INTL 102 Spring 14 – Flashcards

Arbitrage is the practice of taking advantage of price differences in different markets in order to capitalize on the imbalance. This will eventually lead to the disappearance of price differences across markets. The Law-of-One-Price explains this price equality as a result of having no frictions or barriers on free trade and globalization. Though complete equality has not been achieved today, we have seen price convergence across many markets. Yet this remains a measure in order to compare globalization today to the hypothetical case of "complete" globalization.

Home-country bias is the tendency for there to be more domestic trade than foreign trade after all other factors such as distance, income levels, etc... have been considered. This bias is due to several factors that limit the incentive for foreign trade. Firstly, the difference in monetary currency means that one must go through a process of exchanging currency to do business, which creates costs and risks for those engaging it in. Secondly, language and cultural differences demand a certain knowledge of foreign culture and environment, or the need for a hired expert, creating more costs and inconveniences. Thirdly, the legal systems by country differ dramatically, and since transactions require contracts, one must hire lawyers that understand foreign countries legal codes, adding more expenses. This is significant because it demonstrates that along the metric that runs from complete globalization to not globalization, we are still not very close. Foreign trade is still not completely free, with various external costs, making it undesirable.

These are policies that impose barriers on free trade in an effort to maintain price and costs advantages in the domestic market. These policies are usually entertained by the scarce factor of production, because as Heckscher-Ohlin describes, they do not have comparative advantage in the world market, so much protect themselves from world prices by putting limitations on the imports of their products. These are significant because the way the Old and New world began in order to protect their scarce industries, but in the end abundant industries won free trade.

Within technological change, there was a communication and transportation revolution. The communications revolution made the costs of computing and communication fall, so that the natural barriers of distance that separated national markets grew smaller as well - in terms of time and space. The transportation revolution contributed to the accessibility of foreign markets. With containerization and other such innovations, the transportation revolution made trade with foreign markets much cheaper in terms of the displacement of goods and shipping costs. This made free trade much more profitable, leading to globalization

Trade policies, capital controls and immigration policies are all government policies that facilitate/cause globalization. Trade policies are used to regulate that free movement of goods between markets, facilitating it, or impeding it. Tariffs and quotas are such policies. When they fall, this indicates more freedom in trade, therefore facilitation globalization. Capital controls are government restrictions on the purchase or sale of foreign assets. The lack of such controls facilities the growth of globalization. Immigration policies limited the movement of human capital, notably from labor-abundant areas to labor-scarce, because it lowered the cost of living for those from there.

Countries gain from specializing in goods it produces relatively well and easily and trading for goods it produces relatively less well and less easily. This relativity is known as the principle of "Comparative Advantage". This principle refers to the ability of a market to produce a good at a lower opportunity cost than a different market. Heckscher-Ohlin explain that when a country has comparative advantage, it should specialize in that good. They explain that comparative advantage is based on a countries endowments (factors of production and factor intensities), explaining why certain countries have a comparative advantage in certain goods. Comparative advantage explains why trade is beneficial for all nations, because all nations have a comparative advantage in a certain good.

Factor abundance is the amount of resources required to produce goods that are available in a certain market. These include land, labor and capital. Factor intensity refers to the varying differences between these factors. For example, there unskilled vs skilled labor. These are what Heckscher and Ohlin prescribe as the reasons for comparative advantage in a country. The more abundant a factor is, the cheaper it is to obtain and use. The intensity of these factors dictates what kind of production will be cheapest as well, from manufacturing to agriculture. Therefore, the goods in which a country has comparative advantage illustrates the factors that they have in abundance, and what there intensity is.

Prisoner's Dilemma is the theory surrounding a game and why two individuals may not cooperate with each other even if cooperation serves their best interests. This theory shows how individuals are likely to react in concern of the action of the other actors in the game. All individuals tend to act in a way that benefit them and not the other. Yet since they all do that, this does not benefit them as much as their cooperation could. Yet since they are worried about being taken advantage of, this is the inevitable outcome. This theory serves to demonstrates how in the early 19th century, trade policies were put in place quite in the manner of the Prisoner's Dilemma. No one wanted to free their market out of fright of being taken advantage of, yet according to comparative advantage, this would have benefited the world economy as a whole.

