Test 2 Study Guide- Notes
Test 2 Study Guide- Notes PSC 204- Dr. Chyzh
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This 9 page Study Guide was uploaded by Erica Kugler on Friday March 27, 2015. The Study Guide belongs to PSC 204- Dr. Chyzh at University of Alabama - Tuscaloosa taught by Dr. Chyzh in Spring2015. Since its upload, it has received 288 views. For similar materials see International Relations in Political Science at University of Alabama - Tuscaloosa.
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Date Created: 03/27/15
Test 2 Study Guide International Trade Trade liberalization free trade Results of free trade gt lower commodity price good for consumer bad for producer 0 The winner is the consumer gt price is less so spend less money 0 The loser is the producer gt price is less so less profit made How to help losers of free trade subsidize import restrictions of foreign goods 0 subsidization reduces the costs of production so the producer benefits 0 import restrictions make consumer buy domestic goods How to get subsidies collective action problem gt easier to mobilize fewer actors o Producers are small in number Consumers are large in number Subsidization policy allows producers to operate and to keep domestic jobs Adam Smith gt Specialization or Division of Labor 0 Divide up production process and have each person specialize in one part of production I Result increase productivity and efficiency need access to newlarger markets Protectionism is harmful gt price of goods increases leads to inefficient industries Liberalism gt free trade specializationdivision of labor Mercantilism gt based on Realism benefit the state at any cost 0 quotautoarkyquot quotselfreliance domestic production of everything gt NO trade Absolute advantage producing a good more efficiently than any other country 0 Absolute advantage belongs to the producer woverall lowest cost per product value Comparative advantage producing a good at a lower opportunity cost than another country 0 Comparative advantage belongs to producer woverall lowest opportunity cost value All countries have a comparative advantage in something but not all countries have an absolute advantage in something Supply and Demand result of changes in the supplydemand of a commodity 0 Increase supply gt price decrease and quantity increases 0 Decrease supply gt price increases and quantity decrease 0 Increase demand gt price increase and quantity increases 0 Decrease demand gt price decrease and quantity decreases Consumer Surplus monetary gains savings by consumers when buying a product 0 Difference bwn what a consumer expected to pay and what was actually paid 0 It is the triangle ABOVE the equilibrium line on a supplydemand graph 0 Size of the Consumer Surplus can change if there is a change in supply or demand Producer Surplus monetary gains profit by the producers 0 Difference bwn what a producer expects to sell an item for and what it actually sells for o It is the triangle BELOW the equilibrium line on the supplydemand graph 0 Size of the Producer Surplus can change if there is a change in supply or demand Tariffs gt type of protectionist policy to help losers of free trade the producers o Produces Dead Weight Loss DWL inefficient production or consumption of an item I represents the efficiency losses to society 0 Causes the price of a commodity to increase above the world price I Quantity demanded decreases but quantity supplied increases 0 Leads to DWL of inefficient consumption due to supply surplus 0 Tax Revenue for the government is a byproduct of adding a tariff o HeckscherOhlin model gt 4 factors that determine comparative advantage 0 4 factors Land Labor unskilled Capital for investment Human capitol skilled labor 0 Countries will export goods that use the factors they have in abundance 0 Countries will import goods that use the factors they are scarce in o Protectionism specific measures to shield domestic producers from imports 0 Trade barriers impediments to importation of foreign goods I Tariff tax on imports levied at the border and paid by the importer I Quota quantity limit on imports I Nontariff barriers regulations targeted at foreign goods 0 Losers of protectionism consumers winners of protectionism domestic producers I Price of imported goods rises so consumers forced to buy domestic goods 0 3 Costs of Protectionism gt consumers pay higher prices redistribution of income DWL I Redistributive effect income is redistributed from domestic consumers to the protected domestic industry 0 3 losers of protectionism gt consumers domestic exporters politicians I Consumers gt have to pay more for the product quotlosequot money I Domestic exporters gt other countries retaliate and levy tariffs on our exporters I Politicians gt upset consumers and exporters bad for elections 0 1850s Britain pushed for more countries to liberalize their trade policies 0 Start of WW1 to end of WW2 international trade relations entered a 30 year crisis 