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ASU / Political Science / GAP 160 / Change occurs rarely; only when major powers desire it.

Change occurs rarely; only when major powers desire it.

Change occurs rarely; only when major powers desire it.


School: Arizona State University
Department: Political Science
Course: Global Politics
Professor: Reed wood
Term: Fall 2016
Tags: POS160, political science, global, Politics, study, Studyguide, and notes
Cost: 50
Name: POS160 Exam 2 Study Guide
Description: This guide covers the Political economy, regarding theories of IPE, International Trade, Financial Globalization, and Monetary Relations.
Uploaded: 09/13/2016
13 Pages 5 Views 9 Unlocks


Change occurs rarely; only when major powers desire it.

UNIT 8: 


❖ What is IPE?

⮚ The study of:

▪ Politics and policies that influence economic interactions among states and how those  interactions affect the actors and their policies.

❖ Theories of IPE

⮚ Multiple thoughts on nature of economic interactions

▪ Assumptions(differing):

∙ Nature of economics

∙ Relevant actors

∙ Goal of interactions

∙ Relationship between politics and economy.

▪ Each also has differing expectations about how changes in economic relationships come  about.

❖ Approaches to IPE

❖ Nationalism 

Why do some countries promote trade while others restrict it?

⮚ Focus on how economic interactions benefit the state and interests.

▪ Descended from “mercantilism” (~1500-1700)

▪ Assumes that economic relations are conflictual and zero-sum

▪ States vie for economic resources because it increases power in other states (Realism) ▪ Economically subservient to politics: trade and investment meant to promote national  interests.

▪ Change occurs rarely; only when major powers desire it.

❖ Marxism – NOT Communism

⮚ Class relations central to economic relations

▪ Conflictual and zero-sum

▪ Focus on how economic policies redistribute wealth between classes.

▪ Assumes policies set by wealthy to serve their interests

∙ Economic derives politics

∙ Wealthy use power to control wealth, in order to stay in power.

▪ Economic shifts produce political change

What allows society to focus on different economic activities?

∙ Economic change (industrialization) creates incentives for reaction

∙ Results in violent change We also discuss several other topics like aahlm

❖ Liberalism 

⮚ Focuses on individuals and tier reactions within the market

▪ Theoretically harmonious and positive-sum

∙ Economic interactions can benefit all, although distribution of wealth varies ▪ All actors strive for efficiency and profit

∙ Less work for more money

▪ Economics should determine politics

∙ Political decisions reflects aggregate economic interests.

∙ People choose efficient, profitable policy

∙ Change is dynamic because market adaptation

❖ Economic Liberalism 

⮚ Modern global political economy functions under the theory of Economic Liberalism ▪ Principle of exchange with competitive and adaptive market.

▪ Market functions based on rational principles and mechanisms: profit and efficiency ∙ Firms(states) are largely seen as rational, profit maximizing actors Don't forget about the age old question of mehdi pourazady

∙ Markets function most efficiently (most profitably) with less interference (low/no trade  barriers)

∙ Rooted in Classical Liberal Economic Theory

❖ The “Wealth of Nations”

⮚ Adam Smith (1776)

▪ “Invisible Hand” of the market: self-regulating and rational If you want to learn more check out comm 2020 ecu

▪ Markets function better with less government interference

▪ Free market benefits all

▪ Arguably the most prevalent by late 20th century

∙ BUT NOT without vocal critics and dissent.

❖ Morality

⮚ In liberal model economic decisions are controlled by market forces.

⮚ Unrestrained markets are more efficient

⮚ The market is amoral ???? unconcerned w/:

▪ Justice/fairness

▪ Distribution of wealth

⮚ Only concerned with efficiency and profit.

❖ Alternatives

⮚ Liberal model is not the only option:

▪ Autarky(isolation) N. Korea

▪ Centrally Planned Economy (State Socialism) Cuba

▪ Mixed Economy-most common

⮚ Other systems impose some form of morality BUT sacrifice efficiency

❖ Decentralized “Free” Market

⮚ In less restricted/ free markets, the market itself determines the allocation and distribution of  resources:

▪ Raw material, labor, capital

∙ People invest where they choose

∙ Workers go where the jobs are

∙ Profitable businesses survive and expand

∙ Consumers get better products for less money

▪ In unrestrained markets, these factors flow freely

▪ Impeding any of these makes the market less efficient:

∙ Tariffs on imports/exports

∙ Controls on immigration

∙ Restriction on where and how people invest

⮚ NOTE: Markets are rarely fully unconstrained.



