Trade Tools & Protectionism
What is the economic effect of a quota on consumers?
Reduces supply, increases price, harms consumers.
These companies operate in multiple countries and influence global trade decisions.
Multinational enterprises (MNEs)
This is the value of one currency in terms of another.
Exchange rate. (Trading pair)
Which capital flow is risky and causes volatility?
Speculative capital flows. (Fast money)
What are most developing country exports based on?
Primary commodities.
This trade policy raises domestic prices but helps protect local industries.
Tariffs.
When a firm moves part of its production abroad to lower costs.
Offshoring.
This system allows exchange rates to fluctuate freely.
A floating exchange rate system
What crisis in 2008 caused global panic?
The U.S. subprime mortgage crisis.
What is a risk of relying on a single export product?
Vulnerability to global shocks.
A government subsidy given to local producers creates what?
Artificial competitiveness.
What determines whether a firm exports its products or not?
Only firms with low enough costs can still make a profit after paying trade costs. These are the firms that export.
When the Korean won weakens, what happens to exports?
They become more competitive (cheaper).
What is the rapid exit of capital during panic?
Capital flight.
What helped Korea succeed where Brazil failed?
Smart protection, education, and gradual liberalization.
What is a non-tariff barrier example?
Health/safety standards, product certifications.
What are the two types of foreign direct investment (FDI)?
Horizontal: Same product in a new country
Vertical: Split production across countries
If Korea’s CPI increases, what is the likely central bank response?
Raise interest rates.
These organizations give emergency loans but require reforms.
IMF and World Bank.
What challenge makes it harder for developing countries to benefit from international trade?
Poor infrastructure like roads, ports, and electricity makes it hard to export goods and attract foreign investment.
Which trade tool did the U.S. use to protect its sugar and steel industries?
Tariffs
What’s the difference between foreign direct investment (FDI) and speculative capital flows (“fast money”), and why does it matter for a country’s future?
FDI builds real things like factories, jobs, and long-term development - it’s stable and helps the economy grow.
Speculative flows are short-term money that enters quickly to chase profits but can leave fast, creating risk without real development.
What is a pegged exchange rate, and why can it be risky for a country?
A pegged exchange rate is when a country fixes its currency to another, like the U.S. dollar.
If people lose trust and sell the local currency, the central bank must use its dollar reserves to defend the peg. If too many sell, reserves run out and the currency collapses.
What is a major downside of financial globalization?
Shared risk or crisis contagion - problems in one country can spread quickly to others.
For example, the 2008 U.S. financial crisis triggered a global recession as banks and markets were deeply connected.
What’s one major long-term challenge developing countries face when borrowing from foreign lenders?
Too much foreign debt can force a country to cut spending or accept IMF help, which often comes with painful rules like raising taxes or cutting public services.