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International Econ TCU Harvey-May Term

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Distinguish between validity and cogency
-An argument is valid if the conclusion is supported by the premises.
-An argument is cogent if it is valid and the premises are warranted.
From what three intellectual traditions did Neoclassicism evolve?
-Natural Law: the idea that human behavior is law-like; economics as instinctive and common to all homo-sapiens over time and space.
-Cartesian Deductivism: Our senses could not be trusted, so we base premises of models & theories on intuition rather than observation.
-Political Individualism: An individual rather than a collective unit is the most important unit & those individuals are rational.
What are three characteristics of modern Neoclassicism?
-General Equilibrium Framework: all variables are mutually dependent, exist in a timeless world & remain at rest until exogenous forces create a disturbance.
-Axiomatic Modeling: Use of arguments based on untested & presumably obviously true premises.
-Free Markets as Natural & Benevolent: Free markets are best; economy takes care of itself, & capitalism is natural form of human economic organization.
From what intellectual traditions did Marxism evolve?
-Hegelian Philosophy: history moves through stages to particular end point.
-Abuses of the Industrial Revolution: colored Marx's view of capitalism.
-Neoclassical Economics: Marx admired Adam Smith & adopted most of his approach.
In what sense did Marx believe that Capitalism was exploitative?
P1: All value is created by the process of labor.
P2: Workers labor, Capitalists own the means.
P3: Only those who create value earn income.
P4:Capitalists own income in the form of profits.
Therefore the capitalists must be stealing from the workers.
How did Marx argue that capitalism was a necessary stage in the evolution of human history?
History moves through stages: Feudalism>Capitalism>Socialism>Communism.
-Capitalism: two classes, workers & capitalists, which the latter exploits the former.
-Socialism: one class, workers own the means of production.
-Communism: classless society, no one works unless they want to.
Capitalism, stage that spurs Industrial Revolution, is necessary in order to reach tremendous level of productivity needed for Communism.
How did Marx predict that Capitalism would sow the seeds of its own destruction? In his view, was the sequence of events likely to occur?
-The fall of capitalism is inevitable. As capitalism matures and takes over more and more of the world and more and more tasks within our economies so firms will feel pressured to replace workers with machines in order to remain competitive.
-This creates increasing levels of unemployment.
-Meanwhile the workers have no idea that they are being exploited, because there is a veil of consciousness or sense that their society is just over there eyes.
-Eventually unemployment rises so much that the misery it causes the workers leads them to see through the veil of consciousness.
-They realize they are being exploited, rise up, kill all the capitalists, announce socialism/have a beer.
What do modern marxists say about the fact that capitalist countries appear to have strong support for their workers?
Revolution hasn't taken place because capitalists are keeping workers happy by using the surplus labor drained from oppressed workers in developing world.
From what intellectual traditions did PK/I evolve?
-Anthropology: social science, deals with human culture: language, politics, and religion.
-Philosophy of Pragmatism: truth is a function of practicality & thus, is tentative & subject to frequent experimentation.
-Evolution: phenomena that undergoes path dependent change.
What are the characteristics of modern Post Keynesian/Institutionalist economics?
i. Frequent use of observation and description: since economic systems are cultural and subject to change, the specification of their characteristics requires that each system be cataloged and reviewed periodically.
ii. Systems are evolutionary and marked more by circular causation and endogenously generated change than equilibrium.
iii. Ceremonial/Instrumental Dichotomy: All behavior is evaluated.
A) Ceremonial: tradition; often involves conspicuous consumption and invidious distinction.
B) Instrumental: logic & reason; it is experimental and goal oriented.
iv. Economic policy should pursue democratic problem solving via instrumentality.
Explain Say's Law.
-economy automatically tends toward full employment.
-Pro: Demand can never fall short of total supply since our desire for goods and services is insatiable. Unused resources we can already afford to employ are a waste, so we will put them to work doing even trivial tasks rather than leave them idle.
-Con: Demand may be insatiable, but when the future is uncertain part of demand is a desire for a stockpile of purchasing power to meet unforeseen circumstances. Income diverted into this stockpile does not create employment.
How is the Heckscher-Ohlin theorem related to comparative advantage?
HO explains the source of comparative advantage.
Explain the Heckscher-Ohlin Theorem
Country will have a CA in good or service that uses its abundant factor intensively.
What major problem has neoclassical trade theory had in explaining the real world?
One of the most basic results of neoclassical trade theory is that the volume of trade should be largest between countries that are most dissimilar in terms of factor endowments.
-In today's world that would imply that we should see the highest volume of trade atwixt developing (labor-abundant) countries and developed (capital-abundant) countries.
-However, 70% of all world trade actually takes place among developed countries.
James K. Glassman, "The Blessing of Free Trade."