❖ The Central Puzzle

⮚ Why do some countries promote trade while others restrict it?

▪ US, Europe, S. Korea are open economies with relatively few trade restrictions ▪ N. Korea and Bhutan are Autarkic Don't forget about the age old question of what is the term for government employees who expose bureaucratic excesses, blunders, corruption, or favoritism?
Don't forget about the age old question of mde twat

∙ “self-sufficient” and closed in foreign trade

▪ Most state fall somewhere in between

❖ Types of Trade Barriers

⮚ Subsidies: Financial support given to specific businesses or industries. Makes business more  competitive.

▪ US Subsidies:

∙ $20bil agricultural subsidies

∙ $11bil in oil/gas subsidies

⮚ Tariffs: Taxes imposed on imports intended to raise the price of foreign goods. ⮚ Quotas: Limits on the number of specific foreign goods that can be imported. ❖ Protectionism

⮚ Subsidies, Quotas, and Tariffs all fall under Protectionism

⮚ Inconsistent with liberal views

▪ Make trade less efficient; goods more costly

▪ Why not eliminate protections?

⮚ Trade policies based on domestic and international pressures

▪ Pressures from domestic interest groups

▪ Pressures from other states and international organizations

⮚ The trade interactions of these actors produce the trade of policies of specific states. ⮚ A variety of regional and international institutions work to facilitate bargaining on trade. ❖ International Trade We also discuss several other topics like nancy wu wayne state

⮚ Largely free today

⮚ The liberal vision:

▪ Economic independence among states

▪ Cheap t-shirts and electronics

▪ Declined over recent decades due to low cost of labor

⮚ Countries open their markets to foreign goods; sell their products to other states ▪ The US pharma and advanced tech to China

▪ China sends electronics and sneakers to US.

❖ Protectionism 

⮚ Trade policies differ among industries over time

▪ US subsidizes agriculture to assist farmers

▪ Smoot-Hawley Act (1930) imposed tariffs on 20k imported goods to protect US workers ⮚ US imposed quotas in 1970s to increase  

sales of US made cars

⮚ Not a linear path.

❖ Why do we trade?

⮚ Trade is usually a choice:

▪ Could we produce all we need? Maybe

▪ Should we? Probably not (inefficient)

⮚ According to Liberalism, states should specialize. 

▪ Actors engage in foreign trade to realize the benefits of specialization 

▪ The division of labor allows society to focus on different economic activities. ∙ Requires access to larger markets

∙ Need cooperation with a lot of partners in order to work.

❖ Comparative Advantage

⮚ Central to liberal trade theory

▪ States gain by producing and exporting what they produce most efficiently ▪ What a state is “best” at producing is determined by their resource endowments (labor,  capital, and land)

⮚ In a global market, it does not always make sense to specialize in what a state is absolutely best  at.

▪ Need to consider other states’ abilities

❖ Absolute Advantage 

⮚ The ability to do something better than others

▪ US has absolute advantage over China in cars, pharma, t-shirts, and small electronics ▪ Shouldn’t we just produce all of these products?

⮚ Producing all would be inefficient:

▪ Consider trade-off for each product in terms of another

▪ For every(x) number of t-shirts produced, we sacrifice (y) number of cars.

❖ Comparative Advantage 

⮚ How do we decide what to produce?

▪ We need to examine the comparative advantage of each state

∙ Each state has a comparative advantage in something, even if they have no absolute  advantage in anything.

▪ C.A. is the ability of a state to produce some good more efficiently than it can produce  some other good given.

∙ Comparison in terms of efficiency of producing some specific goods rather than other  goods

∙ Not comparison of efficiency between states

▪ Do what you are best at; not necessarily what you’re better than others at. ❖ Example: Comparative v Absolute Advantage

▪Indonesia can produce both products more  

cheaply than the US

▪It has an absolute advantage in both products  

(makes both more cheaply)

▪What should each state do?

