INR2002 Intro to IR Review Sheet for Exam 2 Chapters 7 10 What is international trade and why do states engage in it What do they trade 1 and with whom What are the benefits 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 International trade is the exchange of goods or services between countries States engage in international trade because they realize the benefits of specialization Specialization increases productivity and productivity fuels economic growth They trade endowments because they determine national comparative advantage and in turn what countries produce and export Developing countries tend to be rich in agricultural products minerals or labor intensive manufacturers The benefits to trade are encouraging friendly relations among countries Comparative advantage plays a role in that countries can acquire goods services cheaper from other countries than if they were to produce it themselves The costs to trade are losses in trade liberalization as well as reduced wages for unskilled workers in industrialized countries The main international organizations that cover trade are the General Agreement on Trade and Tariffs GATT and the World Trade Organization WTO They oversaw the dramatic liberalization of trade relations in particular among developed countries for more than 40 years Their goals were to encourage the expansion of an open international trading system They set out to reduce the barriers to trade through organizing a series of rounds where member states negotiate multilateral reductions in trade barriers All in all the GATT and WTO set standards of behavior verify compliance ease joint decision making and resolve disputes The WTO monitors a countries compliance in 2 ways Members must report actions taken under the safeguards clause as well as on any RTAs they may enter into Countries that believe foreign exporters or importers are not complying with the rules can file a complaint with the WTO What is international finance and what forms does it take What are its costs and 2 benefits and why do countries and investors engage in it What are the main international organizations that cover finance and how do they work International finance is the way in which people or countries can invest in foreign lands International finance takes several forms including two broad categories such as portfolio investments and direct investments A portfolio investment gives the investor a claim on some income but no role in managing the investment Ex Loans Foreign direct investment is made by a company that owns facilities in another country facilities over which the company maintains control The costs and benefits of international finance include making money Those with money want to move their money from where profits are lower to where profits are higher Receiving countries gain capital they otherwise wouldn t have companies can borrow from abroad and expand their businesses Governments can borrow from abroad and finance projects that spur development such as roads and power plants Additionally the influx of foreign funds can increase the availability of credit to small business owners and homeowners Costs The costs include the fact that foreign countries have the power ability to do as they please with your money with little to no regard to you They have the ability to reduce the value of the investment explicitly The bargaining path comes into play as both parties have an incentive to work together yet both also have the incentive to reach the biggest personal benefit Making debt service payments can require raising taxes reducing government services restraining wages and consumption importing less while exporting more and generally imposing austerity on the national economy Debt crisis have been associated with slow growth unemployment cuts in social spending and general economic hardship Benefits costs of foreign borrowing do not distribute equally among parties Countries and investors engage in it because if used productively borrowed funds can increase the countries output by more than it will take to repay the debt The prospect of borrowed money to speed growth and increase national output gives developing economies today a powerful interest in attracting loans from international investors and it makes borrowing relatively uncontroversial with debtor countries The main international organizations that cover finance are the International Monetary Fund IMF It is in charge of managing the international monetary system It s principle concern is financial crises in developing nations although it has played a role during crisis periods in developed countries It is a membership organization that includes borrowing and lending countries All member states have a vote on it s activities although this is dependent on the members financial contribution to the IMF resources its quota What is monetary policy and why is it important How do exchange rates work 3 Who is helped and by hurt by fixed or floating exchange rates and strong or weak currencies How can the international monetary system be organized and why does it take different forms Monetary policy is the regulation of currency within a country and how that currency is employed Monetary policy is important because it allows for the convenient exchange of goods services and capital It is a classic public good it benefits everyone but because people cannot be excluded from its benefits and charged for them there is little incentive for private firms to provide it Exchange rates work by fluctuating either up or down The monetary value of a currency can either appreciate rise or depreciate lower This exchange rate goes either up or down due to response in supply and demand There are many factors that influence supply and demand for national money If people want fewer dollars the exchange rate depreciates and vice versa Fixed exchange rates provide currency stability and predictability which generally facilitate international trade investment finance migration and travel It also provides a monetary anchor that keeps prices stable Costs of a fixed exchange rate include the fact that some people and governments are strongly opposed to it It reduces a government s ability to have its own independent monetary policy which can be costly Producers of goods that compete on import or export markers would want the government to be able to fluctuate the
View Full Document
Unlocking...