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Flashcards in Global Trade and Finance Deck (44):

two components of the global finance system

o International monetary system (regulates exchange rates (price of one currencies relative to another) b/w economies
o International investment system (regulates how capital flows across borders)


explain financialisation

progressive insertion of the logic of finance becoming more prevalent in our lives


define financial markets and its role

where people trade fungible items (usually more accurately ‘exchanges’)
- Role: link lenders and borrowers in allocating economic resources
- Developed to support the ‘real’ economy


explain real and money economy

o The ‘real’ economy: concerned with producing goods and services- e.g. manufacturing
o The ‘money’ economy: financial markets, concerned with buying and selling fungible items


what is an inherent part of financial markets and why

risk= expectations of future income flows uncertain


3 parts of mundell flaming

capital mobility
exchange rates
monetary policy


explain MF capital mobility

ability of money to cross borders freely
 Allows access to greater funds for investment + growth


explain MF exchange rates

existence of fixed or minimally floating currencies
 Reassures investors that value of their money not lost through depreciating currency + avoids uncertainty of fluctuating currencies


explain MF monetary policy/autonomy

able to set own interest rates in response to domestic conditions
 Rates able to influence domestic growth and employment


what is mundell flame tricot know as

impossible trinity


why can't gov peruse monetary policy if already strving for first two

o If gov pursue indep. Monetary policy, might then set domestic interest rates low to drive economic activity bc economy experiencing downturn (so lower interest rate to drive activity)
o Then capital leave country as interest rate low= less return in domestic market
o Capital leaving= produces downward pressure on exchange rate
o Gov could increase interest rates to maintain value of exchange rate but this means abandoning initial goal of lowering interest rates


which combination of MF does gold standard express

• Fixed exchange rates + capital mobility


which combination of MF does bretton woods express

• Fixed but adjustable exchange rates + independent monetary policy


which combination of MF does liberalisatoin express

• Sacrificed fixed exchange rates to prioritise capital mobility and preserve autonomy over monetary policy


benefit of gold standard

Reduced foreign exchange risks (provided certainty + // increased international trade) and the incentive for speculation


cost of gold standard

constrained government policy (less control over domestic policy) + long-term stability came alongside short-term fluctuations generated by periodic surges in the world’s gold stock


benefit of bretton woods (embedded lib)

Government spending used to shape aggregate demand (a ’demand-side’ theory to managing the business cycle
• Enabled open economy but governments remained able to target domestic objectives i.e. unemployment)
• Through keyenism policy (spend more to stimulate economy + reduce unemployment) - I.e. infrastructure projects
• Fundamental disequilibrium- countries given option to change peg value of currency if under pressure - sustained payment deficient (more money leaving than coming in) (IMF)
• // could control capital movement (control private financial flows that had potential to disrupt exchange rates and gov autonomy in economic policy) = Mundell Policy


cost of bretton woods

unhelpful in tackling stagflation alongside broader structural issues (Triffin Dilemma)


why nixon shock occured (bretton woods end)

• Ending gold standard= Nixon to intervene in economic downturn + tackle unemployment more effectively
• Structural pressures on US dollar
• Fixed exchange rates undermined by Triffin Dilemma: balance b/w dollars and gold deterior, more dollars outside US than inside + gov not able to redeem dollars for gold
• // Floating exchange rates


benefit of liberalisation

Monetarism (in response to stagflation- targeting high inflation over unemployment), with governments controlling amount of money in circulation – a ‘supply-side’ theory to managing the business cycle – tackled structural issues


cost of liberalisation

created conditions for increased speculation (transactions taking place for profit on expectation of movement in the values of currency rather than to finance international trade and investment)


why was staglflation occurring

o Price shocks were slowing economy – spike in price of oil
 Also meant production less profitable = combination of high unemployment + high inflation
o Keyenism at odds of these events


IMF role

- No longer monitoring activity but a lender of last resort
o Large short term loans in times of economic crisis to stabilise + manage debts


what is FDI

investment in ownership and management of assets in another country


what is portfolio investment

investing in bonds, no management part (shares + stocks)


what is banking investment

short term lending and borrowing- usually interbank borrowing


what has been the biggest rises in international capital flows

flows in institutional money


why are biggest flows in institutional money

due to financial liberalisation
- policies by govs support more liberal cross border flow
- shift to monetarism= competition
- reduce capital control (liberal approach to regulation of financial markets)
- domestic multilateral policy driving new products and tech


3 domestic policy of financial liberalisation

eliminated capital controls (move money freely now)

de reg of activities of banks, stockbroking firms etc, allowing increased comp in financial sector

securitisation- allows financial institutions to fund lending activities indirectly through capital markets rather than taking on deposits or borrowing in own name


multilateral policy of financial liberalisation

• Changes from the 1980s to EU and OECD rules governing capital flows among members
• Domestic policy decisions made among countries for liberalisation environment for cross border capital flows


how did gov create more liberal cross border capital flows

domestic and multilateral policies


what did greater competition in financial sector lead to

new financial products and tech


what are two new financial products made by liberalisation

o Derivatives: contract between two parties to exchange risk
• Issues:
• Varying levels of counterparty risks (insurance policies)
• Usually traded over the counter (deal put through broker not stock exchange // no public record) = difficulties in tracking volumes and measuring systemic risks
• High return= high risk
o High frequency trading
• Front run= buy ahead of order and make small spread of it


Explain casino capitalism

- increase risk =

• High risk high reward
• Expansion of capital flows for speculation, as opposed to production


why do states regulate trade

- Protect industries in contemporary era
o ‘Infant industries’: protect until developed enough to be competitive to foreign suppliers
o National security- should be self-sufficient in production of certain goods, particularly for defence purposes, e.g. food products
o Cultural protection- e.g. film, theatre, music
o Environmental or social goals- to protect labour, protect renewal energy suppliers


how do states regulate trade

tariffs + non tariff barriers (NBT)
ie. quotas, subsidies, admin regulations


why do states engage in trade

labor productivity


explain absolute advantage

entity ability to produce product more efficiently than another, with assumption of same input (employees)
- // goal= produce more than need and sell surplus


eplain comparative advantage

benefits of specialization


explain how people can be negatively affected by comparative advantage (example)

Re-employment issues
o Theoretically: If one industry declines due to comp from another country, industry will shirk and release its capital and labor = which are then absorbed by industries in which the country is relatively more efficient
o Realistically this does not happen bc:
 Workers cannot move freely across jobs bc experience is specific to line of work, + few skills equally valuable across industries
 Capital movement not quick (interest rates high- no new ventures // not employed


how did global trade volumes increase after WWII

• Expansion in South-South trade from the 1990s
• Manufacturing increasingly prevalent, as opposed to raw materials
• Expansion of intra-industry and intra-firm trade


Explain unevenness of trade liberalisation

- developing countries lack resources to advance interests through WTO (litigation)
- level playing field (US vs puerto rico)
- one country one vote (formal vs informal)


define trade liberalisation

is the removal or reduction of restrictions or barriers on the free exchange of goods between nations


define financial liberalisation

deregulation of domestic financial markets and the liberalization of the capital accoun