for inefficiencies that protection causes in the short run, but they don’t get rewarded for over investment in uncompetitive industries. Government can be made better off by ending the lobbying process. Krasner (1976): (1976): Argument: Structure of international trading system follows distribution of potential power among states. • What do states want? à Aggregate national income. • Free trade exposes a county’s economies to international shocks (a negative, but this matters for some countries more than others) • Small states will be more susceptible to international shocks than large states • Developing countries have more adjustment costs. B/c developed countries have more mobile factors, makes them able to change economic activities at a lower cost. • Political power is the relative cost of closure. Suppose we have a liberal trade regime – whose interests are most threatened? à They have the least political power. So large states have more political power. • Reason: effects on social stability are bigger in small states and developing countries. • Economic growth is a positive for small countries – for large countries it might be good early and not as good later. • Krasner identifies 5 main historical periods: • 1) Increasing openness 1820-‐1979 (UK hegemony) • 2) Modest closure 1879-‐1900 (economic growth Germany and U.K. etc.) • 3) Greater openness 1900-‐1913 (all the things we just said are still true… so this doesn't work as well) • 4) Closure 1919-‐1939 (a problem b/c after WWI, the U.S. is an economic hegemon and military hegemon… Krasner does a revision. Says there were too many vested interests in the U.S. to open trade. Some things in the world economy can’t be explained because there are other domestic factors. This institutional “stickiness” is another factor à there has to be something big that shakes the system to force change) • 5) Great openness 1945-‐1970 • Periods 1,2 and 5 are exactly what Krasner would expect Gowa and Mansfield: Think about the prisoner’s dilemma. If trading relations in general are set up this way, trading with allies and adversaries changes how difficult it is to solve this problem. You have to consider economic externalities but also security externalities. • Trade and investment are used to achieve national security objectives à trade is linked to prosperity and a richer ally is better than a poor one. • Both countries will have an incentive to defect on the agreement • But when this dilemma is repeated they use “grim trigger strategy” • They will start by cooperating and keep doing so as long as the other one does not defect, but if they do defect, then there will be no more cooperation ever. • Think about how this game changes if you care about their payoffs a.k.a. They are an ally: How much you care about the future is smaller if it’s an ally. • Sometimes politicians and voters don’t really care about the future à when you trade with an ally, you don’t have to worry about the future as much. This condition is more easily satisfied. • But when you trade with an adversary, you care much more about what happens in the future – are they getting stronger economically? (bad). • This is relatively more important in a bi-‐polar as opposed to a multi-‐polar world. In a bi-‐polar world your chances of not being an ally in the future is less, because you don’t have as many choices: just us and them, and you are not likely to flip-‐flop like that. But in a multi-‐polar world where alliances are really dynamic, this is more applicable/important. • Example: states trade more with their allies during the cold war. Irwin: Details the creation of GATT and its evolution to become WTO. He concludes that he WTO is still not much more powerful than the GATT because it still relies mainly on voluntary cooperation. Mearsheimer: Claims that institutions do not have an effect on state behavior. He compares and contrasts institutionalism and realism. • Institutionalism: institutions can govern governments. Institutions are in a state’s best interest. Institutions provide institutional iteration (repeated interactions), increased information, issue linkages, and reduced transaction costs • Realism: states are unitary rational actors and they compete for power. There is anarchy in the international system. The military is important for rd survival. Cooperation is difficult because there is no 3 party enforcement for cheating. • Institutions reflect the distribution of power in the whole system. Institutions are spurious.
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