Type:
Solution Manual
Resource:
International Economics
Edition:
7th Edition
Author(s):
James Gerber
Contents Chapter 1
The United States in a Global Economy .....................................................................
1
Chapter 2
International Economic Institutions since World War II ............................................
9
Chapter 3
Comparative Advantage and the Gains from Trade ....................................................
16
Chapter 4
Comparative Advantage and Factor Endowments ......................................................
23
Chapter 5
Beyond Comparative Advantage ................................................................................
29
Chapter 6
The Theory of Tariffs and Quotas ...............................................................................
37
Chapter 7
Commercial Policy ......................................................................................................
43
Chapter 8
International Trade and Labor and Environmental Standards .....................................
49
Chapter 9
Trade and the Balance of Payments ............................................................................
57
Chapter 10
Exchange Rates and Exchange Rate Systems .............................................................
62
Chapter 11
An Introduction to Open Economy Macroeconomics .................................................
69
Chapter 12
International Financial Crises......................................................................................
76
Chapter 13
The United States in the World Economy ...................................................................
83
Chapter 14
The European Union: Many Markets into One ...........................................................
90
Chapter 15
Trade and Policy Reform in Latin America ................................................................
95
Chapter 16
Export-Oriented Growth in East Asia .........................................................................
101
Chapter 17
China and India in the World Economy ......................................................................
106
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Chapter 1 The United States in a Global Economy ◼
Outline
Introduction: International Economic Integration Elements of International Economic Integration The Growth of World Trade Capital and Labor Mobility Features of Contemporary International Economic Relations Multilateral Organizations Regional Trade Agreements Trade and Economic Growth Twelve Themes in International Economics The Gains from Trade and New Trade Theory (Chapters 3, 4, and 5) Wages, Jobs, and Protection (Chapters 3, 6, 7, and 8) Trade Deficits (Chapters 9, 11, and 12) Regional Trade Agreements (Chapters 2, 13, and 14) The Resolution of Trade Conflicts (Chapters 2, 7, and 8) The Role of International Institutions (Chapters 2, 8, and 12) Exchange Rates and the Macroeconomy (Chapters 10 and 11) Financial Crises and the Global Contagion (Chapter 12) Capital Flows and the Debt of Developing Countries (Chapters 2, 9, and 12) Latin America and the World Economy (Chapter 15) Export-Led Growth in East Asia (Chapter 16) China and India in the World Economy (Chapter 17)
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Gerber • International Economics, Seventh Edition
◼ Learning Objectives After studying this chapter, students will be able to: 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration. 1.2 Compute the trade-to-GDP ratio and explain its significance. 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization. 1.4 List the three types of evidence to support the idea that trade supports economic growth.
◼ What Students Should Know after Reading Chapter 1 The goal of Chapter 1 is to examine international economic integration in historical perspective. Most features of globalization aren’t new, and international economic integration is described as re-emerging after a period of disruption during World War I, the Great Depression, and World War II. The chapter adds a brief discussion of new features in the current wave of globalization, including regional trade agreements and multilateral organizations. It also briefly discusses three types of evidence to support the idea of gains from trade: historical experiences of similar countries such as North and South Korea; economic theory; and large statistical comparisons of countries. There are three aspects of international economic integration considered: 1.
The growth of world trade. World trade has grown over the last sixty or seventy years but is roughly comparable in percentage terms to trade in 1900. Trade has become a larger share of national economies as measured by the: Trade-to-GDP ratio = (Exports + Imports)/GDP This index does not tell us about a nation’s trade policies. Nations with higher figures for the index of openness do not necessarily have lower trade barriers. Large economies are less dependent on international trade and often have lower measures of openness than small countries do. Figure 1.1 shows the openness index for six nations at different points in time. It shows the drop in trade from 1913 to 1950 and its growth (even above 1913 levels) for most nations by 2000. A trend obscured in the overall trade data is that in 1890 most U.S. trade was in agricultural products and raw materials, while today it is mostly in manufactured goods. The relative importance of capital goods has increased dramatically.
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Chapter 1
2.