0 Post 45 trade liberalization restarted wUSA as leader in global economic and political affairs 0 2 theories regarding tradepolicy interests StolperSamuelson RicardoViner o StolperSamuelson Theorem gt used to predict which industries to protect or liberalize o Protectionism benefits the scarce domestic factors I Keeps cheap foreign products of same factor out of market 0 Protectionism hurts abundance domestic factors I Prevents domestic products of abundant factor from being sold at cheap price 0 Owners of scarce factor favor protectionism 0 Owners of abundant factor favor free trade 0 RicardoViner Theorem gt asks why whole industries often act together 0 Some factors of production are industry specific and hard to convert to other uses I High incentive to keep those industries productive and safeguarded from competition since the workersmachinery have no alternative work option 0 Workers interests flows from hisher sector of economic activity to the whole economy 0 Domestic institutions that reward narrow interests will be more protectionist 0 Labor abundant labor use free trade scarce labor use protectionism 0 Local vs national interests local favors protectionism national favors free trade 0 Trade makes wages and profits similar across countries 0 quotfactor price equalization prices of the factors of production tend to equalize 0 Free trade decreases the wages of domestic workers and increases the wages of foreign workers 0 Govts consider other states likely tradepolicy responses when making their own tradepolicies 0 international trade bargaining problems Prisoner s Dilemma impediment to cooperation 0 Both sides benefit by reducing trade barriers but competition leads to noncooperation o quotdumpingquot on the market selling goods below true cost of production to drive out competition 0 Dump consumers buy cheaper foreign good hurts domestic producers 0 Factors facilitating cooperation few actors hegemon iteration linkage internat l institutions 0 Small number of traders easy for governments to monitor each other s behavior 0 Hegemon can ensure trade cooperation o Iteration repeated interaction provides incentives to avoid cheating 0 Link policy issues to trade cooperation 0 International institutions gt GATT which became the WTO 0 quotMost Favored Nation MFN status 0 Status giving a country trade privilegesrights equal to other states wMNF status International Finance 0 International Finance Relations the borrowing and lending of money bwn states or bwn states and private financial institutions 0 Creditor entity that money is owed to money loaner o Debtor entity that owes money to someone or something else moneyloan taker 0 Interest rates high IR gt hurts domestic loan takers benefits foreign investors o 2 categories of foreign investment portfolio and foreign direct investment FDI 0 Portfolio investment PI claim part of an income no investment management I Ex shares or stock in a company I Sovereign lending loan by private financial institutions to sovereign govt 0 Foreign direct investment FDI a company operates facilities in other countries 0 PI is more mobile bc it s easier to trade and exchange stock than a whole company 0 Overseas investments have one goal make money gt move capital to high profit areas 0 According to HeckscherOhlin model capital in poor countries is scarce so price is high 0 In the same way investment can be thought of in terms of supply and price with capital being the supply and interest rate being the price I Low supply capital high price interest rate gt good for investors 0 Capital flow reality gt 90 bwn wealthy states 10 bwn wealthy and poor states 0 Tensions can arise over loan payback bwn the investor and the country they invest in o Concessional Finance loans lent at low IRs to countries at risk of default 0 Concessional finance is a form of financial aid 0 Debtor states prefer grants S not paid back rather than loans S paid back 0 Governments often impose unpopular measures in an attempt to payoff their loans 0 unpopular measures raise taxes limit govt spending limit consumer spending I Austerity measures name for the collection of unpopular measures 0 worst case scenario of debt repayment difficulties default 0 defaulting on a loan failing to meet loan agreements about repayment o bailout way to help countries that are on the verge of defaulting on loans 0 bailout providing monetary aid money to help countries pay off their loans 0 Possibility of default is problem for borrowers gt must assure loaner you ll pay the loan 0 Creditor can use predefault threats to make debtors solve their issue before defaulting o DebtorCreditor Interactions are characterized by incomplete information o Debtor withholds info on repayment ability to get concessions on loan payback 0 Countries wdebt can use IMF to negotiate economic policy programs and avoid default 0 IMF member countries contribute funds to an aid pool Those funds are then allocated out to different countries that are in