EXAM 2 STUDY GUIDE Chapter 7 1 What type of trade policies do countries pursue What is trade liberalization Its depends on how many abundant factors scarce factors etc but most states will put up trade barriers and all will have those who want to trade and those who don t domestic politics play a large role as well Trade liberalization The removal or reduction of restrictions or barriers on the free exchange of goods between nations 2 What is protectionism How many states have some sort of protectionist policies Protectionism the imposition of barriers to restrict imports commonly used protectionist devices include tariffs quantitative restrictions such as quotas and other non tariff barriers Almost all governments restrict some sort of import 3 Who benefits from protectionism Who benefits from trade Domestic industries states with the most influence over domestic politics would benefit from protectionism Almost all governments can benefit from trade 4 Why would a country restrict trade National trade policy depends on economic interests political institutions and interactions with other nations 5 What is the division of labor and how is it a useful concept for explaining the benefits of trade It is the dividing and specializing of cooperative labor into specifically circumscribed tasks and roles Historically as societies have developed more and more complex divisions of labors the economies of those societies has grown proportionately both in trade output and living standards A complex division of labor appears to be strongly correlated with the rise of capitalism as well as the rise of complex industrial production 6 What is the difference between comparative and absolute advantage Comparative Advantage 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 The comparison is to the efficiency of other economic activities the actor might undertake not to the efficiency of other countries or firms Absolute Advantage The ability of a country or firm to produce more of a particular good or service than other countries or firms using the same amount of effort or resources 7 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 labor land and capital 8 What does the Stolper Samuelson and the Ricardo Viner theories say about trade policy preferences Stolpher Samuelson trade benefits owners of factors of production used to produce exported goods Artificially restricting trade thus hurts owners of abundant factors All human capital is the same can transfer between jobs no problem factor specific full factor mobility Ricardo Viner asks why whole industries often act together some factors of production are specific to particular industries a worker s interests flow from her sector of the economy rather than the factor she owns don t look at the factor production look at the industry industry specific not mobile 9 How can alliances influence trade patterns Barriers are removed 10 What are the problems associated with creating cooperative trade policy and how can they be remedied International trade bargaining problems can resemble a Prisoner s Dilemma Both sides would be better off reducing trade barriers But concerns about cheating cause both sides to act non cooperatively Trade disputes often over dumping implies selling goods below the true cost of production in order to drive out competitors and gain market share allegations can impede cooperation How can they be remedied b a Linking issues allows governments to trade cooperative policies if you cooperate on my problem I ll cooperate on yours International institutions can help overcome collective action and other strategic problems Ex World Trade Organization WTO North American Free Trade Agreement NAFTA c Small numbers information repeated interaction d Hegemonic stability The existence of one very powerful nation helps solve collective action and free riding problem 11 What is the WTO and what does it do The World Trade Organization succeeded the General Agreement on Tariffs and Trade GATT and both were successful in reducing barriers to trade among nations set standards of behavior reduce transaction costs etc Negotiations are generally dominated by larger states Chapter 8 1 Why did investors lend little money to developing countries before 1965 They didn t pay off their debts from around World War II 2 What are the benefits from international finance Investors invest abroad to earn higher rates of return on their capital Borrowers borrow capital to increase productivity of other factors of productions especially labor 3 What is the current level of investment in developing countries Why is this the case It is increasing consistently WHY The poorer the country the higher the interest rate and that means more monetary profit however it is a riskier investment 4 What is the IMF and what does it do What are other examples of international financial institutions IMF International Monetary Fund promotes international financial stability and monetary cooperation In debt crisis when borrower claims an inability to repay IMF may impose a stabilization agreement make a bridge loan and help negotiate new terms with other lenders country has to cut spending as a condition Other Ex The World Bank more long term 5 How is the IMF controversial The population of the country usually does not respond well to the spending cuts and can cause revolts protests etc Ex Greece 6 What are portfolio investments What is sovereign lending be sure to know some hypothetical examples Portfolio investment loans and bonds that provide income stream to lender but no role in managing the investment Just thinking about the rate of return interest rate the higher the better greater return on money usually poor countries have higher rates but that means riskier investments you have no control Sovereign lending loans from private financial institutions in one country to sovereign governments in other countries 7 What is foreign direct investment FDI be sure to know some hypothetical examples Investor actually acquires some sort of real assets facilities in a foreign country you maintain control EX Coca Cola owns and controls factories in Brazil 8 What does the Heckscher Ohlin theory tell us about international
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