Introduction to International Relations Exam 2 Review Helpful Study Tip To everyone who was struggling finding the answers to some of these questions a few of them were in the introductions to the chapters which is how I found them Be sure to read the very beginning part of each chapter as it gives the foundation of everything to come 1 What is international trade and why do states engage in it a International trade is the exchange of capital goods and services across international borders or territories States engage in trade in order to utilize the benefits of the division of labor which is also known as specialization Specialization increases productivity and productivity fuels economic growth 2 What do they trade and with whom a Specifically what is traded depends largely upon what it is that the particular country has a comparative or absolute advantage in producing that the other country does not Once this is determined the country in need of what they themselves cannot produce either due to lack of time money or resources will then trade with the country who is able to do so ie Canada who cannot grow tropical fruit will trade with the Dominican Republic for bananas 3 What are the benefits and costs of trade and who is helped and hurt by it a Imports are the gains or benefits from trade and the exports are its costs Trade protection hurts the economy as a whole as it raises the price of imports and reduces the efficiency of domestic production 4 What are the main international organizations that cover trade and how do they work a Considering that the GATT General Agreement on Tariffs and Trade which was an international institution created in 1947 set out to reducing trade barriers has since been succeeded by the WTO World Trade Organization it is safe to say that this is the main organization that covers trade today The WTO works to organize voting rounds amongst member states to negotiate reductions in trade barriers Other rules and safeguards are proposed and implemented through this organization as well as resolutions of trade disputes 1 What is international finance and what forms does it take a International finance has long been the leading edge of global economic integration Massive investment flows drove the integrated world economy of the 19th and early 20th cent then they dried up during the years between WWI and WWII when the world s nations turned inward Since 960 international finance has revived and is once again the most globalized component of the world economy dwarfing international trade and migration 2 What are its costs and benefits and why do countries and investors engage in it a The benefits entail an increase of capital it would not otherwise have an expansion of business the ability to finance projects that spur development such as roads and power plants and the availability of credit to small business owners and homeowners Overall capital gains the ability to flow across borders However lenders want their debts repaid in full and corporations want the highest profit possible from their investments Therefore capital sending and capital receiving nations have a simultaneous commonality of interests in maintaining a flow of capital and a conflict of interest in distributing the benefits of the flow 3 What are the main international organizations that cover finance and how do they work a The two main organizations are the World Bank and the IMF The IMF focuses on the integration of the global economy and the World Bank loans to the poorest nations which in fact bear no interest Many of the countries that borrow such concessional funds would not be able to borrow from private creditors who are wary of particularly poor and unstable nations The World Bank borrows money on major markets and then lends the money out to developing countries to help them build major infrastructural and other development projects Often countries with severe economic problems are burdened with the price that they have to repay despite how cheap the concessions are but often such organizations as these have been able to write off their debts 1 What is monetary policy and why is it important a Monetary policy is defined as the interrelationships among national monies Such issues are important because in addition to individual national choices monetary issues are central to the international economy and thus to world politics It s a powerful tool of national governments and in most developed nations is implemented by their central bank the Federal Reserve for the US which has the power to raise lower interest rates Stable relations among national currencies allow actors in one country to make payments to actors in other countries and therefore make it easier for goods people and capital to move across borders National and global economies alike would find it difficult to function without some arrangement for the use of money among countries 2 How do exchange rates work a As the exchange rate is the price at which one currency is exchanged for another any form of money that a country claims as its own can be used to buy any other The US dollar can purchase Mexican pesos and vice versa If the US dollar were to go up in value against Mexico such that it could buy more pesos it is said to strengthen or appreciate When the dollar does down against the Mexico such that it can buy fewer pesos it is said to weaken or depreciate When you only need 1 dollar to buy 2 pesos the dollar wins the dollar has appreciated When you need 2 dollars to buy 1 peso the peso wins the dollar has depreciated Note also that exchange rates respond to supply and demand 3 Who is helped and by hurt by fixed or floating exchange rates and strong or weak currencies a Interest rates affect the exchange rate national monetary policy can also have a powerful impact on the value of the national currency For example if a government wants to stimulate demand for its country s products in world markets it can lower interest rates so that the currency depreciates The weaker currency makes local goods cheaper to foreigners and spurs exports In this way a monetary policy that weakens the currency can help the nation s producers Fixed exchange rates provide currency stability and predictability which greatly facilitate international trade investment finance migration and travel Fixed rates help all those who interested in keeping inflation low and in cross border trade However it does hurt a government s flexibility in
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