Final exam flashcards
(87 cards)
Why is support for international trade not the same as support for free trade?
Free trade removes all barriers, but many people want trade with protection for domestic industries.
What is a common political reason governments maintain protectionist policies?
Protected industries lobby strongly, while consumer opposition is weak due to individually small losses.
When have protectionist policies historically increased the most?
After WWI and during the Great Depression, to protect domestic jobs and industries.
What was the purpose of the General Agreement on Tariffs and Trade (GATT)?
To encourage trade liberalization and reduce global tariffs post-WWII.
What is the economic rationale behind undervaluing a country’s currency?
It makes exports cheaper and boosts competitiveness, but can cause inflation.
How does an overvalued currency affect a country’s trade balance?
It makes imports cheaper and exports less competitive, hurting exporters.
Why do developing countries often implement ISI (Import Substitution Industrialization)?
To reduce dependency on foreign goods and foster domestic industry growth.
What are two typical outcomes of ISI policies in developing countries?
Industrial growth and inefficiency due to lack of competition.
What problem can arise from excessive protection of infant industries under ISI?
Industries may become inefficient and reliant on state support.
What role do economies of scale play in support for trade?
They lower production costs by expanding output for larger markets.
What challenge does a large informal economy pose for GDP measurement?
Many transactions are unrecorded, underestimating true economic activity.
What is a practical solution to include informal economy contributions in GDP?
Use sample surveys to estimate non-market production and include it in GDP.
What is the core goal of Import-Substitution Industrialisation (ISI)?
To reduce reliance on imports by developing domestic industries.
What is the main goal of export-oriented growth strategies?
To boost global competitiveness by focusing on international markets and trade.
What role does the real exchange rate play in trade?
It determines international competitiveness by comparing domestic and foreign prices.
What happens if domestic inflation rises but the exchange rate stays fixed?
Exports become expensive and imports cheaper, harming trade competitiveness.
How can devaluation help regain trade competitiveness?
It lowers export prices relative to imports, boosting external demand.
What is one risk of devaluation when a country imports many inputs?
It raises the cost of production, potentially increasing inflation.
Why can repeated devaluations become ineffective?
Persistent inflation cancels out gains, requiring deeper structural reforms.
How does excessive government spending lead to inflation?
It creates excess demand, especially if financed by printing money.
What is the policy solution to inflation caused by budget deficits?
Fiscal reform and disciplined budgeting to reduce deficits.
How do loose monetary policies contribute to inflation?
Cheap credit overheats the economy and raises prices.
What is the solution to inflation from loose monetary policy?
Strengthen central bank independence and set clear inflation targets.
How do import restrictions lead to inflation?
They raise the cost of imported inputs, reducing efficiency.