The United States in a Global Economy
3
Capital and labor mobility. Labor is much less mobile internationally now than it was in 1900. For capital, it is somewhat more mobile. There is a difference between financial capital and physical capital. Foreign Direct Investment (FDI) is the flow of capital representing physical assets such as real estate, factories, and businesses. While capital flows to developing countries have increased in recent decades, the level of investment in any country is still correlated with its domestic level of savings, making national savings rates an important element in national economies. Capital flows today differ from earlier periods in three ways. More types of financial instruments exist today, and flows of financial capital are likely much greater. In 1900, the world operated on a fixed exchange rate standard, and much of today’s financial market transactions are aimed at protecting against exchange rate risk caused by floating exchange rates. Transactions costs associated with foreign capital flows have also fallen significantly. Volatility in international capital flows, while often a subject of intense attention today, is not new.
3.
Movement of prices in different markets. The text does not develop this, but points out that in the late 1800s wheat farmers, meat packers, and fruit growers all produced for a global market where international, rather than domestic, supply and demand determined prices. News reports today could easily demonstrate this for most commodities.
New issues in international trade and investment: 1.
Deeper integration. Barriers to manufactured goods have fallen significantly as a result of a process that began at the end of WWII. As formal restrictions on imports have been reduced, domestic policies on issues such as the environment, labor, and fair market conditions have become the barriers to further increases in trade flows. Reducing trade barriers has been the focus of negotiations between nations. Eliminating the traditional barriers to trade, tariffs, and quotas is referred to as shallow integration because it just changes policies “at the border.” Eliminating domestic policy differences that create trade barriers is much more complicated and is referred to as deep integration.
2.
Regional trade agreements. Since the 1960s, and increasingly after 1990, nations have formed preferential trade agreements with one or more other nations. The European Union, NAFTA, ASEAN, ASEAN+3, and a host of other agreements have provided privileged market access for member countries.
3.
Multilateral organizations. While the number of preferential trade agreements has grown dramatically, it has occurred within an international economic environment that contains several key international institutions: the WTO, IMF, and World Bank are each important and are the main institutions discussed in the text. Their roles are discussed more fully in Chapter 2.
Economists are in agreement that the benefits of trade outweigh the costs, although there is a great deal of disagreement over the form that trade agreements should take (and if preferential agreements are even desirable), the role that multilateral institutions should play, and the optimal trade policy for developing countries. Chapter 1 challenges the belief that the world has embarked on an entirely new and unprecedented era of globalization. In the long run, it seems clear that the period 1870 to 1914 was an earlier era with similar trends. Those years experienced rapid technological change, which came into widespread use in the form of railways, steamships, and telegraphs; they underwent business and financial sector innovation through rapid growth in the corporate form of business organization, the invention and spread of demand deposits, and the development of stock markets; trade policies were liberalized in many nations; and there were widespread protests against immigration and the global economy. In the United States, the protest ..
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movement was centered in populist movements that are reminiscent of the rhetoric of some politicians and commentators today. This is not an argument about history repeating itself. Rather, it is an attempt to encourage students to think of the period from World War I to the end of World War II as an aberration in the last 150 years of world history. The long-run trend is toward integration, punctuated by protests and nationalistic movements that temporarily halt or reverse the trend. When students are asked what they think is new about today’s economy, they inevitably answer “technology.” E-mail, faxes, satellite systems, jet aircraft, and less visible forms such as container cargo transportation systems have each made significant contributions to increasing trade flows. It is useful to engage students in a discussion over the marginal impacts of these new technologies versus the marginal effects of steam-powered oceangoing vessels or transatlantic telegraphy. Telegraphy cut the time it took information to cross the ocean from around three weeks to relatively instantaneously, and reduced the time it took to buy a foreign bond from around three weeks to roughly one day. It is useful for students to realize two points. First, much of what has happened over the last fifty years has been aimed at fixing something that was broken, not creating a new phenomenon. Second, the international institutions that deal with the global economy are new and were created because of a shared recognition that integration was important and helpful and needed to be encouraged. An important subtheme of the text is the idea of deep versus shallow integration and the institutional process that nations go through to create deeper levels of integration. The chapter also cover issues unique to today's economic climate. Important points include flexible exchange rates, regional trade agreements, and the changing mix of the types of goods nations produce. Domestic policies will be a key focus when trade barriers and capital flows are considered. Another important issue will be the developing role of international organizations in negotiating and enforcing changes in domestic policies.
