Midterm Questions.docx

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University of Toronto Mississauga
Pierre Desrochers

GGR365 MIDTERM QUESTIONS 1. According to BERA, what is the simplest definition of globalization? How does BERA define capital flows, migration patterns and trade agreements? According to Douglas Irwin, what are the three (3) basic approaches to trade reform (make sure to define them)? Globalization: the growth in international exchange of goods, services, and capital, and the increasing levels of integration that characterize economic activity  Another word for internationalization  Economic activity that is fuel and furnace of cross-border integration Capital flows: measurement of an increase or decrease in a nation’s domestic or foreign assets Migration patterns: impact of labour market fluidity on production costs through the loss (emigration) or gain (immigration) of potential workers, especially those with particular skills Trade agreements: bilateral, regional or multilateral economic arrangements designed to reduce or eliminate trade barriers - Unilateral tariff reduction – reductions made independently and without reciprocal action by other countries (country can reap the benefits of free trade immediately) - Multilateral – reducing trade barriers in concert with other countries - Bilateral – reducing trade barriers in concert with other countries - economic gains form international trade is reinforced and enhanced when there’s a mutual agreement b/w countries to reduce trade barriers 2. What is Adam Smith's basic case on behalf of free trade (use the specific term and explain it)? According to David Ricardo, what is the basic argument for free-trade when a country is better than another at making everything (use the specific name and specify the condition that needs to be met)? According to Richard Ebeling, what is one of the most profound insights of economics? According to Paul Seabright, what are some of the main benefits of an extended division of labor? Again in Seabright's opinion, what were the two main qualities needed by primitive human beings to trust strangers? Adam Smith’s basic case on behalf of free trade: - improves economic welfare - free trade: absence of tariffs, quotas, or other governmental impediments to international trade, allows each country to specialize in the goods it can produce cheaply and efficiently relative to other countries - argued that economic growth depended on specialization and the division of labour o specialization helped promote greater productivity (producing more goods from the same resources, which is essential for achieving higher standards of living) o division of labour was limited by the extent of the market; small markets would not be able to support a great deal of specialization, whereas large markets could  international trade effectively increased the size of the market for any given country, allowed for more specialization, created an international division of labour, and benefited all countries by increasing the world’s productivity and output Basic Argument for Free Trade: - “Absolute advantage” ~ (or “increasing returns to scale argument”) - Each trading partner is better than another at something…. - Therefore, we specialize in what we do best - Leave to others most other things So what if individual/country have absolute advantage in production of everything? - So as Ricardo said: “Despite this Free Trade still beneficial as long as there are differences in their capacities to produce separate final goods.” GGR365 MIDTERM QUESTIONS - This leads to specialization of goods and more consumers. Thus, less productive nations can be helped by more productive nations. - If a company can produce a given item more cost effectively than another country, that efficiency maybe limited to producing a small number - They might not have the resources to produce that item in bulk. Or if produced in bulk, it might not be advantageous/cost-effective. 1. E.g Some lawyers are better typists than their secretaries. o So should a lawyer:  fire his secretary  and do his own typing? o Not likely. o Though the lawyer may be better than the secretary at both arguing cases and typing, he will fare better by concentrating his energies on the practice of law and leaving the typing to a secretary. - Such specialization not only makes the economy more efficient, it also makes o Better lawyer o And gives secretary work - Same idea applies to nations. Even though country A is better at everything, it will fare better in some productions over others. And so country B (even though not as efficient as A in producing goods) will import the other products. Thereby leaving both countries with productive work. - This is because free trade allows for specialization. 2. E.g. If USA productivity Vs. Canada a. 50% > cars b. 80 > computers Therefore, word better off is o US specializes in computers o Canada specializes in cars - Thus, each country can specialize in what it does best and that way its workers will have jobs and the country can have its domestic needs met with minimum effort. Profound insights of economic: - activities of billions of people can be coordinated without central direction and without most of these interdependent people knowing anything about one another. Benefits:  are that risks can be shared,  greater specialization can be developed  wider accumulation of knowledge can occur. But to take full advantage of these benefits, mankind had to go far beyond the small hunter-gatherer tribe or primitive agricultural community, to include people outside the immediate circle of family and non-relatives in the closed group. In the process of primitive man’s evolution, two qualities developed: - the capacity for rational calculation - The sentiment for reciprocity GGR365 MIDTERM QUESTIONS 3. According to Douglas Irwin, what is the long-standing 'dual view' of international trade? Why does Irwin argue that most economists have traditionally likened free trade to technological progress? How is mercantilism defined in this course? What were its policy implications in terms of international trade? What is mercantilism's main logical flaw according to your professor? What are the two examples of trade barriers used by Stephen Spruiell (list the names, define them and mention their goals)? According to Spruiell, what are the three main arguments used to defend protectionism? What is the infant industry argument? Dual view of international trade: - a recognition of the benefits of international exchange combined with a concern that certain domestic industries (or labourers, or culture) would be harmed by foreign competition Likened free trade to technological process: - overall benefits to society are substantial even though some narrow interests may be harmed Mercantilism defined in this course: - economic nationalism for purpose of building a wealthy and powerful state - can develop things generally within borders of system, better off working with own people - Mercantile system: system of polthicalthconomy that sought to enrich the country by balancing trade (dominated Western Europe 16 – 18 C) Policy implications in terms of international trade: - International Trade Policy  Goal: to achieve “favourable” balance of trade that would bring gold and silver into the country [by manipulating the