Globalization and Public Goods Quiz

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Questions and Answers

What is a key feature of hyper-globalization policies in relation to national sovereignty?

  • They are supported by supranational institutions to prevent a race to the bottom. (correct)
  • They require complete independence from global trade agreements.
  • They allow countries to operate without federal legislation.
  • They eliminate the need for national policies.

Federal legislation can prevent a race to the bottom in sensitive topics.

True (A)

What challenge does globalization pose regarding institutional support?

The challenge is determining who will provide the necessary institutional underpinnings for a global market.

In Europe, political integration among governments allows for free trade and free movement of capital and labor, while retaining some ability at the supranational _____ level to regulate profit-making.

<p>EU</p> Signup and view all the answers

Match the following concepts with their descriptions:

<p>Hyper-globalization = Integration of goods, services, and labor across borders Supranational institutions = Entities that regulate and manage globalization effects Democratic support = Governance that allows voter influence and change Race to the bottom = Deterioration of standards in competitive markets</p> Signup and view all the answers

What is a characteristic that differentiates a true public good from a common good?

<p>It is available for everyone and is not rival. (D)</p> Signup and view all the answers

The degree of publicness of a good is solely based on its availability to the general population.

<p>False (B)</p> Signup and view all the answers

What are the two main functions of money as a monetary instrument?

<p>Means of payment and unit of account</p> Signup and view all the answers

Without money, societies are forced to revert to ______, which complicates trade due to search costs.

<p>barter</p> Signup and view all the answers

Match the following terms related to public and common goods:

<p>Public Good = Non-rivalrous and non-excludable Common Good = Rival in consumption but available to many Austerity = Economic measure to recover fiscal health Barter = Trade without money</p> Signup and view all the answers

What are the components of the Balance of Payments (BoP) identity?

<p>Current account and financial account (D)</p> Signup and view all the answers

The Balance of Payments identity indicates that everything created is accounted for in the system.

<p>True (A)</p> Signup and view all the answers

What is the difference between GDP and GNP?

<p>GDP measures the total economic output within a country's borders, while GNP measures the total economic output produced by the residents of a country, regardless of location.</p> Signup and view all the answers

The current account includes imports, exports, and __________ income from outside workers.

<p>factor</p> Signup and view all the answers

What condition signifies external equilibrium in the Balance of Payments?

<p>Net international flows of goods balances with net international flows of financial assets (A)</p> Signup and view all the answers

Debtors generally hold more power than creditors in financial relationships.

<p>False (B)</p> Signup and view all the answers

What are unilateral transfers?

<p>Unilateral transfers are one-way transfers of money where no goods or services are exchanged, such as remittances from individuals working abroad.</p> Signup and view all the answers

Match the following terms with their definitions:

<p>Current account = Ongoing economic transactions Financial account = Transactions involving financial assets Official reserves = Foreign currency held by the central bank Remittances = Transfers sent by individuals to their home country</p> Signup and view all the answers

What is convertibility in relation to currency?

<p>A guarantee that money can be converted at a fixed price into another asset (A)</p> Signup and view all the answers

Economies of scale can lead to monopoly because larger firms can reduce their average costs.

<p>True (A)</p> Signup and view all the answers

What is the primary source of profit for a bank as a money issuer?

<p>The margin between the interest rate earned on the asset and the interest rate paid on liabilities.</p> Signup and view all the answers

Under the gold standard, convertibility was guaranteed by ______.

<p>gold</p> Signup and view all the answers

What can diminish the credibility of a money issuer?

<p>Engagement in activities that reduce money value (B)</p> Signup and view all the answers

In a country with two different currencies, the utility of each currency increases for residents.

<p>False (B)</p> Signup and view all the answers

What happens to borrowing needs if businesses face financial difficulties?

<p>Businesses may need extra borrowing to support previous debts.</p> Signup and view all the answers

When different currency issuers follow varied policies, the price of one currency into another may ______.

<p>fluctuate</p> Signup and view all the answers

Match the following concepts with their implications:

<p>Concentration of money supply = Achieves economies of scale Bank deposits = Depositors do not collect money altogether Positive network externalities = Willingness to pay for services Riskier borrowers = Higher interest rates may be required</p> Signup and view all the answers

What happens when the costs of maintaining convertibility exceed the benefits for a country?

<p>The country will abandon its promise of convertibility. (B)</p> Signup and view all the answers

In a closed global economy, the sum of world exports is equal to the sum of world imports.

<p>True (A)</p> Signup and view all the answers

What is the implication of the N-1 issue for current account targets among countries?

<p>Only N-1 out of N countries can independently pursue a national current account target.</p> Signup and view all the answers

In a world with N currencies, there are only __ independent exchange rates.