The article states that free trade does not create jobs. Then why, according to the author should we want it?
-It allows us to concentrate on what we do best, thus raising productivity & incomes.
-The imports we receive allow us to enjoy a higher standard of living.
James K. Glassman, "The Blessing of Free Trade."

Any evidence of Neoclassicism's foundation in political individualism?
-Free trade is not merely an economic concept but a human right, a natural right.
-People have right to exchange sweat of their brows, products of their hands & their minds, with whomever they wish.
What do Marxists ultimately think drives trade flows and how?
Labor productivity. Nations with more productive labor export more.
Encyclopedia of Marxism

According to Marxists, who are most likely to be free traders and who the protectionists?
-The Free-traders have always been based in that section of the bourgeoisie whose capital is well-placed to profit from export and stands to benefit by a reduction of the cost of living, and consequently wages, as a result of the importation of cheap foreign goods.
-The Protectionists have always been based in that section of the bourgeoisie who cannot hope to compete with cheap foreign goods.
Encyclopedia of Marxism

According to Marxists, where do workers fit into the struggle over free trade and protectionism and how will they fare?
Fundamentally a struggle within the bourgeoisie, but workers are always the 1st casualties of battle.
If we drop the assumption of no externalities in the comparative advantage model, how can trade not be beneficial to a community?
-Externality: cost or benefit not reflected in price of good or service, gives rise to this.
-If good or service in which the nation enjoys a CA has associated with it negative externalities; then as production increases in that sector, cost from externalities may outweigh the gains from trade.
If we drop the assumption of "free mobility of capital and labor within a country" in the comparative advantage model, how can trade not be beneficial to a community?
-If K & L are not freely mobile then there may be costs associated w/ retraining.
-If cost of retraining for expansion in CA industry is significant, then as production increases, costs of retraining may outweigh gains from trade.
How is less-than-full employment problematic for the theory of comparative advantage?
Opportunity costs do not exist & CA can't be calculated.
Say there is a country whose technology is such that the only industries it has which would be competitive in world markets are producers of primary products (agricultural and mining) and they must trade with a nation that exports manufactured goods. How might they be hurt by free trade (in terms of employment)? How is neoclassical theory insulated from such a result?
-If CA industry sells primary products, may experience diminishing returns. As production increases, cost/unit rises, & CA is whittled away.
-If other country is selling manufactured goods, experiences increasing returns, & increases its CA as production rises.
-The CA industry in the primary products country may not be able to absorb all the unemployed from non-CA industry, while the manufactured goods country has no problem in doing so.
-Neoclassicism is insulated from this result by the assumption of full employment.
"A Primer on Technology Gap Theory and Empirics"

The mainstream view of technology and trade suggest what, while technology gap theory views technology asymmetries as what?
-Technology's importance in determining trade flows diminishes over time because of the easiness of technology to transfer.
-Views them as important long run determinants of trade flows.
"A Primer on Technology Gap Theory and Empirics"

What was the "flaw" in the logical foundation of mercantilist thought and why do many modern writers that work on technology gap theories find this "flaw" of mercantilist logic interesting?
-The assumption that the economy tends to full employment, or in other words will generally operate at a pace that leaves resources, land and labor idle.
This "flaw" of mercantilist logic proved interesting because of the natural link between international trade and changes in the macroeconomy that this logic necessitates.
"A Primer on Technology Gap Theory and Empirics"

What is Tucker's general proposition which very seldom fails?
The general proposition that complicated manufacturing is cheapest in rich or developing countries and that raw materials are cheaper in poor or less developed countries.
John Adams. "Trade and Payments as Instituted Process: The Institutional Theory of the External Sector."

What must the institutional theory of trade and payments explain?
trade & payment relations among societies in all epochs, & not merely offer a partial justification for some types of transactional arrangements among modern market economies.
John Adams. "Trade and Payments as Instituted Process: The Institutional Theory of the External Sector."

A society's external relations must stem from and be consistent with what?
A society's external relations must stem from and be consistent with its culture, politics, economy, technology and physical environment.
John Adams. "Trade and Payments as Instituted Process: The Institutional Theory of the External Sector."

According to Adam's free trade is not the situation that arises when individuals are allowed to exchange goods and services with no external restriction of their activities. Explain.
Free trade requires at least as much national & international implementation & supervision as does non-free trade. All trade requires working rules based on consensus & cooperation among participating societies.
John Adams. "Trade and Payments as Instituted Process: The Institutional Theory of the External Sector."

