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POL208Y1 Study Guide - Bretton Woods Conference, Hegemonic Stability Theory, Pax Britannica

Political Science
Course Code
Lilach Gilady

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POL 208 2nd Semester Vocabs
Lec 12-IPE
Political Economy:
interactions between economics and politics. Polity-Market overlapping area.
Guns vs. Butter:
each society has different balance of how much guns/butters to hold. Limited resources
equals to limited choices. It is also a metaphor for PPF (Production Possibility Frontier).
Economic Warfare:
an intense, coercive disturbance of the economy of an adversary aimed at diminishing its
power. It could be separated from military warfare (sanctions), or combined (strategic
bombing, siege, blockade, etc).
Cost of war:
share of GDP used on military expenses/costs
1. Direct costs tanks, aircrafts, bombs, personnel, damaged infrastructures
2. Indirect costs higher oil prices, borrowing money, healthcare for veterans, etc
3. Opportunity costs economic impact for the war vs direct war costs (ex. US war
during 2002-2009 $1.6 trillion for the economic impact, $804 billion for direct
war costs)
Peace dividend:
economic benefit of a decrease in defense spending. If “guns” harm the economy, peace
must lower the demand for “guns” hence generate more “butter”. Guns and butter are
Economic liberalism:
predicts that the welfare could be maximized through increased efficiency and growth.
Means of efficiency (equilibrium and stability) is based on free market with minimal
government intervention. Trade is an effective method as it achieves peace through
yielding absolute gains. Main actors are individuals and firms.
Economic Nationalism:
Considers wealth to be the source of power, and economic competition for primacy.
Imperialism, mercantilism, realism and protectionism all forms components of economic
nationalism, as it favors the argument for government to intervene, protect their security
and acquire more power. It sees trades as relative gains through processes of;
Trade interdependence vulnerability potential conflict (autarky)
Strategic Trade:
state must engage in trade strategically, only with non-threatening partners and a
guarantee that the trade benefits herself more than the trading partners.

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Lec 13-International Trade
Transaction costs:
costs of trade (including transportation but also risk etc).
Opportunity costs:
amount of some other good that is lost in order to obtain unit of given good.
Relative prices:
the price of good in terms of other goods (the barter price).
Ricardo’s comparative advantage:
global welfare is maximized if everyone chooses free trade, and nation’s welfare is
maximized by unilateral free trade. Trade creates “winners” and “losers” globally and
domestically. Political question of free trade “who” gets “what”, “when” and “how”?
Factors of production:
capital, land and labor that are required for any production.
Heckscher-Ohlin Theorem:
states that a country has comparative advantage in producing goods that make relatively
intensive use of the country’s relatively abundant factor. (ex. US capital intensive
goods; China labor intensive goods)
Stolper-Samuelson Theorem:
states that owners of relatively abundant factors of production benefit from free trade, and
owners of relatively scarce factors of production benefit from protectionism.
Ex. Free trade raises wages in labor abundant countries and lowers wages in labor
scarce countries.
Economical implication suggests that scarce factor is made worse off under free
Political implication suggests that owners of scarce factors are likely to seek
barriers to free trade.
Coalitions of winners/losers formed to fight for free trade/protection.
Generates “sectoral” politics as country experiences clash between aggregate
benefits from free trade vs. private/individual benefits and losses.
Factors of production can divide labor into skilled/unskilled workers.
Terms of Trade:
the ratio of the price of an export commodity to the price of an import commodity. (Ex.
Raw materials vs. processed goods.)

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Types of protectionism:
tariffs, subsidies, Voluntary Export Restraints, Non Tariff Barriers, and Dumping
Tariff level is major tool to evaluate free trade (exports + imports / GDP)
Subsidies allow certain sectors of economy to receive protection from government.
VER’s is a government imposed limit on the quantity of goods that can be
exported. (Ex. US threatens Japan for car export by saying that increase in exports
will result in harsh protectionist measure Japan voluntarily restricts export.)
NTB’s are non-tariff measures to facilitate domestic product sales (no other
methods explained in lectures)
Dumping is driving industry of other country’s business out by flooding their
market with products that are much cheaper (it is illegal).
o Tariffs = source of income for the government and has very strong impact.
o Trade generates interdependence that increases sensitivity and vulnerability. (Ex.
EU interdependence led to countries being vulnerable due to Greek crisis) It could
also lead to social strife and instability.
o International politics concerns about relative gains, so countries need to engage in
strategic trade.
Prisoner’s dilemma on free trade:
Defect-defect result most likely to occur. If countries stick with protectionism, countries
start losing.
Player A Japan, Player B Canada. Choices: Free trade or Tariffs.
Free Trade
Free Trade
Both trade freely
Canada exports
freely; Japanese exports
are taxed
Japan exports
freely; Canadian exports
are taxed
protectionism; limited
o Under anarchy, there is no guarantee that trade partners will follow the principles
of free trade. They could exploit another by protectionist measures. How can we
escape from sub-optimal conclusion from the free trade game?
o Rise of free trade after the industrial revolution can be explained through reduced
transaction costs through;
1. better (cheaper) transportation/communication.
2. Improved industry and banking to support trade.
3. Increased political power of capital/labor (less power for the land owners)
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