With the Repeal of the Corn Laws and the Cobden Chevalier Treaty, Britain became the first free-trading nation. With the evolution of globalizing technologies, transportation and communication costs lowered and made the displacement of goods, capital and information much easier, faster and cheaper. They also allowed for the specialization and trade between developed and developing regions. The Golden Age marks the beginning of the use of the Gold Standard as a fixed exchange rate regimes which facilitated international trade and finance because the currency's exchange-rate stability.

The English Landed Aristocracy were the owners of the majority of the land in Britain. They had complete control over politics due to their nobility and their interest in maintaining protectionist policies. During the Napoleonic Wars, they were used to maintain food security, yet as the Industrial Revolution took off, such policies like the Corn Laws were kept in order to maintain domestic advantage and control of price costs. Yet, with the Reform Act of 1932, these elite were replaced with big city industrialists in Parliament.

Though a conservationist at first, William Peel was a man of the British elite who completely disagreed with the Whig Party, the political party supporting the repeal of the corn laws and free trade. Yet, after the Irish famine, he became slowly convinced that protectionism wasn't in the best interest of the world, and outraged by the landowners lack of empathy for the starving and hungry, worked to finally repeal these laws over a three year period. This led to the end of his political career, because he knew he would be deposed as the Conservative leader.

Set up the Boston Manufacturing Co in Massachusetts after touring and English mill and "memorized" the technologies. At the time this was significant because illegal to export blueprints and for colonies to manufacture. He created the first planned industrial city which drew in labor from farms, notably women. This began the rise of the United States Textile industry, which was only possible due to the artificial environment of isolation is was created in during the war of 1812. This leads to its positioning as a protectionist seeking industry, in strong contrast with the abundant factor of production's, land, desire for free trade.

The Democrats of the South mostly supported free trade because they owned vast Southern plantations that benefits from the world prices and the accessibility of imports for cheap. Yet, after the war of 1812, manufacturers appealed for protection from British imports. The Government needed revenue for national defense and debts, so agreed to protectionism. As the demand for cotton exploded, the South's commitment intensified. The cotton gin increased productivity, giving the South more incentive to reduce trade barriers. This led to a stalemate in Congress with fluctuating tariffs and limitations depending on who was in office.

One of the most notable arguments for protection. Claims that protection is warranted for small new firms especially in less developed countries because they have little chance of competing head-to-head with established firms that have better roots, information and efficiency which makes them more profitable and remain at a lower price. Protectionists demand that they be protected through such things as an import tariffs which would raise the domestic price, covering their higher costs, and allowing them enough time to grow. This is what happened to Europe and Old World during their industrial revolution period (manufactures/Iron). By protecting these industries, a government might stimulate economic growth.

As opposed to Long staple cotton, Short staple was a denser, sticker cotton that grew in a much wider range of climates compared to his counterpart. This is the type of cotton that was grown in the South, however it was incredibly hard to separate. Eli Whitney's Cotton Gin improved productivity, ensured favorably prices and increased market demand. This gave the south much more economic power during a time when manufacturers were clamoring for protectionist policies.

Tariffs before the civil war fluctuated dramatically in terms of which party was in power and majority. When factor scarce Republican manufacturers and capitalists were in power, they rose tariffs as protectionist policies to maintain domestic advantage in the market, while Southern factor abundant landowners would decline tariffs because they benefited from world prices and the free accessibility to global goods. Ended with high tariffs because south was out of congress.

Considered the greatest triumph of the British free trade movement, the treaty consisted of negotiations concerning bilateral tariff reduction with France. Britain abolished or lowered its tariffs on French luxury goods in exchange for a reduction in France's tariffs on British manufactured goods. This treaty was sued to negotiate similar treaties with other countries, which contained MFN clauses, bounding parties to extend all benefits to each states they were in agreement with. This allowed the wide spread of free trade in the Old World through cooperation. Bringing forth the Golden Age.

