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by: Barney Schaden


Barney Schaden
GPA 3.94

Sean Ehrlich

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Sean Ehrlich
Class Notes
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This 6 page Class Notes was uploaded by Barney Schaden on Thursday September 17, 2015. The Class Notes belongs to INR 2002 at Florida State University taught by Sean Ehrlich in Fall. Since its upload, it has received 196 views. For similar materials see /class/205407/inr-2002-florida-state-university in INTERNATIONAL RELATIONS at Florida State University.




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Date Created: 09/17/15
INR2002 Intro to IR Review Sheet for Exam 2 The second exam will be Tue Feb 23 during the regularly scheduled class time Once the rst person nished the exam and leaves no one else will be allowed to start the exam so make sure you re on time It will be multiple choice using a scantron form so bring a pencil The exam will cover Chapters 69 of the textbook as well as the lectures The following broad questions are meant to guide you in your studies but should not be considered an exhaustive list of possible exam topics 1 What is international trade and why do states engage in it What do they trade and with whom What are the bene ts and costs of trade and who is helped and hurt by it What are the main international organizations that cover trade and how do they work Trade of capitals goods and services across borders states engage in it because of mutual bene ts specialization absolutecomparative advantage competition better cheaper products more variety What you trade is based on factors of production land labor capital Export what uses abundant factors and import what uses scarce factors You trade with other countries based on geographical proximity political allyenemycountries use trade relations to reinforce alliancesalso countries make alliances based on trade relations cultural same languagereligion and economicsame currencypartner with opposite factor endowment reasons Helped by trade 7 consumers goods are better cheaper and varied exporters and people with abundant factors bigger marketmore money Hurt by trade 7 import competing companies scarce production factor industrieskeeps price up The main international organization that covers trade is World Trade OrganizationWTO Used to be General Agreement on Tariffs and Trade GATT Based on idealsreciprocity most favored nation status non discrimination negotiating rounds dispute settlementpanel of investigators determine who is at fault May imply retaliatory tariffs to equal the cost of the loss from violating country Decentralized security 2 What is international nance and what forms does it take What are its costs and bene ts and why do countries and investors engage in it What are the main international organizations that cover nance and how do they work Movement of money across borders Actors include individuals corporations states and international organizations Types 7 Portfolio investments and foreign direct investment FDI Portfolio investments dwarf direct investment in size Portfolio investment includes no management control Usually bonds stocks or loans FDI includes management control Multinational corporations are created through FDI Green eld investment building something brand newfactory etc rum 1 39 quot39 acquire rights to quot 39 already created joint venturesnew partnerships Costs 7 cost to investors differences in legal environment risk of international investment sovereign risk discriminatory treatment to outsiders macroeconomic risks supply demand etc information riskless knowledge on foreign companies transaction costs exchange rate risks costs to host countries distributional costs of direct investment may harm domestic currency risk of liquidity can cause bubbles and panic FDI can make host country give up management control invite foreign meddling MNCs can manipulate prices and employment to reduce bene ts Bene ts bene ts to investor diverse portfolios access to resources higher interest ratesusually based on more demand for money for FDIs cheaper labor less environment labor laws market access less transportation costs lower tax rates and labor costs bene ts to host countries more capital for investing doesn t give up management control and keeps bene ts of investing at home in portfolio investing more capital with less liquiditytrue for FDI not PI more jobsexportstax revenue Countries and investors engage in it for the possible monetary gains Main international organizations that cover nance are the International Monetary Fund and the World Bank The World Bank makes loans while the IMF manages international monetary relations and assists with debt and currency crisis 3 What is monetary policy and why is it important How do exchange rates work Who is helped and by hurt by xed or oating exchange rates and strong or weak currencies How can the international monetary system be organized and why does it take different forms Strong exchange rate allows consumers and others to buy more world products but harms exporters that need to make products cheap internationally Also discourages investment in country by foreigners Weak exchange rate bene ts exporters and import competing industries but doesn t allow a large purchasing power Also attracts more investment 4 Why are some countries rich and others poor How can poor countries try to become rich What role does trade and international nance play in this process What role does international organization play What role does foreign aid play Being able to de ne and understand the following key terms