◼
Assignment Ideas
1.
I like to use the trade-to-GDP ratio to contrast the importance of trade to various nations and to drive home the fact that relative value matters. The United States is a huge participant in trade in dollar terms, but it is not as dependent on trade as many other countries. Some countries’ entire economies are dependent on international trade. I find students need some practice calculating and interpreting the trade-to-GDP ratio. The data below are from the World Trade Organization (exports and imports, http://www.wto.org/english/res_e/statis_e/trade_data_e.htm) and the International Monetary Fund (GDP, http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/index.aspx). They are for 2011 and are in billions of current U.S. dollars. Country
Exports
Imports
GDP
Goods
Services
Goods
Services
Bahrain
19.6
3.0
12.7
1.8
25.9
Brazil
256.0
36.7
236.9
73.1
2,492.9
Cambodia
6.9
2.2
9.3
1.4
12.9
Chad
4.6
0.2
2.4
1.9
9.3
New Zealand
37.7
9.9
37.1
10.8
158.9
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Chapter 1
Nigeria
116.0
2.3
55.0
The United States in a Global Economy
22.5
5
244.0
2.
For homework very early in the course, I sometimes assign each student a nation to study, with its trade-to-GDP ratio as one of the pieces of information to collect. I also ask them to find out its currency and its current exchange rate with the U.S. dollar, primary exports, imports, major trading partners, and the trade agreements in which it participates. The WTO’s Trade Profiles (http://stat.wto.org/Home/WSDBHome.aspx?Language=E) has much of this data and is a useful data source for students. For comparison with U.S. historical data, you might ask them to track the nation’s trade figures over time. While these are basic matters of record, I find it helps make what we are discussing more concrete.
3.
The chapter also lends itself to students developing some factual knowledge about U.S. trade history. One possibility is to look at U.S. trade policy through various time periods. The U.S. had relatively high tariffs (greater than 40 percent on average) throughout the second half of the nineteenth century. In 1890, Congress passed the McKinley Tariff, followed in 1897 by the Dingley Tariff. Both tariffs raised rates further from their already high base. President Wilson tried to reduce tariffs but was thwarted by World War I. Rates in the 1920s fell, but the Tariff Act of 1930 (Smoot-Hawley Tariff) raised the rates back up to nearly 45 percent. In the midst of the Great Depression (1934), Roosevelt and his secretary of state, Dulles, persuaded Congress to pass the Reciprocal Trade Agreement Act. The act authorized Roosevelt to negotiate bilateral, reciprocal tariff reduction agreements. This piece of legislation marks an historic shift in U.S. tariff policy, away from protectionism and toward more openness.
◼
Answers to End-of-Chapter Questions
1.
How can globalization and international economic integration be measured? Answer:
2.
The chapter offers three ways to measure globalization and economic integration: (1) trade flows; (2) factor movements; and (3) convergence of prices (goods, factors, and assets). In what sense is the U.S. economy more integrated with the world today than it was a century ago? In what ways is it less integrated? Answer:
The WTO’s Trade Profile for the United States gives an average trade-to-GDP ratio of 28.3 for 2009-2011. That implies that the United States’ ratio is about 150 percent greater today than it was in 1913 ((28.3 − 11.2)/11.2 = 1.53). At the same time, the composition of goods traded has changed from agricultural output to manufactured goods. This is consistent with the observation that world trade has been growing faster than world output, at least since 1950. Much of the growth in trade since then, however, simply brought us back to where we were before World War II. In terms of labor flows, the United States is probably less integrated with the world economy than it was in 1890 or 1900. During that time we had an open door immigration policy (for all but Chinese citizens), and a larger share of our population was foreign born (14.5 in 1890 versus less than 8 percent in 1990 and 12 percent today). Capital flows are more difficult to generalize since they can be measured several ways. While the absolute volume of capital flows has increased dramatically, as a share of world GDP it is probably no more than it was at the turn of the twentieth century, and it may even be less. The level of investment in nearly all countries is still highly correlated with domestic savings rates. What is different, however, is the ease with which capital can ..