List the Five Hypothesis derived from institutional theory of trade and payments.
• more similar 2 societies' exchange institutions, more intensively they will trade
• more divergent societies' exchange systems, harder it is to arrange trade and lower will be the volume of exchange.
• World trade expands more quickly the more societies' exchange systems become similar.
• To increase its participation in intersocial interaction, a country must bring its exchange practices into harmony with, if not in conformity to, prevalent international practices.
• Societies will follow their own methods of exchange where their power & influence enable them to do so.
According to Neoclassicism how will economic development occur
P1: lack of development is a result of insufficient capital.
P2: K & L are attracted to higher rates of return.
P3: K & L earn higher return rates where they are more scarce.
Therefore: Development will occur automatically as captial is attracted to the higher return available in less developed countries.
IMF: Global Trade Liberalization and the Developing Countries

In section one of the article, on what does it appear to be blamed that some developing nations have progressed while others have not?
-Countries have become successful because they chose to participate in global trade, helping them to attract the bulk of foreign direct investment in developing countries.
-The poorest countries have seen their share of world trade decline substantially, and without lowering their own barriers to trade, they risk further marginalization. The depend disproportionately on production and exports of traditional commodities. Reasons for their marginalization include structural problems, weak policy frameworks and institutions, and protection at home and abroad.
IMF: Global Trade Liberalization and the Developing Countries

Industrial countries tend to maintain high protection against what category of goods?
Agricultural
IMF: Global Trade Liberalization and the Developing Countries

Industrial countries tend to maintain high protection against which kind of goods?
Labor-intensive
What do Marxists say about economic development?
-Tremendous economic division between North & South is a function of Capitalist exploitation & Imperialism.
-Capitalists in most developed countries are pushing into the developing world & using their labor to extract surplus they can no longer squeeze out at home.
Harpal Brar, "Lenin's Imperialism"

What, according to Lenin, is the deepest economic foundation of imperialism?
Monopoly
Harpal Brar, "Lenin's Imperialism"

What are the five key points of Lenin's definition of Imperialism?
-High stage concentration of production and capital has created monopolies that play a decisive role in economic life.
- Merging of bank capital with industrial capital; creation, on the basis of this "finance capital," of a financial oligarchy.
- Export of capital as distinguished from the export of commodities acquires exceptional importance.
- Formation of international monopolists combines that share the world among themselves.
-Completion of global territorial divide amongst biggest capitalists combined.
Harpal Brar, "Lenin's Imperialism"

What can be said about the largest 100 economies in the world?
Only 49 are countries
Harpal Brar, "Lenin's Imperialism"

By what is the latest stage of Capitalism characterized?
The latest stage of capitalism is characterized not only by the emergence of monopolistic associations of capitalists in all the advanced capitalist countries, but also by the emergence of the "monopolist position of a few very rich countries, in which the accumulation of capital has reached gigantic proportions", giving rise to "an enormous ''surplus of capital''"
Harpal Brar, "Lenin's Imperialism"

How does the rate of return on FDI in third-world companies compare to that in imperialist ones?
Twice the rate
Harpal Brar, "Lenin's Imperialism"

How does third-world debt service compare to the amount of aid they receive?
The third-world pays $233-billion a year to service their debt while receiving only $55-billion a year in development aid.
Harpal Brar, "Lenin's Imperialism"

Does the author believe that the former colonies received real independence after WWII?
Following WWII, most of the colonies managed to gain political independence, yet imperialism was nevertheless able to devise mechanisms whereby these formally independent countries have been fully enmeshed in the net of financial, diplomatic and military dependence on imperialism.
Harpal Brar, "Lenin's Imperialism"

What according to the author, is the only means of improving the lot of the third-world?
Revolution.
Dr. John T. Harvey, "The Stock Market: Individual Firm Issues."

What are several reasons the ROCK cares about the stock price, even though sales do not directly affect them?
-sales of shares fall, more difficult to raise cash in the future.
-go to bank to finance a new expansion, they'll look at stock prices as indication of how credit worthy you are. Since they've fallen, you get a higher interest rate.
-lower your stock price, the more you look for a new job as stockholders replace you.
Dr. John T. Harvey, "The Stock Market: Macroeconomics and Psychological Issues."

Show the series of links between more efficiency and faster growth. Where is the link broken as it becomes easier to dump bad decisions? How?
More efficiency-higher stock price-cheaper access to funds-faster growth.
-The ease in which one can simply dump a bad decision means that in general, comparatively little research is done.
-Rather than focusing on issues specific to the firm, stock market participants are far more likely to zoom in on psychological factors. It's more "what do I think the other people in the stock market are thinking?" than "what do I think about this firm?"
Ilene Grabel, "Emerging Stock Markets and Third World Development: The Post-Keynesian Case for Pessimism."