<p>N-1</p> Signup and view all the answers

Match the following terms with their correct implications:

<p>N-1 Issue for Current Accounts = Only N-1 countries can target current accounts independently N-1 Issue for Exchange Rates = Only N-1 exchange rates are independent among N currencies National Currency Issue = Requires reciprocal consistency among sovereign targets Convertibility Costs = May lead to abandoning commitments if exceed benefits</p> Signup and view all the answers

What are the practical arrangements needed due to the N-1 issue?

<p>Payments and accounting practices. (D)</p> Signup and view all the answers

Every country can experience a surplus at the same time in a global economy.

<p>False (B)</p> Signup and view all the answers

What trade practices may not be accurately reflected in financial accountings?

<p>Drugs and human trades.</p> Signup and view all the answers

What is one consequence of banks taking more risks in their lending practices?

<p>Bank crises due to borrower defaults (C)</p> Signup and view all the answers

The government has no role in the money supply process once banks are nationalized.

<p>False (B)</p> Signup and view all the answers

What typically occurs during a banking crisis that affects customer confidence?

<p>Customers rush to convert their holdings into hard cash.</p> Signup and view all the answers

The state has a monopoly power to issue _____ and deposits.

<p>currency</p> Signup and view all the answers

What happens to banks that successfully increase their market share?

<p>They may become more profitable. (C)</p> Signup and view all the answers

An increase in the supply of currency by the state will always lead to inflation.

<p>False (B)</p> Signup and view all the answers

What role does the government play during a banking crisis?

<p>Providing a lender of last resort service.</p> Signup and view all the answers

The currency of an over-issuing bank becomes riskier than _____ currencies in circulation.

<p>other</p> Signup and view all the answers

Match the following banking outcomes to their effects:

<p>Bank Crisis = Loss of customer confidence. Increased Market Share = Higher profitability. Government Control = Reduction of private sector competition. Over-Issue of Currency = Possible currency devaluation.</p> Signup and view all the answers

What is a significant function of national money?

<p>Serving as a store of value. (D)</p> Signup and view all the answers

All currencies are good for international reserves.

<p>False (B)</p> Signup and view all the answers

What happens if a government declares its currency inconvertible?

<p>It forces citizens to use the currency domestically.</p> Signup and view all the answers

Countries that experience a banking crisis often see a call for _____ action to regain public confidence.

<p>government</p> Signup and view all the answers

Flashcards

Race to the bottom

A situation where countries compete by lowering standards in areas like labor or environment to attract businesses, leading to negative consequences for workers and the environment.

Supranational institutions

When countries give up some of their national sovereignty to work together on issues like trade, environment, and labor, creating rules that apply to all participating countries.

Technocratic governance

A system where decisions are made by experts, focusing on technical solutions rather than public opinion.

Democratic governance

A balance between expertise and public input in decision-making, allowing citizens to participate and influence policies.

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Democratic globalization

The challenge of creating and maintaining democratic governance in a globalized world, ensuring that citizens can participate in and influence global decision-making.

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True Public Good

A good that is available to everyone without diminishing its availability to others, regardless of who uses it. It cannot easily exclude anyone from using it.

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Common Good

A good that is freely available to everyone without diminishing its availability to others, but it is possible to exclude certain individuals from accessing it.

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Search Cost

The cost of searching for a trading partner with the desire to exchange the goods or services you have for what you want.

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Barter

An economic system where goods and services are directly exchanged for other goods and services without the use of money.

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Austerity

A financial situation where a country implements strict measures to reduce spending and government debt, often in times of economic crisis or recession.

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Balance of Payments (BoP) Identity

The Balance of Payments (BoP) identity states that the sum of the current account (CA), the financial/capital account (F), and official reserves flows must equal zero. This means that any inflow of funds must be matched by an outflow of funds within the economy.

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Current Account

The current account measures all transactions related to the trade of goods and services, income from investments, and unilateral transfers (e.g., remittances). It reflects the country's net income from its international activities.

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Financial Account

The financial account tracks all international transactions involving financial assets and liabilities. It includes investments in stocks, bonds, real estate, and other financial instruments.

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Official Reserves Flows

Official reserves flows represent changes in a country's foreign exchange holdings. Central banks manage these reserves to intervene in currency markets and ensure macroeconomic stability.

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External Equilibrium

External equilibrium occurs when net international flows of goods and financial assets balance each other. This means that a country's imports are financed through exports or financial transactions.

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Intertemporal Budget Constraint

Intertemporal budget constraint requires a balanced current account over time, avoiding excessive borrowing and depletion of reserves. This ensures long-term macroeconomic stability.

