Bretton Woods Institutions and Trade Issues

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Questions and Answers

What is the primary focus of the International Monetary Fund (IMF)?

Stabilizing international monetary arrangements (correct)

Providing long-term loans to low-income countries

Promoting agricultural exports from developing countries

Regulating international trade disputes

According to the Prebisch-Singer hypothesis, why do developing countries experience reduced revenue from primary exports?

Commodity export prices tend to remain stable over time.

Developing countries heavily diversify their export markets.

Commodity export prices tend to decline over time. (correct)

The volume of exports increases at a faster rate than prices.

What issues do many developing countries face regarding international trade?

Excessive dependence on local production of consumer goods

Over-reliance on diversified exports of industrial goods

A balance between exports and imports across all sectors

Heavy dependence on imports of capital goods and machinery (correct)

What can lead to export earnings instability for agricultural commodities in developing countries?

Demand and supply shocks affecting export levels Signup and view all the answers

In the context of international trade, which statement accurately describes capital flows in less developed countries (LDCs)?

Reversals in capital flows can lead to economic crises. Signup and view all the answers

What term refers to commodities that are artificially produced but can replace natural commodities?

Synthetic substitutes Signup and view all the answers

What defines a monopolistic market control?

Single producer controlling the market output Signup and view all the answers

What is meant by 'increasing returns' in production?

A disproportionate increase in output from a change in scale Signup and view all the answers

Which of the following is an example of outward looking development policies?

Encouraging agricultural exports Signup and view all the answers

What is a dual exchange rate?

Two fixed exchange rates for different goods Signup and view all the answers

What is a multifibre arrangement (MFA)?

Non-tariff quotas on textile imports from developing countries Signup and view all the answers

What led to the economic transformation of South Korea post-WWII?

Strong emphasis on manufacturing exports Signup and view all the answers

Which factor contributed to South Korea achieving a high Human Development Index by 2018?

High postsecondary enrollment rates Signup and view all the answers

What does a tariff represent in international trade?

A fixed percentage rate on the value of imports Signup and view all the answers

What does the term 'wage price spiral' describe?

Workers demanding higher wages due to inflation Signup and view all the answers

Which East Asian economy is known for rapid industrialization and development post-WWII?

South Korea Signup and view all the answers

What is meant by 'exchange control'?

Government restriction of capital outflow Signup and view all the answers

Which of the following best describes chaebols in South Korea?

Large conglomerates supported by the government Signup and view all the answers

What characterizes oligopolistic market control?

Dominance by a select few rival firms Signup and view all the answers

What does the Heckscher-Ohlin theory emphasize regarding international trade?

Countries will specialize based on their relative factor endowments. Signup and view all the answers

What is the main conclusion of the neoclassical trade model?

All countries can gain from trade and increase world output. Signup and view all the answers

Which of the following critiques traditional trade theory?

It relies solely on basic factors and ignores advanced factors. Signup and view all the answers

What does the 'vent for surplus' theory advocate?

International trade should help developing countries utilize underutilized resources. Signup and view all the answers

How does import substitution industrialization typically impact protected industries?

It can make industries inefficient and costly. Signup and view all the answers

Which argument do trade pessimists make about specializing in comparative advantage?

It can inhibit industrialization and skill accumulation. Signup and view all the answers

What is a key aspect of export promotion as a trade strategy?

It focuses on enhancing competition and fostering innovation. Signup and view all the answers

What role do national governments play in trading relations according to traditional trade theories?

They are responsible for creating tariffs and quotas. Signup and view all the answers

What is one potential negative consequence of overvalued exchange rates in developing countries?

Hindered exports due to higher local costs. Signup and view all the answers

What do trade optimists argue about the effects of international trade?

It attracts foreign capital and expertise. Signup and view all the answers

What was a primary criticism of South Korea's industrial policy after 1997?

It hindered economic growth due to heavy government involvement. Signup and view all the answers

What contributed to South Korea's adjustment during the 1980s debt crisis?

Early adaptation of its borrowing practices. Signup and view all the answers

What is a characteristic of basic factors in the North-South model?

They encompass raw materials and unskilled labor. Signup and view all the answers

What does the vent-for-surplus theory suggest regarding low-income economies?

International trade can help utilize surplus resources. Signup and view all the answers

What is a common effect of overvaluing a nation's currency?

Deterioration of trade balance. Signup and view all the answers

How did Taiwan's import substitution strategy differ from Argentina's?

Taiwan combined protection with export-oriented policies. Signup and view all the answers

What can lead to declining terms of trade for commodity-exporting countries?

Price volatility of primary commodities. Signup and view all the answers

Which factor is NOT associated with Taiwan's development miracle?

Emphasis on import substitution only. Signup and view all the answers

What is a potential drawback of raising tariffs while simultaneously overvaluing a currency?