should help you understand the material covered on this exam absolute advantage 7 the ability of a party to produce more of a particular good or service than other countries using the same amount of factors Infrastructure basic structures necessary for social activity such as transportation and telecommunications networks and power and water supplyie roads airports sewer systems Appreciatedepreciate 7to increase in value in terms of other currencies appreciate or to decrease in value in terms of other currencies depreciate International Monetary Fund IMF 7 major economic institution established in 1944 to manage international monetary relations and now is in charge of the international nancial system especially debt and currency crises Bilateral Investment Treaty BIT signed between two countries providing protection for each other s investors Outlines conditions for private investment across borders Include provisions to protect an investment from government discrimination or expiration without compensation as well as dispute settlement resolutions International monetary regime formal or informal arrangement among governments to govern relations among their currencies and which is shared by most countries in the world 2 features 1 will currency values be fixed oating or both 2 Will there be a mutually accepted benchmark against which values are measured common standards to which values can be compared There are three types of standards commodity standard ie based on gold commodity backed paper standard ie national governments assign papers equal to gold Bretton Woods and national paper currency standard national paper currencies are only backed by the commitments of their issuing governments to support them Bretton Woods 7 economic order established after WWII among allied nations In 1944 Led to a series of arrangements involving a commitment to relatively low barriers to international trade and investment Established GATT later turned into WTO for reduction in trade barriers IMF to supervise currency US tied its currency to gold and all other countries tied it to the dollar but the other countries were on a fixed but adjustable rate and manage international monetary system and the World Bank to encourage and assist investing in developing countries Lasted until 1970s Monetary policy 7 government attempts to affect macroeconomic conditions such as unemployment in ation and economic growth Common methods include changing national interest rates and changing exchange rates Business cycle 7 the cycle marked by a strong economy followed by a weak economy and then over again Caused by Most favored Nation status MFN 7 a status established by most modern trade agreements guaranteeing that the signatories will extend to each other any favorable trading terms offered in agreements with third parties Caltel commodity cartels are 39 quot of J of Jquot raw materials and r agricultural products that restrict world supply and thereby cause the price of the goods to rise Multinational corporation MNC 7 an enterprise that operates in a number of countries with production or service facilities outside its country of origin Comparative advantage 7 ability of a party to produce a particular good or service more efficiently than other goods or services such that its resources are most efficiently employed in this activity New International Economic Order a reorganization of the management of the international economy demanded by LDCs in the 1970s in order to make it more favorable to developing nations Curtailing rights of foreign investors in developing countries revising trade agreements to favor products from poor countries and enhance in uence of LDCs in 10s Little was accomplished Deadweight cost inefficiency cost to the economy from government subsidies in producing unsustainable products Nontariff barrier to trade NTB 7 obstacles to imports rather than tariffs Examples include quota for amount of products allowed into a country regulations that favor domestic over imported products and other measures that discriminate against foreign goods or services Devaluerevalue 7 to reduce the value of one currency in terms of other currenciesdevalue or to increase the value of one currency in terms of other currenciesrevalue Organization of Petroleum Exporting Countries OPEC group of oil producing countries Type of commodity cartel Reduces production of oil to maintain prices high This sector was unique in its success since there was no readily available substitute Other industries tried imitating OPEC but failed Division of labor increases productivity through specialization Speci c tasks assigned to the party that can perform each task best Portfolio investment 7 investment in a foreign country via the purchase of stocks bonds or other financial instruments Portfolio investors do not exercise managerial control of the foreign operation Most of the portfolio investment that goes into developing countries is in the form of sovereign lending Dollarization when a country uses foreign currency parallel to or instead of the domestic currency Protectionism 7 the use of specific measures to shield domestic producers from imports Common devices are tariffs quotas and nontariff barrier Consumers lose and domestic producers gain from protectionism Makes products more expensive and allows domestic producers to make goods that they are not the most efficient at making thus altering the comparative advantage Hurts 3 groups consumers average consumers and consuming industries car industry needs steel exporters they feel that protectionism in their country will provoke retaliatory protection in other markets and politicians