If a nation chooses to let market forces determine exchange rates. This means that the rate is constantly changing and is allowed to operate unchecked by government policy. This exchange-rate is beneficial in terms of BOP adjustment - the free floatation of currency eliminates surplus or deficits naturally without policy action by natural depreciation or appreciation of currency. It's benefits are that it automatically corrects payments imbalances and gives governments policy independence, yet it is an unstable/uncertain exchange rate that reduces globalization and policy independence can lead to inflation.

If a nation chooses to a adopt a fixed price for its currency and maintains it via policies. This exchange-rate requires heavy government involvement in terms of BOP adjustment where they must actively manage the currency. These rates remain fixed in the face of changes in demand and supply with intervention in the FOREX market (buy/sell currency) and monetary policies such as interest rates. Though fixed exchange rates benefits globalization through its stability and creditworthiness, as well as giving low inflation, it also eliminates domestic monetary policy independence and the risks of currency crisis are much higher.

Balance of payments is the sum accounting of a nation's transactions with the rest of the world. A surplus indicates that a nation is selling more than it is buying. The adjustment process operates differently for floating and fixed exchange-rate regimes. In a floating exchange rate, the BOP adjusts automatically thanks to natural appreciation/depreciation of currency and its effect on trade (currency appreciates, making goods more expensive, reducing exports). In a fixed exchange rate, government much intervene in Forex market or monetary policies in order to affect demand and supply for its currency. For a surplus, they would decrease domestic interest rates in order to increase demand or sell back pesos into the market for foreign reserves. Yet deficits are much more troublesome because foreign reserves are exhaustible.

Demonstrates the way in which politicians attempt to maintain a currency artificially high before re-election in order to increase public opinion in their favor. After the elections, currency is devaluated, which becomes costly and reduces favorable public opinion, yet regardless of who was put in office, they are able to blame it on their predecessors.

If speculators expect that a government will run out of foreign reserves, they will sell the currency and bring about a foreign exchange crisis (a devaluation). Their goal is to get our of the currency while the fixed regime is still in place, still at high value. As speculators sell the currency, this depreciates it further, allowing them to make a huge profit off of it.

The gold standard acted as a metallic regulator to impose wage and price constraints. Hume identified this regulatory process where changes in prices led to specie (gold) flows that tended to force prices and economies to return to balance. Any country that spent more than it earned would be forced by the operation of the gold standard to reverse course, reduce wages, and spending and move back toward equilibrium. Had to privilege international ties over domestic demands, imposing austerity and wage cuts in order to adhere to gold. Gave investors a way of judging financial reliability of the government.

The Gold Standard was a fixed-exchange rate regime where nations fixed the values of their currencies to gold. This was instituted in developed and developing countries during the beginning of the Golden Age, when they began to trade freely in the world market. This was important to globalization because it reduced exchange rate risk and so helped lower the costs foreign trade and foreign investment, motivating global business, as well as signaling financial rectitude and improving a countries creditworthiness. Yet it was politically controversial because it was arbitrarily supplied by the world's supply of gold and there was no room for domestic monetary policy, hindering automatic BOP adjustments.

The "British Peace" was the name attributed to the period after Britain's defeats of the French in 1815, leaving them dominant and mercantilism no longer essential for national security. Britain's navel power meant sea lanes were safe and world markets were open for business. This led to the 100 year's peace which was conducive to negotiating freer trade with other countries. With peace, governments no longer needed trade taxes to pay for costly wars.

The Wizard of Oz is an allegory for interests that opposed and supported the Gold Standard. "Oz" can also refer to ounce, which was a way of measuring gold. The yellow brick road designates gold itself, and its path leads to Emerald City, a parallel to Washington and Congress who implemented the standard. The scarecrow demonstrates the Midwestern farmer, not in favor of the gold standard, portrayed as having "no brain", relating to how they are seen in society, and how their voice is not given any weight. The Tin Man who lost his heart refers to the manufacturers who are in favor of the gold standard, heartless because they live a repetitive life on the assembly line and because they only consider their interests and not the struggling farmers. The Cowardly Lion represents Bryan, the champion of the anti-gold movement, who was a great orator, but never actually won the presidential election. Finally, Dorothy stood for traditional farm values and was modeled after Mary Lease: "Raise less corn and more hell". This allegory intends to demonstrate the conflicts between different industries on the subject of the gold standard and its effects.