∙Examine the opportunity cost in terms of other  


▪Opportunity cost for computers is lower

▪Opportunity cost for textiles lower in Indonesia

∙U.S. and Indonesia should specialize and trade  

to improve efficiency, lower costs.

❖ Time per unit converted to units in a given time period

❖ Red shows units of good produced in a 40hr week

❖ The result is the same:

⮚ US loses 2 computers for each unit of textiles produced

⮚ Indonesia loses 1.5 computers for each unit of textiles

⮚ US: computers

⮚ Indonesia: textiles

⮚ Trade to realize benefits of specialization.

❖ Trade: Benefits

⮚ Free trade allows a country to prosper from its comparative advantage,

▪ Export (sell) what we are most efficient at making

▪ Import(buy) what we are less efficient at making

▪ This is more profitable than doing it ourselves

⮚ This is why protectionism is costly to customers

▪ Ignoring the comparative advantage and not trading raises prices

∙ Production is less efficient

∙ Imposition it takes(to offset inefficiencies)

▪ We get cheaper, better goods through specialization and trade.

❖ Trade: Costs

⮚ Why impose barriers if trade reduces costs?

⮚ While the benefits of trade are diffuse, the costs of trade are often focused. ▪ Americans overall enjoy cheaper t-shirts; Indonesians get computers, but… ▪ In the US: low-skilled jobs go overseas; wages of low-skilled US laborers decline ▪ In Indonesia: Labor standards decline, higher-skilled jobs reduced or never develop (stuck  making t-shirts)

❖ Trade Pattern Theories

⮚ Heckscher-Ohlin trade theory 

▪ Characterizes states in terms of national factor endowments – the material and human  resources possessed.

⮚ Basic four endowments: 

▪ Land(essential for agriculture production)

▪ Labor(unskilled labor)

▪ Capital for investment (machinery, equipment, and financial assets.)

▪ Human Capital (skilled labor)

⮚ Endowments determine comparative advantage

▪ States with a lot of land should have a comparative advantage in agriculture, those with  capital in innovation, and high end products.

⮚ Argument for H-O Theory

▪ Export goods based on resources the country has in abundance

▪ Import goods they make based on resources in which the country is scarce ∙ Industrial countries w/ rich capital and skilled labor:

♦ Export high cost, high quality goods

⮚ (i.e. machinery, pharma, equipment)

∙ Developing countries with rich land and unskilled labor:

♦ Export agricultural goods, textiles, and minerals

▪ Trade must be mutually beneficial

❖ Trade Politics

⮚ Trade decisions are political

⮚ States intervene to protect insufficient industries

▪ Impose a variety of barriers against competition from foreign producers ∙ (i.e. subsidies, import taxes, tariffs, and quotas)

▪ All types of protectionism designed to help domestic producers/workers compete. ∙ This is contrary to free trade theory (BUT common)

❖ The Stolper-Samuelson Approach 

⮚ Trade benefits the owners of factors producing exported goods

▪ H-O: Greatest returns = abundant factor

∙ Scarce factor is hurt.

❖ Competition

⮚ Protection restricts competition& supply, and increases costs.

▪ Benefit:

∙ Domestic producers of protected good

∙ People employed by protected sector

▪ Consequences:

∙ Consumers of imported goods???? more expensive

∙ Foreign exporter ????increased product price

∙ Domestic exporter of other goods ???? reciprocal protection

▪ Decision: Free trade v. Protection ???? based on political calculations

❖ Implications

⮚ When US engages in free trade:

▪ Low-skilled American workers are in direct competition with low-skilled workers in poor  countries

▪ Low-skilled workers in these countries produce similar products for less pay ???? cheaper  goods

▪ Low-skilled US workers support protections

∙ Taxes to make US products comparably priced

♦ Which raises the price for consumers and make the market less efficient.

❖ Equilibrium

⮚ Factor prize equalization: Trade makes wages/profit similar across the same sector in different  states

▪ Trade eventually leads to similar wages for laborers in same sector

∙ Low-skilled US wages decline; Mexican wages increase

∙ High-skilled labor and capital in US should increase through trade

▪ *Income inequality in US

∙ Workers in low-skilled sectors see wages decrease, while workers in high-skilled sector  see wages increase.

