Chapter 71. What type of trade policies do countries pursue?- Depending on factors (scare, abundant) all states are going to have some people who want free trade. Domestic institutions can play a role. What is trade liberalization?- Benefits the economy as a whole better but it can seriously harm groups within the country.2.What is protectionism? The use of specific measures to shield domestic producers from imports. Commonly used protectionist devices include tariffs, quantitative restrictions (quotas), and other nontariff bonds.3. How many states have some sort of protectionist policies? - Nearly all governments restrict at least some imports4.Who benefits from protectionism? - The scarce factor of production- Domestic producers make more moneyWho benefits from trade? - Owners of factors of production used to produce exported goods.5.What would a country restrict trade? - To protect domestic producers 5.What is the division of labor?- An arrangement where each worker specializes in a particular task or job How is it a useful concept for explaining the benefits of trade? - In a labor scarce country labor benefits from protection and loses from trade liberalization. 6.What is the difference between comparative and absolute advantage? - Comparative: The ability of a country or firm 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. - Absolute: the ability of a country or firm to produce more a particulargood or service than other countries or firms using the same amount of effort and resources7.What does the Heckscher-Ohlin theory say about trade patterns? - A country will export goods that make intensive use of the factors of production in which it is well endowed. Thus, a labor-rich country willexport goods that make intensive use of labor.8.What does the Stolper-Samuelson and the Ricardo-Viner theories say abouttrade-policy preferences? The Stolper-Samuelson theorem: - Trade benefits owners of factors of production used to produce exported goods. Trade restricting hurts owners of abundant factors.The Ricardo-Viner theorem:- Some factors of production are specific. 9.How can alliances influence trade patterns? - Trade between hostile nations is riskier than with friendly nations- Governments often pursue economic ties with their allies10.What are the problems associated with creating cooperative trade policy, and how can they be remedied? - Linking issues allows governments to “trade” cooperative policies.o “If you cooperate on my issue, I’ll cooperate on yours.”- International institutions can help overcome collective action and other strategic problems.o Examples: (WTO), (NAFTA) 11.What is the WTO, and what does it do?- Encourages and polices the multilateral reduction of barriers to trade, and it oversees the resolution of trade dispute.Chapter 81.Why did investors lend little money to developing countries before 1965?- They didn’t pay off their debts from WW2. 2. What are the benefits from international finance? - Can improve welfare in both countries. Financial interests cooperate. Financial ties can make societies mutually vulnerable3. What is the current level of investment in developing countries? Why is this the case? 100 billion dollars a year. 4. What is the IMF, and what does it do? - The International Monetary Fund (IMF) was established at Bretton Woods to manage the international monetary system. In debt crises, when the borrower claims an inability to repay, IMF may impose a “stabilization agreement” make a bridge loan and help negotiate new terms with other lenders. What are other examples of international financial institutions? - World Bank: provides long-term loans for development of infrastructure.5.How is the IMF controversial? - Criticized as biased towards lenders; it is, to the extent that programs are designed to ensure investors get (mostly) repaid.6.What are portfolio investments? What is sovereign lending?- Portfolio investment: loans and bonds that provide income stream to lender but no role in managing the investment. You lose control.- Sovereign lending: a private lending. 7.What is foreign direct investment (FDI)? - Investor acquires real assets (facilities) in a foreign country. You remain in control. 8. What does the Heckscher-Ohlin theory tell us about international immigration? 9.What are the pros and cons of immigration? - Pro’s – Depend on unskilled labor you get cheap labor- Con’s – Employment opportunities are going to drop. 10. What is concessional finance?- Money lent to developing countries by developed states or international organizations (e.g. World Bank)Chapter 91.What is an example of international monetary affairs? - International monetary order: Provides predictability in currency values across borders.o Ex: WTO? 2.What is the gold standard? Why was it beneficial/harmful? - The monetary system that prevailed between 1870 and 1914, which countries tied their currencies to gold at a legally fixed price. It was controversial in the US because it made it less competitive. 3.What is monetary policy? What can/cannot a government control? - An important tool of national governments to influence broad macroeconomic conditions such as unemployment, inflation, and economic growth. Typically, governments alter theirs by changingnational interest rates or exchange rates4.What are exchange rates?- The price of a national currency relative to other national currencies.5. Why is currency appreciation/depreciation either good or bad? Who benefits from either appreciation or depreciation? • When the dollar goes up (down) in value against some other currency it is said to appreciate (depreciate) or strengthen (be devalued). 6.What is a floating exchange rate? What is a fixed exchange rate? • Fixed exchange rate: A government promises to keep the national currency ata constant value (measured in another currency or a precious metal such as gold)• Floating exchange rate: A currency’s value fluctuates freely, driven by markets or other factors7.What are the pros and cons for either type of exchange rate? Why would a government choose either a fixed or floating exchange rate?• Why fix the exchange rate? – Stability, in particular to investors. • Why not fix? – Reduces government flexibility• Why float the exchange rate? – More government autonomy• Why not
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