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Questions and Answers

What percentage of Canadian exports is directed to the United States?

90%

25%

76% (correct)

50%

Which of the following is a positive consequence of NAFTA?

Reduction of agricultural exports

Lowered prices by removing tariffs (correct)

Increased unemployment in Canada

Creation of environmental regulations

What was one major negative consequence of NAFTA?

Expanded farming opportunities in Mexico

Boost in U.S. job creation in rural areas

Increased pollution due to industrial activities (correct)

Rise in manufacturing jobs in Canada

What characterized the Gold Standard adopted by England in 1816?

Fixed exchange rates based on gold content Signup and view all the answers

What was a major weakness of the Gold Standard?

Curbing of economic development Signup and view all the answers

Which monetary system collapsed in 1931 due to the Great Depression?

Gold Bullion Standard Signup and view all the answers

Which statement best describes the Bretton Woods System?

It introduced the U.S. dollar as the only convertible currency backed by gold. Signup and view all the answers

What was a key feature of the Gold Standard in international trade?

Automatic trade balance adjustment Signup and view all the answers

What was established in 1945 to promote global monetary cooperation?

International Monetary Fund Signup and view all the answers

What was the primary purpose of the IMF when it was first created?

To monitor fixed exchange rates Signup and view all the answers

What major change occurred in 1971 regarding exchange rates?

Collapse of the fixed-exchange-rate system Signup and view all the answers

How does the IMF assist countries experiencing balance-of-payments deficits?

Through short-term loans Signup and view all the answers

What was one of the main criticisms of the IMF after the Global Financial Crisis?

Underrepresentation of developing economies Signup and view all the answers

What significant reform was implemented in 2010 regarding IMF quotas?

Doubling of the IMF quota overall Signup and view all the answers

Which aim was a key focus of the IMF in preventing trade wars?

Preventing competitive currency devaluations Signup and view all the answers

What was one effect of the IMF's shift to floating exchange rates?

Increased role in providing liquidity Signup and view all the answers

What is a major disadvantage of trade that can lead to job loss?

Overspecialization in specific industries Signup and view all the answers

What challenge do infant industries face in the context of international trade?

Competition from established foreign firms Signup and view all the answers

According to the Product Life-Cycle Theory, where are new products primarily produced during their early stages?

In the country of their innovation Signup and view all the answers

What does the Theory of National Competitive Advantage emphasize as important to a nation's success in exports?

Domestic demand and rivalry Signup and view all the answers

What is the primary goal of free trade?

To minimize restrictions on goods and services Signup and view all the answers

How does protectionism benefit domestic industries?

By restricting trade to safeguard jobs Signup and view all the answers

What risk does a country face if its local producers cannot compete with cheaper imports?

Loss of market diversity Signup and view all the answers

What can overspecialization due to trade lead to in an economy?

Increased structural unemployment Signup and view all the answers

Which organization primarily influences the global economic order through its member countries?

OECD Signup and view all the answers

What effect did NAFTA have on manufacturing jobs in Mexico?

Manufacturing jobs moved from developed nations to Mexico Signup and view all the answers

Which currency is commonly used by most Eurozone countries?

Euro Signup and view all the answers

What was one of the criticisms of the euro on the Eurozone economies?

It contributed to depressed economic growth rates Signup and view all the answers

What is one of the primary aims of NAFTA?

To improve working conditions and reduce trade barriers Signup and view all the answers

How did NAFTA contribute to the U.S. economy?

By adding approximately $127 billion annually to U.S. GDP Signup and view all the answers

Which country was not a founding member of OPEC?

Venezuela Signup and view all the answers

What impact did outsourced jobs to Mexico have in the U.S. by 2010?

Led to 791,000 jobs being outsourced to Mexico Signup and view all the answers

What is one purpose of protectionism in relation to strategic industries?

To safeguard food security and essential industries Signup and view all the answers

What is a potential downside of free trade agreements as mentioned?

They may lower standards for workers' rights and environmental protection Signup and view all the answers

Which sector is characterized by providing services rather than physical goods?

Tertiary sector Signup and view all the answers

What institutions were established during the Bretton Woods Conference?

International Monetary Fund and World Bank Signup and view all the answers

What was one of the main goals of the General Agreement on Tariffs and Trade (GATT)?

To address trade protectionism and exchange controls Signup and view all the answers

Which of the following statements correctly describes the secondary sector?

It is primarily concerned with manufacturing and construction Signup and view all the answers

During which event was the Bretton Woods framework established?

United Nations Monetary and Financial Conference Signup and view all the answers

How might a free trade deal with the US be perceived negatively regarding imports?

It might permit lower-quality imports like chlorine-washed chicken Signup and view all the answers

Study Notes

The Disadvantages of Trade

Trade can lead to overspecialization, threatening job security if world demand drops or cheaper foreign production emerges.
Certain industries may struggle to grow due to competition from well-established foreign companies, particularly affecting new industries.
Local producers may face market displacement due to cheaper imports, impacting domestic markets and product diversity.

Heckscher-Ohlin Theory

This theory suggests that countries specialize in producing goods using factors of production they have in abundance.
For example, countries with abundant labor may specialize in labor-intensive goods while capital-rich countries may specialize in capital-intensive goods.

Product Life-Cycle Theory

Proposed by Raymond Vernon, this theory suggests that new products typically begin production and export from the country of origin.
As product acceptance grows internationally, production shifts to other countries, eventually leading to exports back to the original country.