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cross international boundaries (lower transaction costs) and the much greater variety of assets that are traded. The need to protect against exchange rate risk is a key component of today’s international financial markets and is a primary difference from the fixed exchange rate standard of the past. The incidence of financial crises has not increased and, as a metric of integration, it implies no increase in capital market integration. The growth of regional trade agreements is also an indicator of increased integration. A growing role for international institutions such as the IMF or World Bank may also indicate an increase in international integration. 3.
What does the trade-to-GDP ratio measure? Does a low value indicate that a country is closed to trade with the outside world? Answer:
The trade-to-GDP ratio is a measure of the relative importance of trade to a national economy. It is measured by the ratio of exports plus imports to GDP. A relatively small ratio does not necessarily mean that an economy is intentionally closed to the outside world. Large countries like the United States have large domestic markets that enable firms to specialize and produce in volume in order to attain an optimal scale. Specialization and high volume in manufacturing is often associated with increased productivity, so firms in large markets can achieve the highest possible level of productivity without having to sell to foreign markets. Firms located in smaller countries have to trade their output across international boundaries if they want to have the same technology and the same level of productivity. Consequently, large countries tend to have lower trade-to-GDP ratios regardless of their trade policies.
4. Describe the pattern over the last century shown by the trade-to-GDP ratio for leading industrial economies. Answer: The ratio fell between 1913 and 1950, but then began to rise relatively rapidly. The main causes of the pattern shown in Figure 1.1 are the two world wars and the Great Depression of the 1930s, and changes in trade policy accompanying that period. By 2000, the ratios were mostly higher than they were before World War I. Another pattern the chapter notes is that the ratio is smaller for the large population countries of Japan and the United States, and higher for The Netherlands, with its small population. ] 5. Trade and capital flows were described and measured in relative rather than absolute terms. Explain the difference. Which term seems more valid—relative or absolute? Why? Answer: Absolute values are the dollar amounts of trade and capital flows. Relative values are the ratio of dollar values to GDP. Relative values are a better indicator of the importance of trade and capital flows since they are proportional to the size of national economies. Large economies like the United States may have large export and import values, but the importance of trade to the national economy is not nearly as great as it is for other economies. The United States is a large exporter and importer, but the national economy is so large that trade is much less important for the United States than it is for many smaller countries such as Canada, Belgium, or The Netherlands.
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Chapter 1
6.
7
In relative terms, international capital flows may not be much greater today than they were a hundred years ago, although they are certainly greater than they were fifty years ago. Qualitatively, however, capital flows are different today. Explain. Answer:
7.
The United States in a Global Economy
Major qualitative difference between late nineteenth and late twentieth century capital flows include the fact that there are many more types of financial instruments available now compared to a century ago. These instruments can be finely tailored to the income and risk preferences of investors. Secondly, a large share of the total flow of capital across borders is related to the need to protect against fluctuations in the value of currencies. This use of international capital markets was not as necessary when nations operated within fixed exchange rate systems. Third, the transaction costs of participating in international capital markets are much lower today than it was a century ago.
What are the new issues in international trade and investment? In what sense do they expose national economies to outside influences? Answer:
The new issues involve policy differences between nations that until recently were considered the exclusive responsibility of local or national governments. Examples include labor standards, environmental standards, competition or antitrust policies, and industrial support policies. Negotiations between nations potentially give foreign interests a voice in setting domestic policy. The scope and the depth of the negotiations determine how great a voice foreigners will have. It is often the case, however, that negotiations either occur or are proposed because some aspect of domestic policy is perceived by foreigners as a barrier to trade, and they seek to alter the domestic policy that created it.
8.