William Jennings Bryan was a great orator and champion of the anti-gold movement. He ran multiple times for President, heading the Populist and Democratic platform and demanding for the remediation of the gold standard. America's farming and mining districts greatly supported him and a mass movement began in convalescence to Bryan's defiance. He claimed that taking away the gold standard would result in depreciation that would reverse the effects of the declining world prices of farm and mining goods, and the inflation that would ensue would benefit them. Though Bryan never won the presidency, he way unsuccessful in changing the gold standard.

The Rothschilds were successful noble bankers with global connections and diplomatic influence. Nathan, a member of the City of London, reinforced international finance, the gold standard and free trade. He used his fortune and influence to support global economic integration and derived enormous financial benefits from the worldwide triumph of this commitment to economic openness. He fought to keep global financial markets accessible and stable and bankrolled ambitious ventures in southern Africa to bring new investments to new markets. Was able to bring 98% of South African diamond production under their control.

This refers to the convergence of prices during the Golden Age, when the difference in prices of the same products in markets across the world fell. This is relevant to the Law of One Price, which is considered a way of measuring the economy's globalization in comparison to complete globalization. The cause for these price convergences is due to improvements in transportation and communications that helped integrate these markets.

Electrical power, cheaper technologies and communication, and flurry of inventions that brought forth new products or revolutionized the production of old ones (Cotton Gin, etc...) Demand for consumer goods other than food, clothes and shelter doubled. The rapidly industrializing nations such as Germany and US had the advantage of lateness and so were well positioned to adopt new patterns of production and consumption, making their factories bigger and better. But history weighed on the British manufacturers, making it harder and more costly to implicate all the latest technologies. This serves to partially explain why Britain diminished as a global power during the end of the Golden Age.

The key to economic growth is productivity, which refers to the amount of output Y per hour L. Productivity is the explanation for why some countries are rich and some are poor. Countries that are behind on productivity are behind in growth. Hence productivity growth is how to achieve growth and higher income per capita. It requires better technology and more capital in order to produce more goods. If there are no impediments to the flow of technology, the countries that are behind in productivity show higher productivity growth - should be catching up due to globalization and the spread of technologies and capital to poor nations through trade, etc...

The outcome of globalization, this refers to the specialization of individual nations in certain goods, those that have comparative advantage in because of endowments in particular factors of production (Heckscher-Ohlin). This has led to a global industrial shift, in which production processes are relocated to developing countries.

Catching-up refers to when countries have no impediments to the flow of technology and capital are behind in productivity, they should have higher productivity growth and catch up with rich countries. Globalization should spread technology and capital to poor nations through trade, etc... allowing them the opportunity to improve their productivity and catch up with rich countries. This process of convergence is characteristic of globalization. This leads to a greater equality. Yet controversial because we see increasing inequality in ARS and decreasing inequality in Old world

Areas of Recent Settlement is the name attributed to those areas where labor flowed from where it was abundant and therefore cheap in the Old World, European periphery, to where it was scarce and therefore expensive, in the New World, notably the US, Canada, Latin and South-America, as well as Australia. Heckscher-Ohlin Theorem is used to explain these patterns of factor flows from abundant factors to scarce factors because of the difference of wages. This led to raised wages in Europe, and lowered wages in the US. This is also significant in terms of inequality, because this means it fell in the old world but increased in the new one.

Until 1854, Japan was closed to the outside world until Commodore Perry forced them to open its ports to US trade with 4 steam-powered ships. Tokugawa Shogunate, the last feudal warlord lost face and was deposed in the Meiji Revolution of 1868 which consisted of the restoration of the old emperor, leading to political changes such as a program of modernization by combine western advances and traditional eastern values. Meiji = enlightenment rule - led to the production of goods that could be sold in international markets. This led to Japan's industrialization and rapid growth and economic convergence with the West.

