Does skilled or unskilled labor in a developing country benefit as the country opens up to trade? How might the type of labor which suffers as trade opens compensate for their loss?
- Unskilled labor benefits - plentiful factors prosper
- Gain is relative: better than working in a field, payment improves (may become a developed country then)
- Local capital and skilled labor should lose, though they acutally benefit - owners shape (favorable) government policy
- Trade increases national income even when some lose from it
- Compensated through embedded liberalism: welfare, unemployment insurance, job training - increase mobility of labor
Explain the difference between foreign direct investment and portfolio capital. Which form of finance poses a greater risk of capital flight in a financial crisis?
- FDI: purchase of constrution of assets in another country. Ex: building a factory
- Value of assets, goods, usefulnes
- Portfolio investment: purchase of financial insturments like stocks and bonds; more liquid (easier to sell) than FDI
- Portfoilio investments are riskier: they are promises where the borrower gets money today in exhange for a promise by the lender to pay back with interest later
- Risk combated with collateral, finanical institutions (banks)
Give one advantage and one disadvantage to the creation of the Euro for those countries that are in the Euro zone.
- Advantage: encourages trade in the Euro zone; no exchange rate risk across borders, easier to compare prices
- Disadvantage: eliminates exchange rates as a tool of economic adjustment; when economy slumps, a decline in the exchange rate helps by making its imports more expensive and exports cheaper - this is no more
What is the "race to the bottom" that some claim that globalization causes? Name two state policies that are believed to be compromised by that race. Name one piece of evidence that suggests this is not occuring.
- Free movement of capital allows investors to choose the countries that are most favorable for investment (lowest labor and environmental standards)
- Other governments will have to match these low standards to compete
- Result: all worse off as standards race to the bottom
- Cut taxes on captial
- This is not occuring: the race should drive most investment into developing countries because the rates of return should be highest there. But, the FDI goes from one developed country to another, not the developing world.