Global Economic Policies and Institutions
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Questions and Answers

What is meant by 'fiscal correctness' and how does it differ between Italy and Germany?

Fiscal correctness refers to the appropriate management of a country's finances. It differs between Italy and Germany due to each country's reputation and relative power in fiscal matters.

Define a public good and provide an example to illustrate your definition.

A public good is a resource that is non-rivalrous and non-excludable, meaning it is available for everyone to use without diminishing its availability. An example is a park bench.

How does the degree of private/public relate to non-rivalry and non-excludability?

The degree of private/public depends on how much an item can be consumed by one person without affecting others' consumption and whether access can be restricted. More non-rivalry and non-excludability means a good is more public.

What are the key functions of money in international trade?

<p>Money serves primarily as a means of payment and a unit of account, which are essential for overcoming the limitations of barter in facilitating international trade.</p> Signup and view all the answers

Why is there no single money accepted universally in the international economy?

<p>There is no single money universally accepted because different nations have varying monetary systems, currencies, and economic conditions that influence their acceptance.</p> Signup and view all the answers

How do supranational institutions impact national sovereignty in the context of hyper-globalization?

<p>Supranational institutions limit national sovereignty by enforcing policies that prevent a race to the bottom on sensitive issues, restricting countries' ability to independently select their national policies.</p> Signup and view all the answers

What is an example of how federations like the US or Germany address the challenges of hyper-globalization?

<p>Federations manage hyper-globalization by allowing free flow of goods, investments, and people while using federal legislation to prevent a race to the bottom through democratic elections.</p> Signup and view all the answers

In what way does the European Union exemplify a balance between hyper-globalization and democratic governance?

<p>The EU achieves this by facilitating free trade and movement while maintaining the capacity for supranational regulation to ensure fairness and economic stability.</p> Signup and view all the answers

Identify one challenge posed by globalization regarding governance and democracy.

<p>A primary challenge is determining who will establish the necessary institutional frameworks for global governance and ensuring these frameworks are both democratic and technocratic.</p> Signup and view all the answers

How can voters influence supranational governance if they are dissatisfied with the system?

<p>Voters can influence supranational governance by participating in democratic processes that allow them to change or reshape the institutional frameworks governing international systems.</p> Signup and view all the answers

Why does money function as a collective good rather than a private good?

<p>Money functions as a collective good because its utility derives from widespread use by others, as it holds no utility when used by only one individual.</p> Signup and view all the answers

What risk is associated with the state supplying money?

<p>The state risks creating instability within the financial system due to profit generation from money supply.</p> Signup and view all the answers

How is the utility of money comparable to that of language?

<p>The utility of money increases with the size of the group using it, similar to how the value of language escalates with its communicative reach.</p> Signup and view all the answers

What is the free rider problem in relation to collective goods?

<p>The free rider problem occurs when individuals benefit from a collective good without contributing to its provision, leading to undersupply.</p> Signup and view all the answers

What mechanism allows for the easy payment by users of money?

<p>Users of money can be made to pay easily due to the nature of money balances, which hold no interest, incentivizing the supply of money services.</p> Signup and view all the answers

What role does confidence play in the willingness to hold money?

<p>Confidence is crucial, as individuals are only willing to hold money if they believe its value will not diminish.</p> Signup and view all the answers

What are confidence building schemes and why are they important?

<p>Confidence building schemes, such as investing in sunk capital, help assure holders that suppliers will not reduce the money's value.</p> Signup and view all the answers

Why might individuals be reluctant to hold money balances?

<p>Individuals might be reluctant to hold money balances because they forgo potential higher interest rates from other assets.</p> Signup and view all the answers

What is the main challenge for a country when considering the commitment to currency convertibility?

<p>The main challenge is weighing the benefits of maintaining fixed currency prices against the costs of compromising monetary policy.</p> Signup and view all the answers

Explain the 'N-1 problem' in the context of national current account targets.

<p>The 'N-1 problem' states that only 'N-1' out of 'N' countries can independently achieve a surplus in their current accounts, as not all can pursue positive balances at the same time.</p> Signup and view all the answers

How does the N-1 issue affect a country's ability to manage its exchange rates?

<p>The N-1 issue implies that only 'N-1' independent exchange rates can be set among 'N' currencies, constraining a country's flexibility in managing its exchange rate targets.</p> Signup and view all the answers

Why is it significant that the sum of world current accounts equals zero?