Divergence puzzles consists of perplexing exceptions to why some countries did not converge, but rather diverged and became highly unequal, even though they started off with vast amounts of certain land and natural resources. Mostly this refers to colonies such as those located in Central and South America that have not caught up to the US. This is due to the economic structures that ensued from their endowments, leading to long-run economic and social outcomes that are strongly rooted and hard to change. The reason for their difference is attributed to endowments and economic structures, poor institutions, barrier to trade/globalization, and impact of colonialism. Can be explained by short-run reversal of governmental policies, colonial expansion and long-term historical evolution of interest and institutions conditioned by the initial endowments.

Theory of path dependence originally developed by economist to explain technology adoption processes and industry evolution. The nature of any equilibrium depends partly on the process of getting there.

King Leopold II of Belgium is chiefly remembered for the founding and exploitation of the Congo Free State. Disguised under a the narrative of improving the lives of the native inhabitants, Leopold ran the country using military force, exploiting the Congo's resources such as ivory and rubber. It became a national scandal and Leopold was forced to secede the territory. This is significant because as Frieden claims, this caused the destruction of much of the region's social structure. Colonialism devastate local societies, exacerbated conflicts among the inhabitants and gave the Congolese no opportunity to adopt and adapt to innovations and the world market.

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Different from mass European migrations, a settler colony was ruled by an important caste that dominated and controlled large indigenous populations. These had the same potential for abuse as the cases of unvarnished colonial pillage in Plantation and Conquest Economies. Settlers received subsidies to take land and commercialize agriculturally, and depended on separate and unequal treatment of the locals. Led to the institutions of political polices that maintained such unequal practices within the structure of these nations in the long run.

Climate suitable to small family farms in North America. Consisted of more equal treatment of labor and income, leading to more equal political structures that were maintained in the long run. Usually grew coffee, rice or wheat because it was a more ideal small-holder crop. This led to more broad-based and equitable pattens of political growth.

Backlash against Immigration in the New World, explained by Heckscher -Ohlin because of the movement of labor from a place where it was abundant to a place where it was scarce. Immigration increased inequality in ARS, because tended to be unskilled so flooded the labor markets at the bottom of income distribution. This demonstrates a rise in inequality in New World, and the fall of inequality in Old World. US began to impose restriction on immigration such as 1921 national quota system, capping immigration at 3%. This ended mass migration era. Restrictions bring globalization to an end. Policies in response to closing off of economies during interwar backlash. In response to "grain invasion" agriculturist in Old War demanded protection, because according to Stolper Samuelson, they were losers. Some were successful, like Iron protectionism, others were forced to shift, like in Great Britain to dairy and livestock in order to maintain free trade.

Regarded as the central pillar of the multilateral trading system and contributing to the stability of the global economy. By joining the WTO, member countries agree that if they believe fellow members are in violation of their trade agreements, they will use the system of settling disputes instead of taking action unilaterally. This consists of abiding to procedure and respecting final judgments.

Procedure during which if a member country of the WTO believes that one of his counterparts is in violation of their trade agreements, he must follow the particular Dispute Settlement procedure instead of seeking unilateral action. The duration of dispute settlement is about a year and a few months. It involves the parties and third parties to witness the case, be involved in panels in order to discuss the concerns. At the end of a year, the Body will adopt a report. If the plaintiff submits an appeal, the process could take longer. However they must respect the conclusions of the Settlement Body. This is a way of preventing Prisoner's dilemma by imposing punishments for lack of cooperation and honesty.

Mercantilism was the theory and practice prior to the 19th century free trade era. It's aim was to increase a nation's wealth and power by establishing colonies and heavily regulating their trade for the purposes of promoting the power of the imperial colony. It was the opposite of free trade based on comparative advantage. It defined welfare in terms of maximizing exports, using the surplus for military investment//maximizing consumption (comparative advantage). England's goal was to keep import prices artificially low, export prices and demand for English shipping artificially high and overall accumulate wealth and power. One of their policies was the Navigation Acts which allowed/promoted these goals.

