International political economy Flashcards
International Political Economy
- Highlights intersection of politics and economics
Liberal trade Policy
- Following WWII, U.S. wants an international order that permitted trade to flourish.
- Emphasis on free markets.
Beggar-thy -neighbor policies
- Characterized international commerce during the 1930s
- The idea behind these policies is that economic competition is a zero-sum game.
- Tariffs: tax on imports between soveirn states
GATT
General agreement on Tariffs and Trade (became WTO) created in 1947
* Goal is to maximize growth in world trade through a reduction in trade barriers pursued on a non discriminatory basis.
International Monetary Fund (IMF)
- Part of the free trade regime created by the U.S and its allies after WW11
- Designed to promote the stability and liberalization of international monetary transactions
- The IMF provides temporary loans to states that face temporary balance of payments problems
What are a states balance of payments?
- Consists of a comparison of all the payments the state and its residents made to foreign companies with the total of all receipts obtained from abroad by the state and its residents during the same year.
- And expenditure or movement of finances abroad contributes to a states payments deficit
- Any purchases from abroad or movement of finances into the country contributes to a balance of payments surplus
consists of comparing the overall amount of foreign receipts that the state and its citizens received during the same year with the sum of all the payments that they made to foreign businesses.
Any foreign purchases or financial inflows into the nation add to the surplus in the balance of payments.
Additionally, spending or moving money overseas adds to a state’s payments imbalance.
Balance of payments deficits
- States that find themselves with persistent balance of payments deficits must find ways to restore a situation of financial equilibrium
- Those with surpluses are under less pressure to adjust because they make more than they spend
- States have to find a way to get back to a place where they are not spending more money to stop the gap in deficits
Three Strategies of Balance of Payment Deficits
Three strategies
1. Internal adjustment mechanisms
* Any mechanisms designed to decrease a state’s purchases abroad by reducing expenditures.
* E.g., raising taxes or interest rates.
* Internal mechanisms entail economic and political costs to the state (or elements within it).
* Why do governments not like this–governments are the one paying the taxes, and they do not want to pay money
* This is the last resort
2. External adjustment policies
* Restore equilibrium to a country by altering the terms of exchange for foreign economic transactions.
* E.g., tariffs, quotas, and currency devaluations.
* External mechanisms place the burden of adjustment primarily on citizens from other countries.
* Pushing the costs onto people who live elsewhere
* Canadian dollars in united states–it is a lot more expensive
* Discourages Canadians from going to the us and buying things–opposite for Americans
* Value of foreign goods too expensive
* Foreign consumers look to buy domestic as the prices do not seem as expensive
* Governments love this because the people who help them with balance of payments are not their own citizens–they do not pay for it
3. Liquidity mechanisms
* States can receive short term loans to restore their balance of payments equilibrium.
* Liquidity solutions to balance of payment deficits are provided by the IMF.
* Create an organization that provides states with short term loans–solve balance of payment problems quickly without hurting the government
The International Monetary System
(How do states with different currencies trade with one another?)
* The monetary system establishes a common framework within which states can determine the relative value of their currencies
* Currency rates of exchange: Express the value of one currency in relation to others
* Make it possible for states to trade with one another
* How do you know the Canadian dollar is worth less than the American–it had to be created
* Relative value of their currencies
The Bretton Woods system
- The rules, institutions, and decision making procedures for determining the relative value of currencies was developed in Bretton Woods, New Hampshire in 1944.
- At a conference held in Bretton Woods the U.S. dollar became “good as gold.”
- After ww11–1944
The importance of the U.S dollar
- The US fixed the value of the dollar at $35 per ounce of gold it held in reserve
- The dollar became a parallel currency: It was universally accepted as the currency against which all others were sold or redeemed in exchange markets
- The Bretton Woods system was a fixed exchange rate system
- In theory for you to take $35 and demand an ounce of gold in return
- At Bretton woods meaning where us was known as the worlds parallel currency–the worlds most important currency
The End of Fixed Exchange Rates
- By the 1960s, there were too many dollars available.
- Possibility of U.S devaluation led other states to lose confidence in the U.S dollar.
- U.S suffers its first trade deficit in the 20th century in 1971.
- Nixon announces the U.S will no longer exchange dollars for gold in August 1971. Move to floating exchange rate system.
- On a system of free flowing system–supply and demand–the more amount of currency is printed, the less it is worth–the more people want to hold this money, the higher demand and worth of it
- US broke its promise by printing more cash than holding gold in the reserve
- On the system of floating exchange rates–also in the time of crypto currency
Bitcoin
- The end of paper currency?
- Do not require government backing
- Away from government and into computer networks
- No one person or government controlling the value of bitcoin–bitcoin operates on a blockchain
- Blockchain: A shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network
- Through the blockchain the transactions are recorded and verified
- Also have tremendous downsides–cryptons can be cracked, attached to criminal activity, not as important to currency
- Quick digital transactions
