Chapter 10 Notes: Fundamentals of International Political Economy

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Political Science
INR 2001
Paul D’ Anieri

INR2001 Chapter 10 Notes Fundamentals of International Political Economy  The Importance of International Economy o International political economy: the two-way relationship between international politics and international economics o Globalization: a process in which international trade increases relative to domestic trade; in which the time it takes for goods, people, information, and money to flow across borders and the cost of moving them are decreasing; and in which the world is increasingly defined by single markets rather than by many separate markets o Economics has become central to contemporary politics o In contemporary democracies, people hold governments accountable for the workings of economies o The notion that the government is responsible for the economy is relatively recent, dating the U.S. to the New Deal of President Franklin Roosevelt o Since that time, economists as well as politicians have accepted that certain government fiscal and monetary policies can influence the economy o In fiscal policy, a government uses a budget deficit or surplus to stimulate or slow economic growth o In monetary policy, a central bank raises or lowers interest rates to stimulate or slow economic growth  Key Economic Concepts and Theories o Three basic questions:  Why do states trade?  What are the benefits of trade?  Who gets the benefits of trade? o The Theory of Comparative Advantage  Theory of comparative advantage: a theory developed by the English economist David Ricardo to show logically how and why trade is beneficial to both partners  The basic point is that by specializing and trading, states and individuals can increase overall consumption and efficiency  Why would a country import something that could be easily made with less labor on its own?  The key question is: “How much labor must be diverted from one sector to produce more in the other?”  The difference in relative prices creates the basis for profitable trade  Two important conclusions can be drawn:  With specialization, the overall amount of production and consumption increases without any increase in inputs  Specialization and trade lead to increased consumption in both countries  States trade because trading allows them to produce and consume more and because it leads to greater overall efficiency o Comparative Advantage and Liberalism  Comparative advantage is closely linked to the liberal approach to international relations theory  The theory of comparative advantage powerfully contradicts the realist view that international affairs is a zero-sum-game in which one side can gain only at the expense of another o The Balance of Trade  Balance of trade: exports minus imports (measured in dollar value); a net accounting of how much in the way of goods and services is exported from a country compared to how much is imported  When the trade balance is zero, the economy is importing exactly as much as it exports  When the balance is negative (a trade deficit), the economy is importing more than it exports, so that exports minus imports is a negative number  The balance is positive (a trade surplus) when the country is exporting more than it imports  A trade deficit implies that goods that otherwise might be produced domestically are being produced abroad  A surplus is beneficial because it implies that the country, by selling goods abroad, can employ more workers at higher wages than if production and sales were limited to the domestic market  Trade surpluses are seen as beneficial also because when an economy is exporting more than it imports, the demand to buy that state’s currency will be higher than the need to sell, and the value of the currency will increase  Fair trade: a narrower approach to free trade that advocates retaliation against states that are perceived as “cheating” on free trade o Exchange Rates  Exchange rate: the price of one currency in terms of another  Exchange rates change because supply and demand change  Differences in interest rates also influence the demand for currency, and hence exchange rates  Price fluctuation has two effects:  To the extent that the imported goods have no domestic substitutes, the increased prices paid for them cause inflation in the domestic economy and divert purchasing power away from other goods  Domestically produced goods will become more competitive o The Interaction of Exchange Rates and the Balance of Trade  Combining the discussions of exchange rates and the balance of trade raises two key points:  First, in theory, these factors should balance each other  If states put a high priority on achieving a trade surplus, they can manipulate their currency price to boost trade  Competitive devaluation: competition between states to have the lowest-valued currency in order to boost domestic employment  Competitive devaluation leaves everyone worse off by undermining the stability needed for trade to take place o Protectionism  Protectionism: measures taken by states to limit their imports  Quota: a numerical limit on the amount of a certain item that can be imported  Tariff: a tax on imports, used to protect domestic producers from foreign competition  Subsidies: direct payments to
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