New Trade Theory

This theory emphasizes economies of scale and network effects, suggesting that first-mover advantage in industries can lead to dominant market positions.
It highlights the importance of learning curves and technological innovation in trade patterns.

Theory of National Competitive Advantage

Developed by Michael Porter, this theory explores why nations excel in certain industries.
It highlights the role of factor endowments, domestic demand, domestic rivalry, and related and supporting industries in explaining national success.

Free Trade

Advocates for minimal trade restrictions, aiming to maximize wealth through increased trade.

Protectionism

Supports trade restrictions to protect domestic industries and jobs, particularly in strategic sectors like food and steel production.
Protectionism safeguards strategic industries but may hinder economic growth and innovation.

Primary Sector

Involves extracting raw materials from the earth.
Examples include agriculture, fishing, mining, and forestry.

Secondary Sector

Transforms raw materials into finished goods.
Examples include manufacturing, construction, and energy production.

Tertiary Sector

Focuses on providing services rather than physical goods.
Examples include retail, healthcare, education, and finance.

Bretton Woods Conference (July 1944)

Established a postwar economic framework by delegates from 44 countries.
Created the International Monetary Fund (IMF) and the World Bank (International Bank for Reconstruction and Development).

International Monetary Fund (IMF)

Established in 1945 to promote global monetary cooperation and financial stability.
Designed to monitor a system of fixed exchange rates with currencies linked to gold and the U.S. dollar.
Provides short-term loans to assist countries facing balance-of-payments deficits.

IMF's Role in Preventing Trade Wars

The IMF aimed to prevent trade wars triggered by competitive currency devaluations, common during the interwar period.

Balance-of-Payments Deficits

Occur when a country spends more than it earns.
The IMF provides short-term loans to help countries manage temporary deficits and maintain fixed exchange rates.

Shift to Floating Exchange Rates

In 1971, the fixed-exchange-rate system collapsed, leading to floating exchange rates.
The IMF's role shifted to providing liquidity to countries linked to major currencies.

Quota System

The IMF uses a quota system to determine voting power based on member countries' contribution size.
This system has been criticized for giving larger economies disproportionate influence.

Criticism and Western Dominance

The IMF has faced criticism for its lack of transparency and perceived bias toward Western interests.

Global Financial Crisis and IMF Reform

The 2007-2009 global financial crisis prompted IMF reforms to enhance crisis management capabilities.
Key elements of the reform include resource expansion and quota adjustments to increase representation of emerging economies.

2010 Reform

The 2010 IMF reform involved doubling the IMF quota and shifting shares from overrepresented to under-represented countries.
This reform aimed to increase representation of developing and emerging market economies and improve crisis management.

Organization for Economic Cooperation and Development (OECD)

An influential organization with 35 member states, including Latvia as the most recent addition.
Its influence derives from the resources and economic power of its member countries.

Organization of Petroleum Exporting Countries (OPEC)

Formed in 1960 by Saudi Arabia, Iraq, Kuwait, Iran, and Venezuela.
Currently includes UAE, Algeria, Libya, Qatar, Nigeria, and Indonesia.
Remains a major oil-exporting group.

Eurozone

Most Eurozone countries use the euro as their currency, but some, like Great Britain, Sweden, and Denmark, have not adopted it.
The euro has been criticized for contributing to price increases and depressed economic growth in some member countries.

NAFTA (North American Free Trade Agreement)

Formed in 1994 between the United States, Mexico, and Canada to expand trade and cooperation.
Aims to improve working conditions and reduce trade barriers.

Effects of NAFTA on Mexico

Manufacturing jobs shifted from developed nations to Mexico due to lower costs.
Producer prices in Mexico dropped, leading to agricultural decline and food poverty.

Impact of NAFTA on the United States

NAFTA contributed to U.S.GDP growth but also led to outsourcing and job losses in manufacturing.

Impact of NAFTA on Canada

A significant portion of Canada's trade and jobs are dependent on trade with the United States.

Positive Consequences of NAFTA

Lowered prices through tariff removal.
Increased opportunities for small and medium-sized businesses.
Expanded trade between the three countries.
Created jobs in the United States.

Negative Consequences of NAFTA

Environmental pollution due to increased industrial activity.
Job losses in the U.S. manufacturing sector.
Exploitation of workers in Mexico.
Displacement of Mexican farmers.

International Monetary System

A set of rules, legal norms, instruments, and institutions shaping international payment conditions.

Gold Standard (Adopted by England, 1816)

The first international monetary system, later adopted by European countries and the U.S.
A fixed exchange rate system where countries determined the gold content of their currencies.

Features of the Gold Standard

Unlimited convertibility of currencies into gold.
Stable trade due to fixed exchange rates.
Automatic balance of trade.
Non-inflationary system due to gold backing.

Weaknesses of the Gold Standard

Limited cash flow.
Restrictions on economic development.
Dissolution due to World War I.

Gold Bullion Standard (Genoa, 1922)

A modified gold standard involving gold bullion exchanges.
Failed to ensure free currency convertibility.
Collapsed during the Great Depression.

Bretton Woods System (1944)

44 countries agreed on a new international monetary system to prevent interwar chaos.
Known as the dollar-gold standard or gold-exchange standard, with the U.S. dollar backed by gold.
Experienced a period of stability from 1959 to 1968.

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