Detrimental effects on export prices. Signup and view all the answers

What does effective tariffs refer to?

The overall tax burden on imported goods. Signup and view all the answers

What major factor underlies the success of export-oriented growth in Taiwan?

Focus on technological innovation and education. Signup and view all the answers

What describes the role of the government in Taiwan's economic development?

Guiding industrial development with active investment. Signup and view all the answers

What is a characteristic of export earnings from primary commodities?

They are subject to fluctuations due to market prices. Signup and view all the answers

Study Notes

Bretton Woods Institutions Post-WWII

IMF (International Monetary Fund) stabilizes international finances, facilitating trade and restoring global markets.
World Bank reconstructs national economies.
WTO (initially GATT) governs international trade.
Key differences between developed and developing countries in the Bretton Woods era:
- Floating/managed exchange rates used, not fixed gold convertibility for US $.
- Capital account dominates current account for LDCs (leads to debt crises).

International Trade Issues

Many developing countries depend heavily on primary commodity exports, often undiversified.
Imports (machinery, capital goods) are crucial for developing countries.
Demand elasticities can create export earnings instability, damaging incomes due to shocks and low elasticity.
Terms of trade (the ratio of export prices to import prices) for developing countries tend to deteriorate:
- Commodity prices fall over time (Prebisch-Singer hypothesis).
- Coffee, as an example, has shown an approximate 0.77% annual decline in price over 300 years.

Traditional Trade Theory

Comparative advantage emphasizes specialization for optimal resource use.
Factor endowments (Heckscher-Ohlin model) suggest specializing in products using abundant factors.
Neoclassical model predicts:
- Trade boosts global output.
- Countries specialize in resource-intensive products.
- Wage and capital costs equalize.
- Abundant factor owners gain.

Critique of Traditional Trade Theory

Fixed resources, perfect employment and international immobility of skill and capital are challenges.
Porter's model proposes advanced factors (knowledge, infrastructure) are crucial for development, requiring a departure from factor-driven advantage.
Vent-for-surplus theory posits that trade gives access to previously untapped resources, potentially promoting growth.

Trade Strategies

Import substitution (IS) involves tariffs to protect infant industries, potentially inefficient and costly.
Export promotion focuses on boosting exports; may require undervalued exchange rates, tariff exemptions and government support.
Effective protection rate (EPR) considers value addition in various stages of production.

Trade Pessimists vs. Optimists

Pessimists: Limited demand for developing country exports, deterioration in terms of trade, disadvantages for industrialization and skill development.
Optimists: Encourages competition, accelerates growth, attracts capital and expertise, and eliminates distortions.

Development Policies

Outward-looking policies encourage exports.
Inward-looking policies prioritize self-sufficiency.
Policies categorized as primary (agricultural) and secondary (manufacturing) outward/inward.
MFA (Multifiber Arrangement) involves quotas on textile imports.

Exchange Rates and Monetary Policies

Exchange controls restrict currency outflow to manage balance of payments.
Dual exchange rate systems (overvalued vs. black market) are used.
Devaluation lowers the official exchange rate; depreciation is a market-driven decline in value due to supply/demand.
Inflationary spirals (wage-price spirals) can impact developing economies.

South Korea and Taiwan's Development

East Asian economies (Tigers) saw rapid development post-WWII.
Rapid industrialization, education, and infrastructure investments were key factors.
Industrial policy (e.g., export incentives, protected industries, currency undervaluation) significantly impacted economic outcomes.
Chaebols (large conglomerates) were supported but became liabilities later.
Challenges included oil shocks and debt crises, which were addressed.

Key Concepts and Explanations

Factor endowment theory: Countries should specialize in producing goods they have abundant factors.
GNI vs. GDP: GNI includes income from abroad, while GDP measures domestic production.
Export earnings stability/comparative advantage/terms of trade: Related to the risks and challenges of relying on primary commodity exports.
"Basic" vs. "advanced" factors: Basic factors are unskilled labor and resources; advanced factors include advanced knowledge and sophisticated technologies.
Vent-for-surplus theory: Opening trade allows countries to utilize untapped resources.
Overvalued exchange rate: A currency's official value exceeds its market value.
Nominal vs. effective tariffs: Nominal refers to the rate; effective considers value addition.
Devaluation vs. depreciation: Official rate change vs. market-driven change in value.
Import substitution vs. export promotion: Strategies to promote domestic industries vs. exports.
Taiwan's development strategy: Includes elements of export orientation, infrastructure development, education improvements, and a strong governmental role.
Argentina's development strategy: Faced challenges with heavily protectionist policies leading to inefficient domestic industries and economic crises.

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Description

Explore the roles of the IMF, World Bank, and WTO in shaping international finance and trade post-WWII. Understand the impact of these institutions on developed and developing countries, and examine the challenges faced by developing nations regarding commodity dependence and trade stability.