International Political Economy
(Midterm)
Market-clearing equilibrium correct answers ...
Free trade correct answers The condition in which the free flow of goods and services
in international exchange is neither restricted nor encouraged by direct government
intervention. In practice, all governments are involved in regulating overseas trade in
some way. The most common means of affecting the distribution and levels of
international trade are import tariffs, import quotas, and export subsidies. It has been
broadly accepted among economists that an international free trade policy is desirable
to optimize world output and income levels in the long run.
Post-mercantilism, laissez-faire, Adam Smith, Pax Britannica, abandoned in interwar
period, post-WWII move back to free trade with GATT and then WTO, now regional
trade blocs, why not unilateral?-->prisoner's dilemma
Public good correct answers Commodities, the consumption of which has to be decided
by society as a whole, rather than by the individual. They are non-rival, non-excludable,
non-rejectable (can't abstain from national defense).
Externalities correct answers A consequence of an economic activity that is
experienced by unrelated third parties. An externality can be either positive or negative.
It is the full social costs that are important in determining an efficient resources
allocation, and private costs that actually determine prices. When individuals do not
bear the full costs of their transactions, they will engage in more of that activity than
society desires. When individuals do not capture all benefits from a transaction, they
engage in less of that activity than society desires.
Liberalism correct answers A traditional school of political economy that emerged in
Britain during the 18th century as a challenge to mercantilism. Liberalism asserts that
the purpose of economic activity is to enrich individuals and the state should thus play
little role in the economic system. Liberalism gave rise to the theory of comparative
advantage. It suggests that international political economy is cooperative rather than
conflictual. BUT state still needs to provide basic services, like the expectation of
property rights.
Hegemonic Stability Theory correct answers A model that hypothesizes that the global
economy will be open and stable when a hegemon exists and will tend toward
protectionism, instability, and crisis when no hegemon exists. (Krasner)
Distributional consequences correct answers Marx, Ricardo Viner
,The incomes of land, labor, and capital are determined by the supply and demand for
them, which is in tern a derived demand for commodities. In the market for the factors of
produciton, the owners of the factors will seek to maximize their profit from the use of
the factors in the production process.
WINNERS AND LOSERS
Political institutions correct answers Established forms of law, accepted practice and
organization which govern social and economic relationships. More explicitly, they
include, for example, property rights, the rules governing political behavior, commercial
transactions and the organizations that conduct them, such as the judiciary.
Monetary policy autonomy correct answers When a state has control over changes in
the country's money supply; it make undertake changes here in an attempt to manage
aggregate economic activity. An expansionary monetary policy is typically associated
with rising inflation, a restrictive monetary policy will falling inflation and rising
unemployment.
International spillovers correct answers Spillovers: a type of externality whereby third
parties benefit from public expenditures that lead to new technology available for all.
Protectionism correct answers Tariffs, quotas, other trade barriers (ex. controlling
exchange rates, etc.)
Usually aim is to protect domestic industry from the market forces at the international
level in the world market.
Collective action problem correct answers Applies to instances in which the action of a
number of individuals is required to achieve a common goal. The proglem arises
because people will not voluntarily invest time, energy, or money to achieve a common
goal, but will instead allow others to bear these costs. Try to free ride, then everybody
loses.
Why consumer interests are underrepresented in trade policy relative to producer
interests.
Gold Standard correct answers Pax Britannica, currencies tied to gold, could exchange
at a fixed rate for gold
Post Bretton-Woods, American dollar tied to gold, everyone else tied to USD
Ease of trading on the gold standard meant one of the freest periods of trade in history.
Welfare consequences correct answers ...
, Special interest groups correct answers ...
Stolper-Samuelson theorem correct answers In open economies, international trade
will cause the price of the factors of production to equalize. In a two-country world, the
price of each country's scarce factor will fall, whereas the price of its abundant factor will
rise. Eventually, the price of labor will be the same in both countries and the price of
capital will be the same in both countries.
The theory that protection benefits the scarce factor of production. This view flows from
the Heckscher-Ohlin approach: if a country imports goods that make intensive use of its
scarce factor, then limiting imports will help that factor. So in a labor-scarce country,
labor benefits from protection and loses from trade liberalization.
Fixed exchange rates correct answers A system in which governments establish a
central or official rate for their currency, usually expressed in terms of some standard,
such as gold or another currency. Governments are required to use monetary policy
and foreign exchange market intervention to maintain their currency within a band
around the official rate.
Countries prefer a fixed exchange rate regime for the purposes of export and trade. By
controlling its domestic currency a country can - and will more often than not - keep its
exchange rate low. So, keeping the exchange rate low ensures a domestic product's
competitiveness abroad and profitability at home.
Institutionalism correct answers A school of economic thought that first flourished int he
1920s in the US. Economists holding institutional views criticize orthodox economists for
relying on theoretical and mathematical models that not only distort and oversimplify
even strictly economic phenomena but, more importantly, ignore their non-economic,
institutional environment. The political and social structure of a country may have a big
effect on normal economic processes. Institutionalists believe that there is a need for
economists to recognize the relevance of other disciplines.
Marxism correct answers A school of political economy originating in the 19th century
work of Marx. It asserts that politics is dominated by distributional conflict between
social groups and that social groups are defined by economic structure. In capitalism,
politics is dominated by conflict between capitalists and workers. Marxist theories of
International Political Economy often emphasize distributional conflict between
advanced industrialized and developing countries.
Mercantilism correct answers A traditional school of IPE dating from (At least) the 17th
century. It asserts that power and wealth are inextricably connected. Accordingly, it
argues that governments structure their international economic transactions in order to
enhance their power relative to other states and domestic society. Mercantilism thus
depicts international political economy as inherently conflictual.