❖ Strategic interactions in trade relations

⮚ Even pro-free trade may hesitate to adopt free trade unilaterally

▪ Trade interactions are strategic

▪ States consider other states decisions in their strategies

▪ Opening markets is not good if trade partner do not reciprocate

⮚ Resemble the Prisoner’s Dilemma

▪ Both sides are better off reducing trade barriers

▪ BUT concerns about cheating undermine cooperation

❖ Overcoming problems of strategic interaction

⮚ Recall: factors that help facilitate cooperation

▪ Small numbers:

∙ More easily able to cooperate/coordinate

∙ Easier to monitor cheating

∙ Fewer competing perspectives/interest

♦ Bilateral trade deals (US-China, Japan-Indonesia)

♦ Regional trade institutions(NAFTA,CAFTA,ASEAN,EU)

▪ Information

▪ Repeated interactions

▪ Linkage in politics

▪ Institutions

⮚ Hegemonic stability: 

▪ Absorb startup costs (e.g. creating institutions)

▪ Punish defections

▪ Maintain stability in system

∙ Pax Britannica(1800-1900)

∙ Pax Americana(1945-current)

UNIT 10 


❖ Capital Flows

⮚ Foreign exchange:

▪ Flows of money that occur as currencies are bought and sold

∙ $1.2 trillion/day (“hot money”)

⮚ Bank Loans and Sovereign Lending:

▪ Banks in one country lend to borrowers in another country

∙ Prevalent in 70s-80s

⮚ Investment:

▪ Portfolio Investment: (liquid and volatile)

∙ Short-term capital flows (time horizon < 1yr.)

∙ Common assets are stocks (equity) and bonds (debt)

∙ Managed by pensions, mutual funds, and hedge funds

▪ Foreign Direct Investment FDI: (stable)

∙ Investments in specific company/project including new facilities abroad

∙ Longer time horizon

∙ Tools used by Multinational Corps. (MSCs)

❖ Financial Globalization

▪ Increased dramatically in last 20 yrs.

⮚ Developed Nations:

▪ 50s/60s: Protected/closed market

▪ 70s: restrictions decrease = opening

▪ 90s: restrictions removed

⮚ Developing Nations:

▪ 80s: protected/closed market

▪ 90s: restrictions decreased

▪ Still highly restricted

❖ Benefits

⮚ Capital flows are an aspect of free trade

▪ H-O trade theory:

∙ Developed states: capital rich = benefit by export capital

∙ LDCs: capital poor(labor rich) = benefit by import capital

▪ Liberal Market Theory:

∙ Developed states sent investment to LDCs

∙ Labor rich LCD use capital to head production of goods to export to Developed states. ∙ Benefits both:

♦ LCD import investment

♦ Export goods produced by investment

♦ Developed states import goods

♦ LDCs economic growth

❖ Problems

⮚ Fears of LDCs:

▪ Economic exploitation

▪ Asymmetric bargaining relationship

▪ Financial openness create uncertainty/instability

∙ Market crash = devastating for LCD

∙ Hard to manage economy because liquid capital flows

⮚ Fears of Developed States:

▪ MNCs investing overseas

▪ Outsourcing jobs

▪ Lower labor standards

▪ Decreased environmental regulations

❖ Institutions

⮚ Promote economic interactions among states and contribute to globalization ▪ Globalization: opening and increased relationships of global economies ▪ WTO(GATT) 

∙ Reduced trade protection

▪ IMF 

∙ “Lender of Last Resort”

∙ Loans in exchange for economic restructuring

▪ World Bank 

∙ Promotes international development

∙ Loans to initiate development in order to modernize LDCs


⮚ Bretton Woods System (1944-1973)

▪ Promote global financial stability

▪ Lends to LDCs

∙ Short-term cash loans

▪ “Lender of Last Resort”

∙ Lends to a country when it is on the verge of economic collapse

∙ Loans come with conditions:

♦ Requires reforms:

⮚ Austerity Measures:

▪ Reduction in government spending

▪ Reduction in public sector employment

⮚ Increased privatization

⮚ Greater Liberalization(trade/capital openness)

♦ Pressure to reform to liberal markets

♦ This solution is better than economic collapse, but it is questionable that it  produces growth.