balance of trade or commodity composition of trade in favour of the home country]  In other words: to enrich a country by  Restraining imports (because they are harmful)  Encouraging exports (because exports of manufactured goods and raw materials were considered beneficial)  But supporting domestic producers  Monopolies (restrict competition, e.g. government imposed tariffs, quotas, and prohibitions on imports of goods that competed with local manufacturers)  Subsidies (money to domestic producers)  Tax breaks  Less regulation  With prohibitions on:  [once again] imports of good competing with local manufacturers  Export of tools and capital equipment to foreign countries and colonies  Emigration of skilled labour to foreign countries and colonies  At the same time [via diplomats] incentives to attract foreign manufacturers to home countries - Mercantile’s classes induced governments to enact policies that protect their business interest against foreign competition  In trade policy, government helped local industry by imposing tariffs, quotas, and prohibitions on imports that competed with local manufacturers Mercantilism’s main logical flaw: - How can you export when you don’t import?  even if the logic of mercantilism was correct, this strategy could never work if all nations tried to follow it simultaneously, not every country can have:  a balance of trade surplus,  and not every country can export manufactured goods and import raw materials o e.g. some countries export raw material for the manufactured goods to be made, therefore mercantilism cannot be pursued by every country Trade barriers: - 1. tariffs  high taxes on imported goods that make them less competitive with domestic products GGR365 MIDTERM QUESTIONS - 2. subsidies  monies paid to domestic producers that allow them to sell goods more cheaply than their foreign competitors o both policies keep foreign producers from selling very much in domestic markets, because when given the choice most people will buy what is cheapest o trade policy: boils down to what tariffs or subsidies a government chooses to implement to keep its’ country’s markets closed to other countries o protectionism: policy agenda that seeks to maximize the number of tariffs and subsidies a government employs Defend protectionism: - 1. Protectionist policies like high tariffs and subsidies save jobs in domestic industries - 2. Eventually, left to compete for too long against Brazil, a domestic industry like U.S. steel might collapse completely, leaving the United States dependant on foreign steel  Could be devastating if the United States suddenly went to war with everyone, as it would find itself unable to produce a badly needed resource - 3. A country’s protectionist policies should be reciprocal to those of other countries – that our barriers have to be as high as the other guy’s  governments that employ this theory use tariffs and subsidies as bargaining chips at the negotiating table with other countries Infant Industry argument: - The only case, in which on mere principles of political economy, protecting duties can be defensible, is when they are imposed temporarily (especially in a young and rising nation) in hopes of naturalizing a foreign industry, in itself perfectly suitable to the circumstances of the country - Nascent industries (new industries, which in its early stages experiences relative difficulty or is absolutely incapable of competing with established competitors abroad) often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar economies of scale - Temporary protection for emerging industry of special importance  hard to make new industry, need a head start 4. Summarize Jacob Steelman's description of the copper industry's public relations (protectionist) strategy in the early 1970s. (Feel free to use bullet points.) Protectionism – Case of Copper - American copper producers hurt by < $ Chilean imports - New environmental regulations - Several copper industry executives got together to devise plan, and have elected officials etc - Industry group hired: 1 large PR and lobbying firm, 2 large law firms, 1 accounting firm, and other support - Within weeks, there were emotional articles (written press and tv -prepackaged media)  flight of copper miners and their families - Several meetings of industry group; to review progress, to make sure everyone remained supportive of it, - lawyers and accountants spend hours supporting case - basically went all out – large politicians brought in, large hearings, media events, testimonies scripted by lawyers etc - Outcome: US copper industry received some of the protectionist relief requested but to little awail - Why? – time – effort – money - To promote protectionism masked more serious threat – New Technology - Did not save copper industry in the long run, will not save any sector in the face of economic reality - Way to save is to produce the product in demand GGR365 MIDTERM QUESTIONS 5. According to Held and McGrew, what were, historically, the three (3) main forms of migration? List three (3) factors used by your professor to explain the advantages cities offer for economic development. How did your professor characterize the 'bottom line' of transportation systems before the 19th C (list two characteristics)? Three main forms of migration: 1. Elite migrations – from core to periphery of empire in acts of conquests or conversion followed by settlers 2. Elite and mass migration – from outskirts to core in search of jobs  to imperial core & cities from hinterlands and countryside in search of work; (jobs in main cities attract people from other countries/provinces) 3. Expansions+ contraction of nomadic people – usually regional by – early Islamic, -late Mongal had global reach Most of these have been regional in scope, though - early Islamic - Later Mongol Empires had global reach Three factors to explain the advantages cities offer for economic development: - Agglomeration economies/division of labour o “necessarily the man who spends all his time and trouble on the smallest task will do that task the best” (Xenophon) - Knowledge spillovers & trust o Knowledge developed to solve problems in one particular line of work helps to solve problems in other lines of work o Word used in one context can be completely different in another o Cross-fertilization of ideas across lines of work but also within the same line of work; having different people who specialize in different - Transportation hub - Concentrated markets th ‘Bottom Line’ of transportation systems before the 19 C: - Before 19 Ch o Long-distance trade limited 2 o Cities < 20 km o Trade in perishable commodities < 50 kms o Emphasis: high-value & non-perishable goods  Spices,  Silk  Perfume  Precious metals, jewellery  Salt, grains, olive oil, wine (Mediterranean)  Grain, salt, wine, wool, timber & stone (Hanseatic League) o Silk route 6. What are the two historical cases singled out by Rodrigue et al. in terms of having built a large land transport infrastructure? How did they differ from each other? What are the trade winds? How do Rodrigue et al. describe the annual volume of goods transported by the Venetian during the Middle Ages and Renaissance? What were the foundations of modern industrial production made possible by fluvial canals? Which technologica
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