Navigation Acts (1650-1849) were acts that benefited England's goal of accumulating wealth and power by artificially high demand and artificially low prices. They dictated that goods going to/from colonies had to be carried in British ships - promoted sea power, denied the benefit to rival nations. Enumerated goods (tobacco, rice, sugar) could only be exported to England - lowered the price of England's imports, denied access to other rivals. The colonies were forbidden of manufacturing - kept colonies importers of British manufacture goods. These acts raises British exports 10-fold, generating a fleet of merchant ships, important during this time of constant war.

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After 1776, the US was cut off temporarily from the world economy by wars and embargoes notably, the Napoleonic Wars. These wars consisted of a series of was between the French and Great Britain and demonstrated revolutionized armies because of the manner in which they played out at an unprecedented scale. This stimulated the rise of manufactured goods that thrived in this sort of artificial setting. Yet, at the end of the wars, the manufacturers faced extinction because of the end of this artificial setting. Therefore, they demanded to be protected from the impact of the world market. Yet, for Britain, Mercantilism had spend it's usefulness. At the end of the war, it was no longer necessary to build up militarily - Hundred Years Peace/Pax Britannica. This led Britain to free trade.

The Corn Laws were protectionists tariffs on agricultural products that originated during the Napoleonic wars for "national security grounds", when food security became primordial. But Land in Britain was so uneconomic that landlords demanded higher tariffs. This became a dominant issue because Britain's abundant factors, capital and labor favored free trade due to the benefits of the technological and communication revolution. The corn laws worked against comparative advantage and labor and capital suffered through high costs. Relevant to Stolper-Samuelson - abundant factor = free trader. Opposition spear-headed by capitalists and skilled labor party, the Whigs, and lobby, Anti-Corn Law League. The Industrial Revolution has shifted economic power from the landed elite to urban areas, but the British electoral system still favored landlords due to malaportionment. Reform Act of 1832 paved the way for repeal by giving seats to large cities, so industrial districts had greater representation. The Irish Potato Famine also outraged public opinion when Corn Laws had limited emergency food imports. In 1846 Corn Laws were repealed. Britain became first trading nation, which spread to other european nations. Started Golden Age.

Anti-Corn Law League was a powerful lobby advocating free trade and consisted of manufacturers, merchants, bankers, etc... In other words, Britain's abundant factors of production advocating for free trade and the repeal of the protectionist Corn Laws. They recognized the inefficiency of protectionism in light of comparative advantage, and the benefits free trade would bring for the manufacturing industry. Were able to acquire Reform Act of 1832, which reconfigured the House of Commons, giving more seats to large cities, and taking those of the landed elites from the "rotten boroughs" away, reducing their influence, and giving far greater representation to capitalists. They ultimately led to the repeal of the Corn Laws in 1846.

Mines and large-estates; Native populations for labor in Mexico, Central and South America. Also very prone to unequal institutions because of large agricultural lands and hard working, low-skilled labor was in abundance, so easily exploited.

Caribbean climate ideal for sugar; slaves from Africa for labor. Such endowments led to plantation economies which led to initially unequal income distribution. Eventually the plantation owners, as the elite created political and legal institutions in order to maintain their superiority and dominance. Eventually these unequal institutions are imposed in the long-run growth, making it hard to change the political system.

Post-colonial dependency relations in the developing world.

Crops such as corn and wheat were considered low value crops and usually grown on smaller type farms like in settlement economies. These economies usually created an equal distribution of wealth, with little exploitation, creating nations who focused more on political and socio-economic equality, notably in the long-run, eventually creating public schools for the good of the nation's labor. This explains why such nations were able to catch up and converge with globalized, rich and free trading nations.

Crops such as sugar and tobacco were considered high value crops and usually grown on plantations. Plantation economies usually created unequal distribution of income, leading to the introduction of political and legal institutions guaranteeing inequality and in the long-run, became part of the political structural order. This explains the reason why some nations, though they began like the US and Canada with abundant land, diverged from their enriching path, and became a poor nation.

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