<p>This equality signifies that for every surplus there must be a corresponding deficit, limiting the ability of all countries to simultaneously run surpluses.</p> Signup and view all the answers

What does the term 'convertibility practices' refer to in the context of international monetary arrangements?

<p>Convertibility practices refer to the conditions under which national currencies can be exchanged, impacting decisions on fixed or flexible exchange rates.</p> Signup and view all the answers

Discuss the implications of the N-1 issue when multiple countries issue their own currencies.

<p>The N-1 issue implies that if multiple countries have their own currencies, only 'N-1' can independently pursue specific exchange rate targets, limiting their monetary policies.</p> Signup and view all the answers

How does distrust among economic agents impact the international supply of money?

<p>Distrust among economic agents leads to reluctance in accepting currency, making the international supply of money more challenging and contingent on perceived credibility.</p> Signup and view all the answers

What practical arrangements are necessary due to the N-1 problem in international finance?

<p>Practical arrangements such as informal or formal agreements on payments and accounting practices to ensure consistency among sovereign targets are necessary.</p> Signup and view all the answers

What outcome led to the establishment of the Gold Standard?

<p>The establishment of the Gold Standard resulted from national independent decisions influenced by increasing financial integration among countries.</p> Signup and view all the answers

Define internal equilibrium in the context of macroeconomics.

<p>Internal equilibrium refers to a state of full employment and stable prices within an economy.</p> Signup and view all the answers

How does government prevent price level instability according to the provided content?

<p>The government prevents price level instability by avoiding substantial fluctuations in aggregate demand relative to full employment levels.</p> Signup and view all the answers

What is represented by the equation PY = Mv?

<p>The equation P<em>Y = M</em>v represents the quantity theory of money, linking price, income, money supply, and velocity of circulation.</p> Signup and view all the answers

Explain the concept of 'neutrality' of money as described in the content.

<p>'Neutrality' of money suggests that changes in money supply do not affect income growth but only influence inflation rates.</p> Signup and view all the answers

What is the formula for external equilibrium in macroeconomic terms?

<p>The formula for external equilibrium is Y = C + I + G + (EX - IM), where external factors affect the economy's output.</p> Signup and view all the answers

What role did central banks play in maintaining external balance under the Gold Standard?

<p>Central banks were responsible for fixing the exchange rate between currency and gold to maintain external balance.</p> Signup and view all the answers

Why do policymakers adopt balanced current account targets?

<p>Policymakers adopt balanced current account targets to manage external balances while accounting for the gains from trade over time.</p> Signup and view all the answers

How did the concept of monetary gold evolve during the discussed period?

<p>The role of monetary gold became more significant than its role as a metal, leading to instability in the relative prices of gold and silver.</p> Signup and view all the answers

What is the relationship between money supply and price levels according to the content?

<p>According to the content, an increase in money supply leads to a proportional increase in price levels.</p> Signup and view all the answers

What defines an asset's liquidity?

<p>Liquidity is defined as an asset's ability to be easily transformed into money.</p> Signup and view all the answers

What are Special Drawing Rights and who creates them?

<p>Special Drawing Rights are flat money created by the IMF and distributed among its member countries.</p> Signup and view all the answers

During the 19th century, what was the primary goal of the Gold Standard?

<p>The primary goal was to ensure the free convertibility of currency into gold at a fixed price.</p> Signup and view all the answers

How did the Gold Standard contribute to the stability of international currencies?

<p>The Gold Standard linked currencies to gold, ensuring that each currency was convertible to fixed amounts of gold.</p> Signup and view all the answers

What role did professional arbitrage play in the Gold Standard system?

<p>Professional arbitrage enabled the direct conversion of currencies based on their gold value without needing to convert to gold first.</p> Signup and view all the answers

Explain the significance of 'rules of the game' for countries participating in the Gold Standard.

<p>The 'rules of the game' required participating countries to follow specific monetary practices to maintain the system's integrity.</p> Signup and view all the answers

What was Pax Britannica and how did it influence the Gold Standard?

<p>Pax Britannica refers to the relatively calm economic situation from 1815 to 1914 when Britain emerged as a global economic power.</p> Signup and view all the answers

What was the impact of Britain’s Gold Standard on other countries?

<p>Britain's Gold Standard served as a model, leading many countries to adopt similar monetary systems.</p> Signup and view all the answers

What was the relationship between gold reserves and paper money supply under the Gold Standard?

<p>There was a proportional relationship where the amount of paper money issued was backed by gold reserves.</p> Signup and view all the answers

What significant change occurred in monetary policy regarding bimetallism in the 19th century?

