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Week 4 Notes

by: Kate Notetaker

Week 4 Notes BADM 1004

Kate Notetaker

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These notes cover class lecture and recitation for September 19 and 21.
The Age of Globalization
Maurer, N; Rehman, S
Class Notes
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This 6 page Class Notes was uploaded by Kate Notetaker on Wednesday September 21, 2016. The Class Notes belongs to BADM 1004 at George Washington University taught by Maurer, N; Rehman, S in Fall 2016. Since its upload, it has received 240 views. For similar materials see The Age of Globalization in Business Administration at George Washington University.

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Date Created: 09/21/16
September 19, 2016 Flows of Money  Economies don’t need money  However, money is useful o Barter is hard o Search costs and transaction costs  find people who want what you have but also have what you want  Cost of making a transaction  really hard o Double coincidence of wants  Economic Organization of a POW Camp o Allied prisoners got the same rations o Sikh prisoners didn’t want beef, French prisoners were desperate for coffee o Cigarettes emerged as currency  Uses of money o Medium of exchange  standard object, exchange goods and services o Unit of account  standard unit, quoting prices o Store of value  store wealth  Money reduces transaction costs when it is: o Divisible o Uniform o Storable o Compact  Gold and Silver worked well  they weren’t very useful for anything else  First paper money  11 century in China o Bank notes carried a guarantee that it could be traded at any time for coinage o Could be public or private  Invention of Finance o Money makes deals easier to strike o Early states stored their treasure in temples  People began storing valuables in the temple, including coins o Julius Caesar introduced the idea of allowing creditors to seize land if payments weren’t made  Not all lending relies on legal contract enforcement  Fractional reserve banking system o Banks take deposits in return for interest o Lend out the cash for more interest o Keep little cash in the vaults  reserves of cash are only a fraction of their deposits  Mostly electronic these days o Effects:  Banks make money on the “spread”  Banks create money  Bank runs risk the economy  Bank run o Something causes depositors to worry about their deposits o They storm the banks demanding to see their money o Banks start to call in loans if they can  A healthy bank shuts down o Other people get scared o Banking system shuts down  without credit, the real economy follows  Credit drives up  can’t get loans anymore  Most of our wealth is tied up in the creation of money by the financial system  Governments can stop bank runs o Alleviation  central banks can print money and lend it to banks that are facing bank runs  Buying assets in return for a deposit  Stops banks from failing and keeps credit flowing o Prevention  Insurance and regulation  Insurance stops runs in their tracks  Regulation prevents “moral hazard”  International bank runs o Foreign investors more likely to panic  Less information  Don’t trust institutions  Deposit insurance systems are national  Exchange rate risk o Take their money, pulling deposits from banks and selling securities o Sends prices crashing  contagion across countries  Crisis free, abundant credit countries o Half are small island or city states o Other half are democracies o All are former British colonies  Non-democracies seem to be systematically less stable  Banking crises are not caused by unforeseen shocks  Bank bargains o Banks require governments o Governments can use banks  Finance state, government and their supporters o Banks need to be sure that the government won’t turn against them  Legal system assures the above, but policies can still change o Governments and financiers make bargains  Bargains govern entry into finance, how credit is priced and who holds the bag when (or if) things go wrong o These bargains vary across countries and time  Takeaways o Finance is necessary for a modern economy o Finance is inherently risky o Finance is extremely difficult without the government  Provides property rights and can mitigate risk o Getting the balance right is extremely hard  Democracies generally do it but not all September 21, 2016 Recitation  Midterm  Topics 1 through 6  What works in one country does not work in others  Big three in economics o John Maynard Keynes o Adam Smith o Karl Marx  Developmental Economists o William Eastery  Tyranny of Experts  2014  over the last century, global poverty has largely been viewed as a technical problem that merely requires the right “expert” solutions  If you do X, Y and Z, you can fix global poverty  Then why hasn’t it been solved yet  Experts recommend solutions that fix immediate problems  Don’t address the systemic political factors that caused them  Produce an accidental collusion with “benevolent autocrats”  Leaving dictators with more power to violate rights of the poor  Remedy extreme poverty  failed because they have neglected that individuals, businesses, governments and donors respond to incentives  Failure of economic development is not the failure of economics  Failure to apply economic principles  Recommendation is to improve the institutions of governments and international actors  Create incentives that promote growth o Daron Acemoglu and James Robinson  Why Nations Fail  2012  “You need to go back 200 years, not 20 years to understand”  Key differentiator between countries is (good) institutions  Good institutions  Laws and practices that motivate people to work hard, become economically productive  Narrow focus on inclusive institutions  Ignore certain things o Area’s being landlocked  harder to trade o Environmental damage o Tropical diseases o Tropical agricultural productivity o Jeffery Sachs  Earth Institute  Topography  decides whether you can make it or not  “I have assumed that America... would reliably find its way to social betterment.”  We need a new economic paradigm  Changed gears and devoted himself to looking at economic problems in the US  End of Poverty  clear conceptual map of the world economy  Explains why, over the past 200 years, wealth has diverged across the planet o Why the poorest nations have so far been unable to improve o Thomas Friedman  Books  Hot, and Crowded  The World is Flat  Talks about the US  something really wrong is going on here  How to renew the US  Global Warming and rapidly growing populations and the astonishing expansion of the world’s middle class through globalization  Have produced a planet that is hot, flat and crowded  Earth is dangerously unstable  green revolution we need is like no revolution the world has seen o Paul Collier  The Bottom Billion  Shows what is happening to the poorest people in the world  Offers ideas for opening up opportunities for all  Why the differences?  central question  Norway is 496 times richer than Burundi  Average per capita income: Norway $84,290 and Burundi $170  Power, prosperity and poverty vary greatly around the world  Hot-Cold climate theory  politically incorrect today  People in hot places work less than those in cold climates o Jared Diamond  Guns, Germs and Steel  Attributed the success of a state’s economic development (or lack thereof, to characteristics of its physical environment  Geography is an important determinant  Geography theory  Farming and governments  The curse of natural resources  Cold versus Hot Climate  impacts rate of diseases and agricultural productivity  Natural environment o Max Weber  Reasons why some countries and regions of the world experienced near miraculous periods of explosive growth  while the rest of the world stagnated  Multi-disciplinary approach is necessary  Cliometric theory o Emphasis on developing a coherent and consistent theoretical model that will provide the basis for interpreting historical economic and social phenomena  What makes countries rich or poor? o No simple answer, depends on so many things o Inheritance, education, ambition, talent, health, personal connection, etc. o Also depends on how you define health  The IMF o Creation after WWII  Manage the world’s exchange rate system  Global financial system of currencies o Since 1976, we are in a volatile exchange rate system  IMF had to reinvent itself o Lender of last resort when you run out of real money  IMF grabs the reigns of economic power of a country when they are called in  Badge of shame  means that the government has failed


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