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Balance of Payments (BofP) - Short Term

In a short-run perspective, external equilibrium is achieved when the BoP is balanced through financing methods, like borrowing. However, this is not sustainable in the long-term.

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Balance of Payments (BofP) - Long Term

The longer-run perspective focuses on long-term sustainability. This involves balancing the current account through adjustments to income and expenditures, ensuring no systematic debt accumulation or depletion of reserves.

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Convertibility

The ability to exchange money for another asset at a fixed price, even if the supplier has no control over the asset's value.

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Credibility Problem

The risk that the issuer of money might not be able to convert their liabilities back into the promised asset, even if they owe it to depositors.

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Economies of Scale

Lower costs of providing goods or services as the scale of production increases. For instance, the cost of producing money decreases as the amount of money supplied grows.

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Liquidity Presence

The ability of a lender to loan out deposits knowing not all depositors will withdraw their funds at the same time, allowing for profitable lending activity.

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Interest Rates

The premium paid for borrowing money due to the opportunity cost of capital, meaning the borrower forgoes the potential to invest the money elsewhere.

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Monopoly Formation

The tendency of firms to grow larger due to economies of scale, potentially leading to monopolies as smaller competitors are driven out of business.

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Positive Network Externalities

The added value that a good or service gains as more people use it, such as increased network effects and social acceptance.

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Opportunity Cost of Holding Cash

The opportunity cost of holding cash, meaning the potential returns forgone by not investing it.

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Riskier Investors

Companies that are willing to take on higher risks in order to earn higher potential returns.

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Multiple Currencies in a Country

The situation where two currencies issued by different entities in the same country may fluctuate in value against each other, leading to uncertainty and potential confusion for transactions.

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Credibility Problem of Fixed Exchange Rates

A situation where a country's commitment to fixed exchange rates is not credible because the benefits of maintaining convertibility are outweighed by the costs of restricting monetary policy.

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N-1 Problem in Balance of Payments

The idea that all countries cannot simultaneously aim for and achieve trade surpluses. This arises as the total of world exports must equal the total of world imports due to the closed nature of the global economy.

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Flexible Exchange Rates Post 1971

A situation where a country abandons its commitment to a fixed exchange rate and allows its currency to fluctuate freely in the market.

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N-1 Problem in Exchange Rates

The concept that in a world with 'N' currencies, only 'N-1' currencies can have independent exchange rates. The last exchange rate is determined by the relationship between the first 'N-1' currencies.

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Practical Arrangements for Exchange Rate Management

In the global economy, countries must find ways to manage their sovereign targets (like exchange rates and trade balances) in a way that is compatible with other countries' goals.

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International Monetary Cooperation

The process of countries working together to manage exchange rates and trade balances. This can involve formal agreements (like the Bretton Woods system) or informal coordination.

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Banking Concentration

A situation where banks compete aggressively to gain market share by offering loans to riskier borrowers. This can lead to a domino effect where a bank failure triggers broader financial instability.

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Expanding Loan Portfolio

A situation where banks increase their lending activities faster than others, often by lowering interest rates on loans and accepting riskier borrowers. This can lead to instability and losses for banks if borrowers fail to repay.

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State Involvement in Money Supply

The process by which a government takes control of the money supply, typically through nationalizing the central bank or regulating the banking system. This aims to stabilize the economy and prevent financial crises.

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Currency Inconvertibility

The use of government power to enforce the use of a specific currency as the sole legal tender within a country, even if citizens might prefer other forms of money. This can be a tool for managing inflation and controlling the economy.

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Individual Bank Risk-Taking

A situation where an individual bank expands its lending activities faster than others, often by accepting riskier borrowers and low interest rates. This can lead to financial instability if borrowers fail to repay.

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State Control Over Money Supply

A situation where the government uses its power to control the money supply to achieve specific economic goals, such as financing wars or stimulating the economy.

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Banking Crisis

A situation where several banks fail to repay their debts, leading to a loss of confidence in the banking system and a potential financial crisis. This often involves customers withdrawing their deposits, triggering a domino effect.

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Liquidity Problem in Banking

A situation where a bank is unable to meet its obligations to its depositors due to a lack of available cash. This can lead to distrust and panic, impacting the overall banking system.

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Generalized Banking Crisis

A situation where a large number of banks fail simultaneously, causing severe economic disruption and widespread panic. This can lead to a loss of faith in the banking system and a deep economic recession.

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Lender of Last Resort

A situation where the government acts as a lender of last resort, providing emergency loans to banks facing liquidity problems. This helps stabilize the banking system and prevent a widespread crisis.

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Currency Conversion

The process of converting a currency into a more stable or valuable form, often done during periods of economic uncertainty or political instability.