⮚ Funding = control

▪ IMF resources come from member governments

∙ Larger contributions lead to greater voting power

♦ US holds 17%(largest)

∙ Wealthy countries lead

⮚ Criticism

▪ Tool of international financiers

∙ Does not assist economic growth/development

∙ Pressure for western liberal models

∙ Negative impacts on poor, children, workers, and women

∙ Destabilize countries

∙ Creates debt for citizens

▪ Source of moral hazard

▪ Moral hazard: a state is more likely to engage in risky behavior if they know they will be  bailed out.

❖ The World Bank

⮚ Promotes international development of LDCs

⮚ Integration into global market

▪ Sister to IMF and product of Bretton Woods

⮚ Contributions = control

▪ Relies on member contributions

▪ Voting based on economy size (GDP)

∙ US 16% (largest)

∙ President from US, and nominated by US P resident

▪ Economic power buys influence

▪ Advocated economic reforms

▪ Based on Washington Consensus (liberal model)

∙ Focus on GDP growth

∙ Liberalization, deregulation, privatization, government downsizing

▪ Loans promote:

∙ Infrastructure development

∙ Projects promoting liberalization in the economy

∙ Promote special interest areas:

♦ Poverty reduction

♦ Environmental protection

♦ Women’s rights etc.

⮚ Criticism

▪ Same as IMF

∙ Economic imperialism

∙ “cookie cutter” development strategies

∙ Focus on growth of GDP and liberal markets vs sustainability, equality, and quality of  life

∙ Destabilize LDCs

∙ Works through MNCs and wealthy countries’ agenda at expense of LDCs

UNIT 11 


❖ Monetary policy: 

⮚ Government policies influencing macroeconomic conditions:

▪ Unemployment

▪ Inflation

▪ Economic growth

⮚ Involves manipulation of interests and exchange rates

❖ Exchange Rates: 

⮚ The price of a National currency relative to other national currencies

▪ Appreciation: when the dollar goes up in value

▪ Depreciation: if it goes down in value

⮚ Effects of exchange rate fluctuations

▪ Appreciation: cost of exported good increases and leads to lower foreign demand for goods ▪ Depreciation: cost of goods decline and leads to more exported goods

▪ Influences importers and exporters differently

❖ Currency Values

⮚ Determined by the supply/demand of a currency

▪ More demand = higher value

▪ Less demand = lower value

⮚ Exchange system effects value

▪ Choose another currency (Ecuador uses US $)

▪ “Fix/Peg” currency value to another currency or precious metal (gold/silver) ▪ Allow currency to float in open market

⮚ Interest rates influence exchange rates

▪ Higher interest rates = more profitable for people to put their money in a country ∙ i.e. Investors need a currency in order to invest in a country

???? greater demand for currency

???? higher currency value

⮚ Higher interest rates = greater currency value

⮚ Currency appreciation leads to more expensive exports and less expensive imports ▪ Less demand for US goods

▪ Foreign goods are cheaper

▪ Lower inflation & higher standard of living

❖ Gold Standard (1860-1930)

⮚ Most major economies were on a classical gold standard

▪ Benefits of using gold:

∙ Economic price stability

∙ Long-term growth (rarely devalues)

∙ Prevents inflation

▪ Costs of using gold:

∙ Reduces flexibility in monetary policy

♦ Harder to print money  

♦ Less control of inflation and unemployment

♦ Short-term price volatility

❖ Bretton Woods Monetary System (1945-1973) 

⮚ Fixed but adjustable rates

⮚ Governments foxed currency values for long periods of time but permitted some changes ❖ Post 1973

⮚ Floating exchange rates dominate

▪ Major currencies float

▪ Other states “Peg” national currency to currency of another state (China, Pakistan pegged  to US dollar)

❖ Fixed or Float – Government decides

⮚ Fixed exchange rate: provide stability and facilitate international trade and investment ▪ Reduces control of monetary policy

∙ Cannot adjust fixed rates

⮚ Floating exchange rate: offer more freedom

▪ Government can change the exchange rate

▪ Manipulate value via interest rates

▪ Can make trade and investment more difficult

∙ Currency value becomes volatile

∙ Investors may be scared away

∙ Capital flight during economic crisis

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