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Introduction to International Political Economy

Introduction to International Political Economy. A country’s economic and political system determines…. * What will be produced? * By what methods? * Using what resources? * For whom?. Capitalism.

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Introduction to International Political Economy

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  1. Introduction to International Political Economy

  2. A country’s economic and political system determines…. * What will be produced? * By what methods? * Using what resources? * For whom?

  3. Capitalism A social and economic system in which the means of production are ____________ and operated and in which resource allocation is determined by the laws _________________

  4. Socialism A social and economic system in which the means of production are collectively owned and equality is given a high priority.

  5. Pure socialism: You have two cows. The government takes them and puts them in a barn with everyone else's cows. You have to take care of all the cows. The government gives you as much milk as you need.

  6. Bureaucratic socialism: You have two cows. The government takes them and puts them in a barn with everyone else's cows. They are cared for by ex-chicken farmers. You have to take care of the chickens the government took from the chicken farmers. The government gives you as much milk and as many eggs as the regulations say you should need.

  7. Pure capitalism: You have two cows. You sell one and buy a bull.

  8. American Corporate Capitalism: You have 2 cows. You sell three of them to your publicly-listed company, then execute a debt/equity swap with associated general offer so that you get all four cows back, with a tax deduction for keeping five cows. The milk rights of six cows are transferred to a Cayman Islands company secretly owned by the majority shareholder, who sells the rights to all seven cows' milk back to the listed company. The annual report says that the company owns eight cows, with an option on one more. You get a huge bonus. You contribute some of your profit to the President's re-election campaign. The President announces tax cuts for corporations in order to stimulate the economy.

  9. Anarchism: You have two cows. Either you sell the milk at a fair price or your neighbors try to kill you and take the cows. Surrealism: You have two giraffes. The government requires you to take harmonica lessons.

  10. Economic Liberalism-- Economic principles emphasizing the importance of:

  11. Pennsylvania can produce corn & potatoes more efficiently (using less land and labor) than Maine • But Pennsylvania exports corn and imports potatoes – WHY?

  12. Opportunity Cost The highest-valued alternative that must be given up to engage in an activity.

  13. Absolute advantage The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources. Comparative advantage The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.

  14. Theory of Comparative Advantage By specializing in those goods which it can produce for a lower opportunity cost and trading with other countries, countries can increase their income.

  15. Basic Principal of Comparative Advantage Even if an individual is worse at producing everything two individuals can still benefit from trade because of differing opportunity costs

  16. Two men live alone in an isolated island. To survive they must carry water, fish, cook, and build shelter. The first man is young, strong, and educated and is faster, better, more productive at everything. The second man is old, weak, and uneducated. In some activities the difference between the two is great; in others it is small. Is it in the interest of either of them to work in isolation? If not, how should they divide the work?

  17. COMPARATIVE ADVANTAGE HIGHLIGHTS 1. TOTAL PRODUCTION AND CONSUMPTION IS LESS IN NO TRADE WORLD 2. BOTH COUNTRIES ARE BETTER OFF AFTER TRADE 3. ABSOLUTE ADVANTAGE DOES NOT MATTER

  18. EXAMPLE WHEAT IRON UK 100 250 US 200 150 WHEAT IRON UK 10,000 25,000 US 20,000 15,000 --------- --------- WORLD 30,000 40,000 PRODUCTION CONSUMPTION WHEAT IRON WHEAT IRON UK 0 50,000 16,000 30,000 US 40,000 0 24,000 20,000 --------- --------- --------- ---------- WORLD 40,000 50,000 40,000 50,000 PRODUCTIVITY: AMOUNT PRODUCED PER WORKER (A) AMOUNT PRODUCED AND CONSUMED ASSUMING 200 WORKERS IN EACH COUNTRY WITH 100 PRODUCING EACH GOOD (B) (C)

  19. Gains from Trade + Each country can concentrate its efforts on what it does best (specialize) and trade some of those goods for goods that other states produce most efficiently increased

  20. Caveats • Winners and losers: • All groups in society do not necessarily gain • Benefits… • Adjustment pains

  21. Romney Beats McCain in Michigan Vote By JOHN M. BRODER (NYT) Promising to revitalize the automobile industry, Mitt Romney defeated his principal rival, Senator John McCain, by winning a clear plurality.

  22. Caveats • Negative externalities/ social costs • Barriers to free and fair trade

  23. In the 1980s Mr. Calero led the largest faction fighting Nicaragua's left-wing Sandinista government. He was responsible for managing the US-backed rebels' finances and buying weapons. In 1987 he testified before the US Congress about the Iran-Contra scandal that shook the administration of President Ronald Reagan. Mr Assad again blamed "terrorists", supported by foreign powers, for fomenting discord and creating "a project of... dissent" inside the country. He said Syria was "facing attempts to weaken Syria, breach its sovereignty”. The only way to resolve the crisis, he said, was through political dialogue. But he said he would not negotiate with those who, he said, did not represent the will of the Syrian people. What seems to be missing from the equation at the moment is the kind of pressure on Damascus from Russia that was crucial in persuading the regime to accept the Annan plan in the first place, and to drop impossible conditions it later placed on implementing it. For the time being, despite mounting international pressure on their own position in the wake of the Houla massacre, the Russians are continuing to argue against the idea that the UN Security Council should consider tougher action such as mandatory sanctions. Blocking off such action increases the onus on Moscow to help secure Syrian compliance.

  24. Terms for Today • Free trade • Protectionism • Barriers to trade • Trade liberalization • Compensation principle

  25. TRADE STRATEGIES 1. AUTARCHY 2. FREE TRADE 3. MANAGED TRADE

  26. Protectionism: Government policy of restricting imports to “protect” domestic industries from foreign competition Barriers to trade: • Tariffs • Non-tariff barriers

  27. Economists agree on the _____________gains from free trade: • with free trade economy will produce more goods overall with same resources • Consumers will ___________________________available However, some individuals will gain and some will lose. Trade liberalization reallocates capital, labor and land to more efficient use.

  28. Global trade negotiations eventually culminated in creation of World Trade Organization in 1994. WTO consists of two parts: • global agreement to reduce barriers to trade. • Dispute resolution mechanism. Country that believes itself to be victim of unfair barriers to trade can bring case against another. If WTO panel finds in favor of plaintiff, then that state may impose retaliatory tariffs equal to losses it has sustained.

  29. The WTO’s procedure underscores the rule of law, and it makes the trading system more secure and predictable. The system is based on clearly-defined rules, with timetables for completing a case. First rulings are made by a panel and endorsed (or rejected) by the WTO’s full membership. • Disputes are about broken promises • A dispute arises when one country adopts a trade policy measure or takes some action that one or more fellow-WTO members considers to be breaking the WTO agreements, or to be a failure to live up to obligations. A third group of countries can declare that they have an interest in the case and enjoy some rights. • GATT the previous agreement (IGO) had dispute resolution mechanism, but it had no fixed timetables = lowered commitment since no defined time table for punishment!

  30. How long to settle a dispute?

  31. Some ways in which the markets that Rivoli’s t-shirt encountered were not “free” include. • Cotton farmers in Texas • Hokou system in China • Textile industry in U.S.

  32. What are the likely effects of trade liberalization? What is the compensation principle?

  33. Why does the U.S. protect its textile industry? Who do U.S. protectionist measures help? Who do they hurt?

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