Describe three kinds of evidence that economists use to support the assertion that economies open to the world economy grow faster than economies that are closed. Answer:
Economists base these conclusions on three types of evidence: causal empirical evidence of historical experience; evidence based on economic models and deductive reasoning; and evidence from statistical comparison of countries.
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Gerber • International Economics, Seventh Edition
8.
Describe the three kinds of evidence economists use to support the assertion that economies open to the world grow faster than economies that are closed. Answer:
These are: (1) casual empirical evidence of historical experience; (2) economic logic and deductive reasoning; and (3) evidence of statistical comparisons of countries. (1) The historical evidence examines the experiences of countries that tried to isolate themselves from the rest of the world. First, not only did trade protection exacerbate the Depression of the 1930s, but it also led to the misery and tragedy of World War II. Second, an examination of countries such as former East and West Germany, North and South Korea, and other countries with the same historical, economic, and ethnic background that were divided by war, indicate that those who closed their economies from the rest of the world suffered in terms of prosperity and environmental degradation. East Asia experienced an economic takeoff when it decided to integrate with the rest of the world, while Latin America, which had the same economic background as East Asia but chose to remain partially closed, experienced mediocre growth. (2) The logic of economic theory also suggests a strong causal relation between trade and faster economic growth. The following is a summary of this linkage: Following Adam Smith, David Ricardo proved that comparative advantage leads to trade and this in turn leads to the reallocation of resources and the improvement of the standard of living of any nation, large or small. Modern trade theory also makes the case for exports and open trade as the causes for economic expansion. Exports and open trade foster competition, innovation, and learning by doing and bring international best practices to the attention of domestic producers, spurring greater efficiency and export expansion. This helps domestic producers to realize economies of scale when they attempt to produce for the world market rather than for their own limited base of domestic consumers. Larger markets create incentives for firms to engage in research and development, and allow countries to import important production inputs and foreign capital by minimizing foreign exchange constraints. They facilitate the transfer of technology and managerial skills. It follows that open trade and exports increase the demand for the country’s output and therefore contribute strongly to positive economic growth. (3) Even though the statistical evidence is not quite conclusive (mainly due to measuring trade policy), the evidence of statistical comparison of countries (cross-sectional time series) indicates that countries benefit from open trade.
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Chapter 2 International Economic Institutions Since World War II ◼
Outline
Introduction: International Institutions and Issues since World War II International Institutions A Taxonomy of International Economic Institutions The IMF, the World Bank, and the WTO The IMF and World Bank The GATT, the Uruguay Round, and the WTO Case Study: The GATT Rounds Regional Trade Agreements Five Types of Regional Trade Agreements Case Study: Prominent Regional Agreements Regional Trade Agreements and the WTO For and Against RTAs The Role of International Economic Institutions The Definition of Public Goods Maintaining Order and Reducing Uncertainty Case Study: Bretton Woods Criticism of International Institutions Sovereignty and Transparency Ideology Implementation and Adjustment Costs Case Study: China’s Alternative to the IMF and World Bank: The AIIB
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Gerber • International Economics, Seventh Edition
◼ Learning Objectives After studying this chapter, students will be able to: 2.1 Classify with examples the main types of international economic organizations. 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active. 2.3 Compare the different levels of integration found in regional trade agreements with examples. 2.4 Analyze the roles of international economic organizations. 2.5 Debate the pros and cons of international economic organizations.
◼
What Students Should Know after Reading Chapter 2
Chapter 2 introduces the major international governmental organizations of the global economy. This background material is designed to remove some of the mystery about the IMF, World Bank, WTO, and GATT early in the course. Chapter 2 also addresses both the need for these organizations and the criticisms against them. Institutions are supposed to reduce uncertainty and increase stability. Drawing on material from the new institutionalists, such as Doug North, the chapter introduces international institutions as organizations that set the rules that govern behavior and potentially constrain or limit a nation’s actions. Chapter 2 makes the case for international institutions and addresses some of the criticism they have received. It defines international public goods and addresses the free-rider problem. It gives some examples of international economic crises that may have been related to market failures. The main benefits of institutional relationships are the maintenance of order and the reduction of uncertainty. The latter part of the chapter address some of the criticism these organizations receive, including issues related to sovereignty and transparency, ideology, and implementation and adjustment costs. Another chapter goal is for students to understand the various types of regional trade agreements and the level of policy integration associated with each type of agreement. In the recent past, bilateral and regional trade agreements have expanded more rapidly than multilateral negotiations. Chapter 2 provides a taxonomy of these agreements and includes accompanying arguments for and against as drawn from the economics literature.
