POL S 7 Lecture 8: Section 8
NO SECTION NEXT WEEK!!!
RECAP: International Trade
International trade is better than autarky because of comparative advantage
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There'll be winners and losers from trade
3 different political cleavages
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Solutions to current account deficit
Depreciate currency to stimulate exports and discourage imports
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Deflate the economy by reducing spending
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Borrow and invest abroad
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RECAP: International monetary relations
An exchange rate is the price at which one currency is exchanged for another
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A country can use fixed exchange rate or floating exchange rate systems
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The impossible trinity: impossible for a country to pursue all three (fixed exchange rate,
permit free capital flows, autonomy over monetary policy)
Easiest to give up exchange rate
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NOTES
Discussion questions
Is the Euro Zone a good idea? Should countries try to create more common currency
zones? What are some challenges in creating and maintaining such currency zone?
Nota good idea today, but it was
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Reduced transaction costs and instabilities regarding currency
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Other regions might be well off having same currency if they interact so much
But it could also complicate things if there are too many different
components involved
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Do you think financial crises can be prevented? What are some of the lessons
learned from the cases of Mexico, East Asia, and Europe's crises?
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What are some criticisms against the International Monetary Fund? How would you
change the institution?
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Section 8
Tuesday, May 21, 2019
12:01 PM
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International financial relations
Puzzles:
Why do countries invest or borrow abroad?
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Why do relations between foreign investors and the host countries often
become hostile?
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The Heckscher-Ohlin theory
In a poor country, capital is scarce and therefore expensive
Interest rates are higher
Trying to draw investments to get more money/capital
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In a rich country, capital is abundant and therefore cheaper
Interest rates are lower
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Money should flow from the rich country to the poor country
Money goes wherever the interest rates are higher (but not to borrow
money, only to invest) -- leads to highest return
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Foreign investment
If investors only care about rates of return, then all investment would flow form
capital-rich to capital-poor countries
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But, investors look at risks associated with investment too
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Risk-adjusted rates of return take into account risk of default (whether the
investment will be repaid at all)
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What are debtor's interests?
Low interest rates
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Long periods to repay
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Easy terms/conditions to borrow
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What are creditor's interests?
High interest rates
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Shorter grace period to get money paid back
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Leverage and credibility on debtor
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Guaranteeing that money comes back
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What are debtor-creditor interactions like?
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What are problems with foreign investment?
Fluctuating currency
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Multinational corporation
A multinational corporation is an enterprise that operates in a number of countries
with production or service facilities outside its country of origin. Creates global
supply chain
Advantages: lower cost of production, technological transfer, employment,
infrastructure, development
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Disadvantages: race to the bottom, no real technological transfer, no real
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