Politics of Trade and Monetary relations Flashcards
comparative advantage
- Adam Smith
- firm/states’ emphasize what they can do compared to others
- “an actor’s ability to produce a good or service more efficiently than another actor’s ability to do so”
- consequence is specialization
- purpose: find someone who is better than others at a certain part of production: can allow for greater total production
- opportunity cost
Heckscher-Ohlin (H-O) model
- based on endowments of the factors of production (land, labour, capital)
- comparison of ratios will tell us how much inputs cost to produce goods for exchange
- H-O model helps explain trade patterns; it remains the foundation for other models of trade
- looks at mixes of raw inputs
intra-good trade
trade of similar/same goods
ex.automobiles
intra-firm trade
trade between same corporation in different regions
—not driven by markets–taxes, tariffs, choice
Why was trade challenged?
Economists: politics gets in the way
-different politicians are pursuing different goals
- realist: security/power concerns
- analytical liberals’ response: trade redistributes wealth inside states, so this produces a domestic struggle over this policy
Stolper-Samuelson Theorem
- thinks about what trade does for each of the factors of production to try to explain why some people are against trade
- assumes factors of production may move from one application to another with ease, at no cost (ie. transition to specialization is easy)
- assumes specialization can occur rapidly and fully
- Intuition: Trade Liberalization changes the demand for inputs
- consequence: redistribution of income earned by each factor (scare endowments can now charge less (since they can be found elsewhere)(abundant factors will have increase in demand)
- owners of scarce factors= losers, owners of abundant factors=winners
- factor-based (or class ) cleavages result –workers lose, capitalists win
Sector Specific Approach
assumes factors can move from one application to another only with great difficulty, and at high cost–unrealistic to assume otherwise
- land, labour, and capital are differentiated–diffficult or impossible to move it to another sector
- specialization would occur slowly and never be completed
- Intuition: Trade changes price of goods factor markets are segmented–sectors influence preferences
- Consequence: changes to income vary by sector
- sector-based cleavages result
- -import-competing sectors prefer protectionism
- -export-competing sectors prefer trade liberalization
- explains lobbying
Intra-Industry Firm Heterogeneity
- differentiation between firms in a single industry
- begins with sector-specific model, but assumes firms vary in how they produce the sector’s good
- trade liberalization only benefits the most efficient firms in a sector
- -least efficient may even be harmed
- many added costs associated with doing business in a foreign market
- trade is uneven within a sector
- most efficient firms will increase production, dereases domestic price, increase demand for factors
- -makes it difficult for least efficient firms to afford the factors
- least efficient firms: higher cost for factors, lower rate of profit
- suggests we will see a cleavage inside a sector, if the sector is composed of heterogeneous firms
What are the int’l consequences of specialization for different paradigms? (relationship between power/ politics and economics)
- Liberalism
- Marxism
- Realism
- Marxists: division of labour is hierarchical : Economics -> politics
- Realists: trade depends on int’l regime, which depends on distribution of power: power–> economics
- Analytical liberals: domestic politics drives int’l outcomes: domestic politics–> economics
What are the three functions of money
- Medium of exchange (facilitates the exchange of goods and services; necessary for markets to function; allows for specialization)
- a store of value– a form of credit
- unit of measure
Government and managing money
government action: legal tender
-have to exercise political authority to make money a desirable medium of exchange
manage a money by balancing:
-confidence: sense that people believe money will keep it’s value in future
(if money is perceived to be losing money, people will want it less)
-liquidity: having access to money, needs to be enough in circulation to facilitate transactions
—too much in circulation will decrease value (inflation)
What are the two prices for money?
- interest rate (domestic price): Keynesian tool–lower interest rates will cause more spending (increase liquidity), raising interest rates will increase confidence
- -central banks can regulate this for private banks - exchange rate (foreign price)–comparison of currencies
What is the trilemma
-Mundell and Fleming noted tension between exchange rate and interest rates in terms of governments goals
Can only have two at once:
- domestic monetary policy autonomy: freedom to shift domestic interest rate as necessary
- fixed exchange rate: better for int’l transactions, facilitates it for investors (fluctuation could destroy profit)
- open capital flows/markets: trying to invest capital or attract it, allows the transition from the domestic market to int’l
What is the role of private banks?
serve as intermediaries between savers and borrowers; threat of a “panic” or “bank run” (when savers lose money because borrowers can’t pay bank back)
- -banks will lend out your money, charge borrowers higher interest rate than they pay you
- -difference is how you make profit
what is central banks role in lending
-became the lender of last resort (LLR)
-when private banks are failing–system wide issue
-the LLR function and “moral hazard”
–insurance makes banks reckless–abused
CB trade-off: insurance, but regulation