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Currency Depreciation

A situation where the value of a currency decreases compared to other currencies, often due to inflation or economic instability. This can make imports more expensive and exports less competitive.

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Currency Appreciation

A situation where the value of a currency increases compared to other currencies, often due to strong economic growth or low inflation. This can make exports cheaper and imports more expensive.

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Over-issuing Currency

A situation where a government issues more currency than is backed by gold or other hard assets, leading to a potential decrease in the currency's value and increased inflation. This is often done to finance government spending or to stimulate the economy.

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Inflation

A situation where the general price level of goods and services rises over time, reducing the purchasing power of money. This can be caused by factors like over-issuing currency, increased demand, or supply shortages.

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Study Notes

Global Economic Policies and Institutions

  • Industrial revolution and Pax Britannica: Trade, money, and finance interconnected during this period.
  • World War I and its aftermath: Disintegration of economic systems
  • World War II and its aftermath: Bretton Woods era, shift after US dominance as an economic power in post war.
  • Financial globalization, a game-changer: significant change in how trade, money, and finance interact.
  • New things in money and finance: Blockchain, cryptocurrencies, CBDC's, and decentralized finance.
  • Are financial "crises" accidents?: Examination of whether financial crises are predictable or random events.
  • Economic interdependence: Mutual reliance of nations on each other in their economic activity, actions of one country impact other countries.
  • Dependence vs Interdependence: Distinction between self-sufficient nation's independence and nations' dependency on each other due to globalized systems, outcomes of one nation depend on the other's.
  • The two world wars period: Pre-WWI world was interconnected in trade and economic activity. Afterwards, the world became disconnected due to autarky and high tariffs.
  • Bretton Woods Conference in 1944: Agreement to establish a new global financial order during WWII.
  • Mexico crisis 1985; South-East Asian tigers crisis 1997/98: Examples of events impacting national and international finances.
  • Global recession from 1980-1982: Similarities with modern-day economic situations.

Globalization and Rodrik's Policy Trilemma

  • Globalization can produce winners and losers: the expansion of trade and services can benefit all countries but some countries can experience negative consequences due to capital flowing to nations with lax environmental and low tax regulations or weak worker rights.
  • The political trilemma of the world economy: There are three values to be considered simultaneously: hyperglobalization, democracy and national autonomy.
  • The trilemma refers to the inability to simultaneously achieve all three goals.

The Globalization Paradox

  • Legitimacy and efficacy all require an effective regulatory state: The ability to effectively enforce laws and regulations can be undermined by globalization.
  • Harmonizing rules across countries: The costs of imposing rules applicable to all countries rather than being specific to each country.
  • Restricting the scope of globalization: The cost of giving up on some of the gains from trade in order to maintain political stability in a democracy.
  • The globalization paradox in advanced countries: Globalization can disrupt domestic policy making and cause problems like unemployment increase and environmental protection problems.
  • Responding to the globalization paradox: The solutions to the disruption caused by globalization: Ignoring the problem, Harmonizing rules, and Restrictions of the scope of globalization.

Trade, Money, and Finance for Interdependent Countries

  • Trade, money, and finance: international arrangements, cyclical changes in the way trade, money, and finance are arranged between countries

  • Trade • Multilateral and bilateral trade arrangements • Deep integration (MNEs, global value chains) • Regional preferences, fading multilateralism and unilateral protectionist policies • Informal international monetary arrangements using precious metals

  • Money • Paper money (fiat money) and convertible • Fixed versus flexible exchange rates • Evolution of international monetary regimes (Gold Standard, Bretton Woods)

  • Finance • Intertemporal promise, which is dependent on time • Bonds and Equities • Derivates • Crises (2008, 1995 Mexico, etc)

The Balance of Payments Identity

  • Balance of payments (BoP) identity: The sum of a country's current account (CA), financial/capital account (F), and official reserve flows must equal zero.
  • Current account: Imports and exports of goods and services, factor payments (income from outside workers), and net transfers to other countries (e.g., debt repayments, gifts, remittances).
  • Financial account: Measures the flow of capital and financial assets between countries
  • Official reserves increase or decrease when a country is a net debtor or net creditor abroad

A Longer Run Intertemporal Perspective

  • The BoP constraint: Satisfying the intertemporal budget constraint requires a balanced current account.
  • The debtor-creditor relationship: There is a fundamental symmetry between debtor and creditor countries.
  • How long a country can borrow: A country's ability to borrow from another is ultimately limited by its ability to repay the debt.

The Globalisation Paradox in Advanced Countries

  • Legitimacy and efficacy all require an effective regulatory state • Regulations (ex. Financial regulations, product safety rules) • Tax regime (ex. income and capital taxes) • Institutional practices (ex. employer—employee bargaining)
  • The disruption of policy making

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