Up to Midterm
Define absolute advantage and comparative advantage, highlighting the differences. Be sure to mention the concept of "opportunity cost"!
Absolute advantage is the ability to produce more of a good or service than competitors while comparative advantage is the ability to produce a good or service at a lower opportunity cost than competitors.
True or False: Foreign direct investments (FDI) raise wages equally for all workers in a host country.
False: According to Pandya (2010), FDI raises wages in host countries, but especially for skilled labor. High-skilled workers could earn 50–70% more, and low-skilled workers’ wages increase by 10–30%.
What are the three corners of the "Unholy Trinity"?
Capital Mobility, Monetary Policy Autonomy, and Fixed Exchange Rate
List two of the five goals of US Foreign Aid
National security, commercial interests, humanitarian concerns, protecting human rights and democracy, and supporting international peace through global cooperation
What is an oligopoly and how does this concept relate to first-move advantage?
Oligopoly is a structure characterized by competition between only a few firms.
In an oligopolistic market, being the first mover can allow a firm to establish significant market share before competitors enter. This is particularly important in markets where economies of scale can lead to cost advantages, making it harder for later entrants to compete.
What is the obsolescing bargaining model (OBM)?
It asserts that the MNC has a bargaining advantage in the pre-investment negotiations. Consequently, the initial investment agreement will direct a larger share of the resulting income to the MNC and a smaller share to the government. Once the investment is made, however, the government gains bargaining power at the expense of the MNC. The government uses its enhanced bargaining power to renegotiate the initial agreement and claim a larger share of the investment income. The initial bargain is thus rendered obsolete by post-investment changes in relative bargaining power.
The MNC cannot easily remove its fixed investment from the country, so the investment becomes a hostage. In addition, the MNC’s monopoly over technology diminishes as the technology is gradually transferred to the host country and indigenous workers are trained. If the investment proves successful, uncertainty about the return on the investment diminishes. Unable to threaten to leave the country without suffering substantial costs, and no longer controlling technology needed by the host country, the MNC sees its earlier bargaining power weaken while the host country’s power strengthens.
Describe and differentiate between nominal wage and real wage. Be sure to mention inflation!
Nominal Wage: It is the raw dollar (or other currency) figure that appears on a paycheck. It does NOT account for changes in inflation.
Real Wage: The wage amount adjusted for inflation or changes in the cost of living. It represents the purchasing power of income.
What is fair trade according to Ehrlich (2018)?
Concerns about trade effects on human rights, labor rights, and environmental standards (moral/ethical rather than economic concerns).
What is the infant-industry argument for protection, and how does it justify government intervention?
The infant-industry case for protection argues that there are cases in which newly created firms will not be efficient initially but could be efficient in the long run if they are given time to mature. Consequently, a short period of tariff protection will enable these industries to become efficient and begin to export. Once this point has been reached, the tariff can be removed. The long-run welfare gains created by the now-established industry will be greater than the short-run losses of social welfare imposed by the tariff.
Describe the purpose of structural adjustment programs and be sure to mention the role of the state.
Structural adjustment programs sought to reshape the indebted economies by reducing the government’s role and increasing that of the market. Reforms sought substantial market liberalization in four areas: trade liberalization, liberalization of FDI, privatization of state-owned enterprises, and broader deregulation to promote economic competition.
Fixed Exchange Rate Regime: The value of a currency is pegged to an external standard (like the U.S. dollar or gold). Under this regime, the government intervenes in the foreign exchange market to maintain this fixed value (e.g., buy or sell its reserves to stabilize the exchange rate).
Floating Exchange Rate Regime: The value of a currency is determined by supply and demand forces in the foreign exchange market, without direct intervention by the government or central bank.
According to Lant Pritchett's 8 "myths" or "immovable ideas," what is a morally legitimate basis for discrimination?
One's nationality (the country in which he or she is born)
What is GSP and what rule/principle is this an exception to?
Generalized System of Preferences (GSP) allows the advanced industrialized countries to apply lower tariffs to imports from developing countries than they apply to the same goods coming from other advanced industrialized countries. These exceptions aside, Most Favored Nation ensures that all countries trade on equal terms. It is a legal exception to the principle of non-discrimination.
What is "terms of trade" and what does it mean when there is an improvement in a country's terms of trade? According to the Singer-Prebisch theory, the terms of trade deteriorate over time for what kind of countries?
The terms of trade relate the price of a country’s exports to the price of its imports. An improvement in a country’s terms of trade means that the price of its exports is rising relative to the price of its imports.
Singer and Prebisch argued that primary commodity prices steadily fell relative to manufactured goods prices, thereby steadily reducing the incomes of developing countries.
Explain what kind of interest rate would tackle inflation and what kind of interest rate would lower unemployment rates. For each, explain how the interest rate solution would solve corresponding economic problems.
High interest rates tackle inflation - Raising interest rates makes borrowing more expensive and saving more attractive. This reduces consumer spending and business investment, decreasing overall demand in the economy. Lower demand reduces upward pressure on prices, helping to control inflation.
Low interest rates decrease unemployment - Lowering interest rates makes borrowing cheaper and saving less rewarding. This encourages businesses to invest and consumers to spend more, stimulating economic growth. Increased economic activity leads to more jobs being created, reducing unemployment.
Define horizontal integration and vertical integration of MNCs. Be sure to mention intangible asset and specific asset!
Horizontal integration occurs when a firm creates multiple production facilities, each of which produces the same goods. Because the same firm owns all of the production sites, it can realize the full value of its intangible asset without having to try to sell it in an open market. Horizontal integration, therefore, internalizes economic transactions for intangible assets.
Vertical integration refers to instances in which firms internalize their transactions for intermediate goods. An intermediate good is an output of one production process that serves as an input into another production process. Vertical integration often involves specific assets — resources or facilities tailored to a particular use within the firm's supply chain. These can include specialized machinery, logistics systems, or supplier networks that are critical for operational efficiency.
According to the new new trade theory (NNTT), why do only the most productive firms trade internationally? Also, how can smaller domestic firms still survive domestically despite a huge, productive firm (e.g., Apple) offering extremely competitive and cheap products domestically?
International trade often involves significant fixed costs (e.g., logistics, regulatory compliance, marketing, tariffs, quotas). Only the most productive firms can bear these costs and still maintain profitability (because their products are sold very cheap given their productivity once they enter the foreign market --> high demand abroad) when entering foreign markets. Less productive firms may not have the resources or scale to manage these costs effectively.
And the smaller firms can still survive domestically because of several factors, including but not limited to consumers' love of variety, brand loyalty, affinity toward small businesses, etc. (but they can also die out)!
Guess these company names based on these slogans: (1) The Most Magical Place On Earth (2) That’s What I Like (3) Democracy Dies in Darkness
(1) Disney (2) Pepsi (3) Washington Post
Which country was the first to issue paper money?
China, during the Tang Dynasty
Which month is the Fair Trade Month?
October!