financial distress o IMF can certify a debtor country as being in compliance wIMF norms o certification makes that country more attractive to future creditors 0 Some feel that the IMF reflects geopolitical concerns of the US since the US is its largest and most influential member donates the most S to the IMF aid pool 0 Overall trend being friends wUS get financial benefits from the IMF o 2 criticism of IMF violates sovereignty by dictating economic policies hurts poor states 0 US 2008 financial crash 0 Excessive government spending and borrowing banks lent out too much 0 Government intervention 1 tril bailout package to financial industry 0 Multinational corporations MNCs operate facilities overseas o Corps go multinational to gain access in 1 local markets and 2 local resources 0 Criticisms of MNCs gt outsource jobs avoid regulations relaxed ethics standards 0 Contradicts the notion of corporate responsibility 0 MNCs bring skills and investment capital to the host country gt boosts the economy 0 MNCs prefer to invest in more democratic regimes 0 1960s LDC governments began to restrict and regulate MNCs 0 1980s MNCs regained popularity due to LDC govt s increased need for capital 0 FDI uses bilateral investment treaties to protect each actors state company investments 0 1800s early 1900s high international labor migration rates 0 Applying the HeckscherOhlin theorem to international migration of workers 0 inflow of unskilled labor from abroad will reduce the wages of local unskilled workers I why Think about the SupplyDemand graph with wages being price 0 Benefits of immigration gt employers profit from lower wages decreased cost of production International Monetary Relations 0 18601930 Gold Standard gt currencies backed by gold moneygold exchanged at fixed rate 0 1930s WW2 currencies off the gold standard 0 WW2 1973 Bretton Woods system gt currencies rebacked to gold 0 Many currencies became pegged to the US dollar which was backed to gold 0 1973 now paper currency gt currency backed by faith in what the government says it s worth 0 3 paths that governments can choose in regards to monetary relations 1 Give up their own currency and adopt the currency of another country 2 Peg value of one currency to currency of another country 3 Use own currency wits value determined by the supply and demand of the market 0 Exchange rates price of a national currency relative to other national currencies o The price at which one currency is exchanged for another 0 Exchange rates can change gt appreciate or depreciate a country s currency o If the value of the US S goes up it appreciates gt S grows stronger o If the value of the US S goes down it depreciates devalues gt S growers weaker 0 Supply and demand of currency determines the exchange rates and thus the currency value 0 Governments can raiselower their interest rates as part of their monetary policy 0 Higher interest rate and exchange rates appreciation of a currency 0 Lower interest rates and exchange rates depreciation of a currency 0 Lowering the interest rate Depreciation Policy weaken the currency 0 People take out loans gt low IRs make it easier for people to borrow money 0 Consumersbusinesses spend more 0 Money supply increases economy grows unemployment decreases o demand by foreigners for US S decreases I People want to exchange dollar for another currency to invest o Depreciation leads to an increase in exports and decrease in imports o Eventually inflation occurs gt combat inflation by appreciating the currency 0 Raising the interest rate Appreciation Policy strengthen the currency 0 People take out less loans gt higher IRs make it harder to borrow money 0 Consumers and businesses spend less 0 Money supply decreases economy shrinks unemployment increases 0 demand by foreigners for USS increases I People want to invest in US and have to exchange their currency for the dollar 0 decrease in exports and increase in imports o Eventually deflation occurs gt combat deflation govts depreciate the currency 0 Depreciation policies used 0 To stimulate the economy after an economic downturn o For politicians to gain favor with the public right before elections 0 Appreciation policies would be used to combat inflation caused by depreciation policies 0 Appreciation of US dollar 0 Winners foreign investors foreign exporters US tourists o Losers domestic consumers and businesses foreign tourists o Depreciation of US dollar 0 Winners domestic consumers and businesses foreign tourists o Losers foreign investors foreign exporters US tourists o Fixed exchange rate government promises to keep the national currency at a constant value 0 Also known as pegging a currency 0 Countries that trade a lot use fixed rates 0 Developing countries operate on a fixed exchange rate to avoid financial risks 0 Floating exchange rate currency value fluctuates freely o Floating rates is more risky because a currencies value changes from day to day 0 Countries with strong economies developed countries