may be blamed for the costs that are imposed on the citizens Export Oriented Industrialization EOI policies originally pursued starting in the late 1960s by several East Asian countries to spur manufacturing for export often through subsidies and incentives for export production Reciprocity 7 a mutual agreement to lower tariffs and other trade barriers Governments exchanging trade policy concessions with one another Factors of production The factors are the essential resources for economic activity Land labor unskilled labor capital human capital skilled labor Ricardo Viner model a model of trade relations that emphasizes the sector in which factors of production are employed rather than the nature of the factor itself Protection benefits all those associated with importcompeting industries Protection hurts all those associated with exporting industries Factors of production aren t mobile between sectors Fixed 0r pegged exchange rate 7 exchange rate policy in which a government commits itself to keep its currency at or around a specific value in terms of another currency or a commodity ie gold Beneficial to those who trade across borders stability halmful to domestic consumers govt can t change rates to alleviate recession Resource curse paradox that countries with plenty of natural resources are retarded in development Governments of countries with natural resources are more likely to allocate most of the money to activities associated with the resource and virtually nothing toward productive activities education public health economic infrastructure Also the effortless ow of money can create a perfect environment for corruption Floating exchange rate 7 an exchange policy under which a government permits its currency to be traded on the open market without direct government control or intervention Beneficial to domestic consumers gov t can change rates to fight recessionin ation and import competing companies but halmful to exports and international investors volatile exchange rates Sovereign lending 7 loans from private financial institutions in one country to sovereign governments of other countries Foreign Aid aid to developing countries to help in development Usually doesn t work because 1 amount of money isn t very large when compared to developed countries and 2 most of the time the money doesn t go to a broad use Usually aid is in form of geopolitical and military aid and doesn t decrease poverty Stolper Samuelson theorem 7 theory that protection benefits the scarce factor of production Poor country with a lot of unskilled labor must export laborintensive products and import capitalintensive products prrotection is put in place then country s capital must be diverted from laborintensive production to capitalintensive production ie from clothe factory to chemical plant This raises domestic demand for capital and reduces demand for labor thus raising capital and lowering wage of labor Protection benefits scarce factor of production and hurts abundant factor of production Factors of production are mobile Foreign direct investment FDI 7 investment in a foreign country Via the acquisition of a local facility or the establishment of a new facility Investors maintain managerial control over foreign operations Subsidies General Agreement on Tariffs and Trade GATT 7 international institution created in 1948 in which member countries committed to reduce barriers to trade and to provide similar trading conditions to all other members Replaced by WTO Tariff 7 a tax imposed on imports This raises the domestic price of the imported good and may be applied for the purpose of protectionism Gold standard monetary system that prevailed between 18701914 in which countries tied their currencies to gold at a legally fixed price Terms of trade 7 relative prices of a country s export to import Group of 77 a coalition of developing countries in the UN formed in 1964 with 77 members it has grown to over 130 members but maintains the original name Attempted to use the collective power of numbers in the world political arena to reform the economic order in favor of the developing world Theory of hegemonic stability single world power willing be privileged actor to stabilize world economy When you have a hegemon it is easier to maintain a stable world economy US during Bretton Woods era paid the costs to have a stable world economy Heckscher Ohlin trade theory 7 theory that country will export goods that make intensive use of abundant factors and import goods that make intensive use of scarce factors Pattern of specialization leads to analogous trade patterns poor countries with little capital have to import capitalintensive products that they need ie farm machineryelectronics and export their laborintensive products to rich countries Washington Consensus policy recommendations generally advocated by developedcountry economists and policymakers starting in the 1980s including trade liberalization privatization openness to foreign investment and restrictive monetary and fiscal policies Import Substitution Industrialization ISI policies pursued by most developing countries from the 1930s through the 1980s to reduce imports and encourage domestic manufacturing often through trade barriers subsidies to manufacturing often through trade barriers subsidies to manufacturing and state ownership of basic industries World Trade Organization W TO 7 created in 1995 to succeed the GATT and to govern international trade relations The WTO encourages and polices the multilateral reduction of barriers to trade and it oversees the resolution of trade disputes


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