<p>Many countries switched from bimetallism, which used both gold and silver, to adopting only the Gold Standard.</p> Signup and view all the answers

Flashcards

Race to the Bottom

A situation where countries compete by lowering standards to attract international investors or companies, often at the expense of environmental protection or worker rights.

Democratic Deficit in Globalization

The idea that globalization may lead to a lack of democratic control over global markets and institutions.

Supranational Institutions

Organizations or institutions that operate above the national level, having power to regulate or influence actions of sovereign states.

Hyper-globalization

A model of economic integration where goods, capital, and people move freely between different countries without much government interference.

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National Sovereignty

The ability for countries to make their own decisions on policies like taxation, regulations, or trade without interference from other countries.

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True Public Good

A good that is available to everyone without diminishing its availability for others. It's difficult to exclude anyone from accessing it.

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Common Good

A good that is enjoyed by many people, including the individual. The individual benefits from the fact that others also benefit from it.

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Barter

The act of exchanging goods or services directly without using money.

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Search Costs in Barter

The cost associated with finding a trading partner who wants what you have and is willing to exchange it for what you want.

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International Money

A widely accepted medium of exchange, unit of account, and store of value that facilitates international trade.

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Money as a Collective Good

The value of money comes from its widespread use by others; it has no inherent utility if only one person uses it.

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Money Supplied by Private Agents

Private companies can profit from supplying money services, even though money is a collective good.

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Free Rider Problem with Collective Goods

The free rider problem arises when individuals benefit from a collective good without contributing, leading to under-provision.

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Opportunity Cost of Holding Money

Holding money balances doesn't generate interest, unlike other assets. Thus, users of money face an opportunity cost.

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Charging Users of Money

The ability to easily charge users of money (like through interest rates) helps avoid the free rider problem.

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Confidence in Money

People's willingness to hold money depends on their confidence that its value won't decline.

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Sunk Capital as a Confidence Builder

To build confidence in their money, suppliers invest in 'sunk capital' (assets that lose value if the business closes). This demonstrates their commitment.

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Acceptance of Money

Money is accepted because people believe the issuer will not take actions that devalue it.

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Gold Standard

A system where each participating country guarantees the convertibility of its currency into gold at a fixed price, creating a fixed exchange rate between currencies.

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Gold Exchange Standard

A system where the participating countries maintain a fixed exchange rate between their currencies by holding reserves of gold or other currencies, typically a dominant currency like the US dollar.

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Liquidity

A country's ability to quickly and easily convert its assets into cash, without significantly affecting the asset's value.

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Special Drawing Rights (SDRs)

A form of international reserve asset created by the International Monetary Fund (IMF), allocated to member countries based on their quotas.

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Symmetrical System

A monetary system where each country independently determines its currency and exchange rate, with no central authority setting fixed rates.

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Gold Standard Era (1870-1914)

A period from 1870 to 1914 when the Gold Standard dominated international finance, characterized by stable exchange rates and a global economic system.

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Interwar Period

The period after World War I, marked by economic instability and uncertainty due to changes in the global monetary system, including the break-up of the Gold Standard.

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Convertibility

The act of converting a currency into gold at a fixed price, as practiced during the Gold Standard system.

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Store of Value

The ability to hold a value over time, even in times of economic fluctuations.

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Reserves

Assets that can be easily used as a medium of exchange, facilitating transactions and economic activity.

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Credibility of Fixed Exchange Rates

A country may choose to abandon its commitment to a fixed exchange rate if the costs of maintaining it exceed the benefits. For example, it may be forced to sacrifice its monetary policy goals to keep the exchange rate fixed.

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International Supply of Money: A Bumpy Road

The global supply of money can be unreliable because of the constant need to balance the benefits of supplying money with the potential distrust of those using it. This creates uncertainty in the international monetary system.

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Closed Global Economy: Balance of Payments

In a closed global economy, the sum of all countries' exports must equal the sum of all countries' imports. This applies to goods, financial assets, and money. However, some transactions, like illegal activities, are not recorded, leading to slight discrepancies.

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N-1 Problem in Current Accounts

The sum of all countries' current account balances must equal zero. Since only N-1 countries can independently pursue a current account target, one country's balance will always be determined by the others.

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N-1 Problem in Exchange Rates

In a world with multiple currencies, only N-1 countries can independently set their exchange rates. This is because the exchange rate between any two currencies is determined by the other rates.