use floating rates Adjustable peg government fixes its currency value for long periods of time but allows for adjustments to the currency value if necessary such as in econ downturns o Bretton Wood system of 19451973 gt fixed rate but allowed instances of floating Fixed exchange rates provide tradeinvestment stability Fixed rates reduce a govt s ability to control its own monetary policies Floating exchange rates offer offer monetary policy freedom gt gov t can change currency value Consumers and businesses wdomestic economic activity favor a floating rate to earn profit People who invest abroad favor a fixed exchange rate gt reduce any chance of investment risks All domestic actors favor a currency policy that ensures stable prices International monetary regime governs relations among currencies 0 An international monetary regime is a public good but it has to overcome freeriding I Govts want to benefit from currency regulations but don t want to provide resources to help with regulation 0 2 features I Must identify currencies as fixed floating or mixed I Must establish a common base or benchmark for currency comparison 0 commodity standards 0 commoditybacked paper standard 0 national paper currency standard Competition and Prisoner s Dilemma gt can lead to devaluation of currencies 0 Countries have an incentive to depreciate to make it more competitive on world market Gold Standard Stability of system was tied to Great Britain France and Germany US on gold standard dollar appreciated so exports less competitive hurt farmersexporters Wizard of 02 contains elements of US goldsilver debate PostWorld Great Depression govts tried floating rates based on paper international currencies PostWW2 Great Britain pushed for Bretton Woods monetary system gt fixed and floating rates 0 Bretton Woods tied many currencies to the US S which was pegged to gold Later the IMF was created to oversee currency relations 1970s US went from gold standard to floating currency monetary policy freedom Today there are few major currencies in global market and they use a floating rate system Currency crises result from governments failing to credibly commit to a fixed exchange rate The typical currency crisis cycle 0 Government faces pressure to devalue o This scares investors who sell off their currencies 0 Government eventually devalues o It is more difficult for citizens to pay off foreign debts o This increases defaults and banks collapse triggering a recession The currency crisis can spread through contagion contagion of uncertainty 0 Uncertainty about a country s currency value can feed uncertainties about others Cases of currency collapse or near collapse 0 Europe I Many countries pegged their currency to the Deutsche mark and when the German Central Bank increased interest rates it threatened to throw other European nations into recession countries eventually devalue their currency I Pegging currencies to the Deutsche mark wasn t working so European Central Bank established and Euro was introduced in 2002 0 Mexico I Peso pegged to US S but forced in 94 to devalue the peso causing a recession 0 East Asia I 1997 East Asian economies grew inflation was high and banks gained debt I Led to currency speculation as investors feared imminent currency value drop 0 Caused currencies to devalue and economies to collapse 0 Major economic powers have common interest in containing currency crises I Economic stability Public good nonrivalrous nonexclusionary o IMF and other institutions support governments in crisis via financial aid Development Wealth and Poverty of Nations 0 3 factors for lack of development geography domestic factors politics domestic institutions 0 Three geographic disadvantages to development landlocked diseaseridden desolate 0 Climate and development tropical regions are usually poor temperate regions are usually rich 0 Geography is important but it is not deterministic of a country s development 0 Wealth is concentrated in countries that are the most developed 0 Divide bwn the Northern and Southern Hemispheres Northern contains most of global wealth 0 Domestic factors have most influence on a country s economic growth and development 0 Government policies can impact economic growth by either encouraging it or impeding it 0 Encourage provide public goods ex infrastructure things necessary for social activity I Three types of infrastructure physical roads economic banks social edu o Governments must do two things protect and provide 0 Protect property rights ensure the security of property against seizure 0 Provide public goods through credible commitments o Hindrances to gov tbacked development lack of expertise and resources conflicting interests 0 Groups wmost access to policymakers are able to influence policy decisions 0 Collective action problem hard to mobilize large groups 0 Interests of social majority are harder to organize than narrow interests of minority I majorityminority in terms of support of an interest