◼
Supplemental Lecture Possibilities
1.
The Global Players: Given some of the sub-themes of this chapter, it usually takes a day to lecture on what I call the global players: national governments, international multilateral and regional organizations, multinational or transnational corporations, and nongovernmental organizations. Understanding issues related to global economic development, the politics of trade policies and agreements, the responsibilities and criticisms of international economic institutions, and other current developments requires a clear sense of who the players are and what they bring to the table. I define each of these players and address their strengths and weaknesses. I focus on economic development, national sovereignty, and how trade-related laws are negotiated and changed. For development, I focus on the increasing role of direct foreign investment, which covers multinational corporations and national governments. Criticisms of world trade often come from civil society/NGOs, who often have a special role to play in the least-developed countries.
.
Chapter 2
International Economic Institutions Since World War II
11
2.
In presenting the major international organizations that deal with the global economy, it is useful to do a historical overview. What happened in terms of trade, foreign investment, and exchange rates from World War I through the Bretton Woods conference that made the United States and the United Kingdom think the IMF, World Bank, and something resembling GATT were necessary institutions? By covering prior crises, we can explain the framework in which the Bretton Woods institutions were created and how they operate. The prior lecture on the global players helps students understand why it was easy to create institutions that were banks and more difficult to create an institution that would affect trade laws.
3.
Prior to starting Chapter 3, some instructors prefer to go directly from Chapter 2 to a case study on a specific regional trade agreement. Chapter 14 on the European Union is one such case study. One purpose moving to a specific case study is to familiarize students with the various levels of economic integration as well as the concepts of “widening” versus “deepening.” Students tend to be able to handle Chapter 14 without first having a more theoretical base, and it builds some interest in later topics such as foreign exchange. It also gives them a real-world foundation for understanding trade theory.
◼
Assignment Ideas
Most important international organizations have Web sites where they provide a large variety of information as well as detailed descriptions about themselves. Students could be assigned to choose an organization, go to its Web site, and use the information there to write a short paper (two to three pages) detailing both the organization's purpose and structure and the institutional environment it creates. In addition, they should be asked to think about which countries have the greatest control over their organization’s policies. The table below contains the URLs for a number of important international organizations. These organizations are particularly relevant throughout the book. Addresses for a large number of additional sites can be found on the United Nations Web server: http://www.unsystem.org. Name
URL
Asia-Pacific Economic Cooperation (APEC) European Union (EU) International Labor Office (ILO) International Monetary Fund (IMF) Organization for Economic Cooperation and Development (OECD) Organization of American States (OAS) United Nations Conference on Trade and Development (UNCTAD) World Bank Group World Bank and links to its subgroups International Finance Corporation (IFC) Multilateral Investment Guarantee Agency (MIGA) World Trade Organization (WTO)
www.apecsec.org europa.eu www.ilo.org www.imf.org www.oecd.org www.oas.org www.unctad.org www.worldbank.org www.ifc.org www.miga.org www.wto.org
Note that the World Bank is divided into five subgroups, two of which have their own Web sites. These five subgroups are: the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), the International Bank for
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Gerber • International Economics, Seventh Edition
Reconstruction and Development (IBRD), and the International Center for Settlement of Investment Disputes (ICSID). The following questions can be worked into the assignment: • What is the role of the organization you chose to write about? • What kind of public good does it try to provide? • Describe the main elements of the institutional environment it supports. • What is its structure? Do some countries have a greater voice in setting policies?
◼
Answers to End-of-Chapter Questions
1.