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Need for International Coordination

Due to the N-1 issue, countries need to cooperate to make their economic policies consistent. This can be done formally through international agreements or informally through coordination.

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Convertibility Practices

International monetary systems need mechanisms for making payments and accounting. These practices can vary, ranging from fixed exchange rates to flexible ones.

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Reserve Currency Management

International monetary systems also require rules and guidelines for managing the reserve currency. This includes determining the role of the reserve currency and its impact on the global economy.

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Internal Equilibrium

A situation where a country's economy is operating at full employment and with stable prices, minimizing fluctuations in output and price levels.

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Neutrality of Money

The belief that changes in the money supply primarily influence price levels and have little impact on real economic variables like output. It emphasizes the role of money in determining the price level.

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Quantity Theory of Money

Equation that states the total value of transactions in an economy is equal to the amount of money in circulation multiplied by the average number of times money changes hands.

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Current Account (CA)

The difference between a country's exports and imports, reflecting its balance of trade in goods and services.

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External Equilibrium

A situation where a country is neither gaining nor losing gold reserves due to international trade. It indicates a balance between the inflows and outflows of gold resulting from trade.

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Fixing the Exchange Rate

The central bank's responsibility to maintain a stable exchange rate between its currency and gold by ensuring the country neither gains nor loses gold reserves.

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Balance of Payments

The sum of a country's current account balance and its capital account balance, which includes investment flows and financial transactions.

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Gold Shipments to Finance CA Deficit

The process of reducing a current account deficit by drawing on gold reserves to finance the deficit, leading to a decrease in the gold reserves.

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Balanced Current Account

A situation where a country's current account is neither in a large surplus nor a large deficit, reflecting some degree of balance in trade and investment.

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Study Notes

Global Economic Policies and Institutions

  • Industrial revolution and Pax Britannica: Trade, money, and finance intertwined.
  • World War I and its aftermath: Economic disintegration.
  • World War II and its aftermath: Bretton Woods era.
  • Financial globalization: A significant change.
  • New developments in finance: Blockchain, cryptocurrencies, Central Bank Digital Currencies (CBDCs), and decentralized finance.
  • Economic interdependence: Mutual reliance of economic actors within a system.

Dependence vs Interdependence

  • Interdependence: A decision-maker's actions affect others and vice versa.
  • Dependence vs Interdependence: Perfect Competition vs. Oligopoly.

Historical Perspective: Between the Two Wars

  • Trade imploded, finance disappeared, flexible exchange rates prevailed between WWI and WWII.
  • Bretton Woods Conference: Agreement in 1944 to establish global economic cooperation.
  • Global recession and crises: Mexico, 1985; South-East Asian tigers, 1997/98.

Globalization and Rodrik's Policy Trilemma

  • Globalization undermines itself (winners and losers) - it can be politically unsustainable in a democracy. Policies to attract foreign investment often contradict policies for environmental stability and social justice.
  • The trilemma: Hyperglobalization, democracy, and national sovereignty. The three cannot simultaneously coexist.
  • Countries face choices between these competing objectives: They must sacrifice one or more to maintain the other two.

The Globalization Paradox in Advanced Countries

  • The need for effective regulation in advanced countries but hyper-globalization undermines regulations.
  • Harmonizing rules across countries vs. Restricting the scope of globalization.

The Globalization Paradox in Advanced Countries

  • The need for a regulatory state undermined by globalization necessitates policy choices.
  • Three options: 1) Ignoring the problem and pushing for deeper globalization, 2) Harmonizing rules across countries, 3) Restricting the scope of globalization.

The Globalization Paradox in Advanced Countries

  • The Globalization Paradox: Effective regulatory states are essential for legitimacy and efficacy, but become undermined by hyper-globalization.
  • This necessitates choices: ignoring the issue, harmonizing rules, or restricting globalization to maintain a degree of control.

Trade, Money, and Finance for Independent Countries

  • Trade, money, and finance across countries operate in waves of increasing interdependence.
  • Paper money, initially convertible into precious metals, evolved into "fiat" currencies.
  • International Monetary regimes: Gold Standard, Bretton Woods, and subsequent eras of flexible exchange rates, and their implications.

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GLOBAL ECONOMIC POLICIES AND INSTITUTIONS PDF

Description

Explore the significant developments in global economic policies and institutions from the Industrial Revolution through World War II, examining the impacts of financial globalization and interdependence. Understand the historical context of trade, finance, and economic cooperation leading to modern challenges in financial markets.

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