or policy 0 Domestic institutions can influence development 0 Institutions influence a group s ability to press for implementation of certain interests 0 Representative institutions favor broad interests over narrow interests 0 These institutions are more representative of interests of majority 0 Democratic political institutions provide more public goods than authoritarian institutions 0 Resource endowments can produce groups and institutions with contradicting interests 0 Ex contradicting interests exploit or conserve a resource resource curse states wnatural resources usually have stuntedno development 0 Countries wabundant resources are usually ruled by a small group of political elites that make it hard for the public to have control over how those resources are managed I Elites use the resources for their own interests and to get money corruption 0 States wa natural resource have little incentive to develop other industries All countries benefit from international economic systems but problem is that all states want the benefits and none want to provide resources for sustaining those systems Efforts of colonization depend on similarity of interests of the colonized and the colonial power o If their interests were similar then the infrastructure spurred development o If their interests were dissimilar they engaged in predatory policies hurt development Areas of colonizer settlement made the colonizers more willing to develop those regions Areas wo colonizer settlement meant the colonizer had little incentive to develop those areas Resource exploitationextraction by the colonizer was bad for development in the colony Theory of settler mortality and economic development 0 Areas of high mortality rates of settlers underdeveloped regions today LDCs have deteriorating terms of trade ToT relations bwn export and import prices 0 LDCs export primary products agriculture raw materials gt cheap prices fluctuate 0 Advanced economies export manufactured goods gt prices fixed by oligopolistic firms I Oligopolistic market dominated by a few economically elite firms 0 LDCs get less for what they sell and they pay more for what they buy net loss LDCs are politically weak against developed states so developed states control trade interactions 0 Developed countries can gain easy access to LDC markets while LDCs have harder time gaining access to markets of developed countries 0 Developed countries can impose trade protection barriers against cheap foreign products to protect their own industries hurts the LDC exporter I Ex Agricultural subsidies to US cotton farmers impacts cotton producers in LDCs o Subsidy allows US farmers to produce more cotton which increases the supply of cotton and lowers the price of cotton worldwide This price decrease is bad for cotton producers in LDCs as they will get less profit International institutions IMF World Bank tend to promote interests of wealthy countries Importsubstitution industrialization S gt policies to encourage domestic development 0 Goal reduce a countries dependence on imports gain economic selfsufficiency 0 Goal have states move away from primary production and focus on industry 0 Goal Produce for domestic market rather than for export o S tools trade barriers gov t subsidies gov t provision of industrial services 0 Used in mainly in Latin America Exportoriented industrialization EOI gt policies to increase production for export o Encouraged producers to produce goods for foreign consumers 0 Tools of EOI Tax breaks lowcost loans and weak currencies 0 Used mainly East Asian think about South Korea s development S countries hurt more by 80s debt crisis than EOI countries 0 To get debt reconstruction LDCs adopted Washington consensus proglobalization I Goal switch from economic nationalism to economic openness 0 Trade liberalization gt remove trade barriers to importsexports o Privatization gt sell off gov t owned enterprises to private investors 0 Fiscal conservatism gt avoid future debt and high inflation o Openness gt allow foreign investment LDCs attempted to counter global power imbalance bwn developed and developing countries 0 NonAligned Movement group of countries not aligned wUS or USSR during Cold War 0 G77 gt coalition of developing countries in UN 0 New International Economic Order gt change internatl economy s management to be more favorable to poor countries LDCs have influenced commodity cartels association of producers who control a good s price 0 Ex Organization of Petroleum Exporting Countries OPEC Foreign aid won t help underdevelopment aid values are small aid misses underlying problem Growth of globalization Globalization of LDCs has problems 0 Contagion of crises gt currency crisis of one country and can affect many other countries 0 Winners and Losers gt globalization has benefits market expansion and costs crises o Increases inequality gt unequal economic growth internal divide bwn poor and rich ppl
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