What is an institution? Give examples of both formal and informal institutions. Explain how they differ from organizations. Answer:
An institution is a set of rules of behavior. It sets limits or constraints on social, political, and economic interaction. The rules can be formally recognized in a code of laws, club rules, or an organization’s standards of behavior. The rules of an institution may also be informal as in the case of table manners or social customs. Examples of formal institutions include civil codes, commercial codes, and university standards of behavior (e.g., regarding plagiarism or sexual harassment). Examples of informal institutions include gift exchanges on birthdays, eating salad with the small fork, and giving up your seat to an elderly person on a crowded bus. Institutions differ from organizations in the same way that the government of the United States differs from the Constitution. The latter is the set of rules that governs the former. Organizations are associations of individuals or groups, institutions are the rules that determine the limits and imperatives of their behavior.
2.
What are the arguments in favor of international organizations? What are the arguments against them? Which do you think are stronger? Answer:
Arguments in favor: International organizations are essential for the containment of national or regional crises and the avoidance of their propagation internationally. By providing a set of rules (institutions) which are certain and known (transparent), they reduce uncertainty and increase stability. In many instances, they overcome problems of free riding in the international economy in order to insure the provision of (international) public goods such as lender of last resort financing for resolving a liquidity crisis, or open markets in a recession. Arguments against: The text describes the problems with institutions in terms of issues of sovereignty (may force adoption of domestic policies against nation’s will or interests), transparency (decision making at institutions may be dominated by others pursuing their own interests), ideology (advice may be bad or biased), and implementation and adjustment costs (asymmetries in negotiation power and in ability to absorb costs imposed). Overall, critics question whether institutions generate economic inequality and compound risks to vulnerable groups. The issue of which arguments are stronger is ambiguous. Either can be viewed as more cogent. The key is that students understand both arguments and that they develop a set of reasons to support their views.
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Chapter 2
3.
International Economic Institutions Since World War II
13
Give the arguments for and against free trade agreements. How might the signing of a free trade agreement between the United States, Central America, and the Dominican Republic have harmed Bangladesh? Answer:
Proponents of RTAs view them as building blocks for freer, more open, world trade. They are able to perform this function because it is easier for a few countries to reach agreement on difficult trade matters than it is for a large number of countries to reach the same agreements. Furthermore, the domestic effects of a reduction of trade barriers are less dramatic since fewer countries are involved. Import flows and job losses and displacements are smaller and more easily managed. In addition, RTA members can experiment with new agreements, such as labor and environmental standards that are too contentious in a larger set of negotiations. Opponents question these assumptions and argue that RTAs undermine progress toward multilateral agreements, such as the Doha Round of the WTO. They argue that RTAs polarize countries because they are discriminatory against nonmembers and because they disadvantage smaller countries that enter into agreements with large ones, since the small countries lack the ability to negotiate effectively and they are often unable to take advantage of the market opening of the larger country due to their limited infrastructure and other resources. Bangladesh may be hurt by a free trade agreement between the United States and Central America due to the trade diversion that might result. If Bangladesh is the lowest cost producer of apparel, for example, then a lowering of U.S. tariffs against Central America could result in production for the U.S. market shifting from Bangladesh to Central America.
4.
What are public goods and how do they differ from private ones? Give examples of each. Answer:
5.
Public goods are nondiminishable and nonexcludable. Private goods generally share neither of these characteristics. Private goods include most things that are bought and sold in private markets (restaurant meals, clothing, houses, cars, etc.) while public goods are often provided collectively. Public goods include national defense, public airways, civil and commercial codes, and so forth.
Describe the main functions of each of the following: • The IMF • The World Bank • The GATT • The WTO Answers: (1) The IMF’s role is to act as a lender of last resort in the case of a debt crisis or foreign exchange crisis. It provides technical expertise and advice and assists national governments with necessary but difficult reorganizations of their national economies. (2) The World Bank’s mission, in general terms, is to assist the economic development of nations through the provision of loans, technical expertise, and advice. (3) GATT is a series of multilateral trade negotiations and resulting treaties which binds the tariffs and trade policies of nations and limits their ability to arbitrarily change them. Its mission is to keep markets for goods open and to ensure that nations follow a set of rules governing fair trade.
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