In what three ways have most developing and former socialist country policymakers and policy consultants viewed portfolio investment inflows as an unambiguous benefit to the recipient economies?
-Reflect investor confidence in ambitious programs of free market reform.
-An important source on investment finance in capital scarce economies.
-Free of the constraints on national policy sovereignty normally associated with direct investment, commercial bank loans, or foreign aid flows.
Ilene Grabel, "Emerging Stock Markets and Third World Development: The Post-Keynesian Case for Pessimism."

Under constrained policy autonomy, what does the necessity of creating an attractive climate for portfolio investment force host-country governments to do and how might that be a problem?
-Governments must pursue macroeconomic, exchange-rates, & social policies that are compatible w/ investors' economic interests.
-Governments may be forced to adopt tighter monetary policy & currency values, may negatively effect level of economic activity.
Ilene Grabel (PK/I)

The increase risk of potential portfolio investment is an outcome of what?
high degree of liquidity, financial openness, & the volatility of portfolio investors' expectations.
James Dilmus, "Technology and Third World Development."

For institutionalists, what has always been viewed as a core element in economic development?
Technology
James Dilmus, "Technology and Third World Development."

Among recent events that have spurred research into technology, James mentions "Recognition of Technological Capacity in the South." Explain what he has to say here.
As evidence that many Third-World firms did innovate, one can cite the emergence of the East Asian super exporters, studies on innovational activities in mature developed countries which greatly advanced the understanding of how technological changes comes about, and research in the Third World, partly were inspired by studies in advanced countries.
James Dilmus, "Technology and Third World Development."

What is it that paves the way for fruitful absorption of technology?
It is attention to physical, organizational, and attitudinal preconditions that pave the way for the fruitful absorption of technology.
James Dilmus, "Technology and Third World Development."

List the problems with innovation systems in the South.
-Portfolios of R&D projects in developing countries are too heavily skewed towards pure side of the R&D spectrum, instead of applied segment.
-Influenced by what is in vogue in the international scientific community rather than addressing actual, more important development problems.
-Project selection process contributes to the serious disarticulation between R&D activities.
-Volatile fluctuations in government financing for public R&D.
-Impossible to read reviews of science, technology, & innovation systems without resulting in the impression that science & technology policy is nowhere near the center of economic policy.
James Dilmus, "Technology and Third World Development.
"
In James' conclusion, what does he list as the two main points of his paper?
-Insights regarding science, technology, & development gained over past several decades are not being satisfactorily exploited.
-Primary locus of problem is in inadequate institutions that are severely inhibiting the process of technology transfer, local technology generation, post-acquisition dissemination & innovation—the whole route to technology innovation.
Explain purchasing power parity. An example is essential, as is the clear explanation of the effect of PPP on currency prices.
Goods throughout the world are same price once exchange rates are taken into account. If not, forces are set into motion that make them equal.
-P$/P£ = $/£
This equality is maintained by assuming: P$/P£ > $/£
Here, US stuff is more expensive than UK stuff. So everyone buys UK stuff & no one buys US stuff.
-Prices in US go down as everyone sells stuff in the US.
-Prices in UK go up as everyone buys stuff in the UK.
-Dollar depreciates, Pound appreciates; everyone buys the Pound to buy UK stuff.
-Continues until P$/P£ = $/£
Explain uncovered interest-rate parity (especially how it affects exchange rates).
-Expected rates of return throughout the world are equal once expected exchange rate movements are taken into account. If not, forces are set into motion that make them equal.
-(1 + r$) = (£/$)(1 + r£)($/£)ᵉ
-equality is maintained by assuming the following:
(1 + r$) > (£/$)(1 + r£)($/£)ᵉ
-In that case, the US's expected return is higher than the UK's. So everyone buys US interest-bearing assets & not UK.
Consequently:
-US interest rates decrease as capital becomes less scarce in the US.
-UK interest rates increase as capital become more scarce in the UK.
-Dollar appreciates, Pound depreciates as everyone buys the $ in order to buy US assets.
Continues until the equality is restored.
Compare the Neoclassical view of how exchange rates relate to trade flows to the Marxist one. Assume sticky domestic prices in both but only full employment in the former. No need to mention the assumptions or who has the absolute advantage. An example is essential.
Once they begin trading, Sypen will export both goods & will experience a trade surplus & a net inflow of money, while Harvania will have a trade deficit & a net outflow of money.
In the Neoclassical view, full employment is assumed & exchange rates bear the entire burden of adjustment. In this case, the $ would depreciate because no one is buying Harvania stuff. This will make their goods cheaper. Eventually, Harvania will be the low-cost provider of Rice & Sypen will continue to be low cost in BB's & trade will be balanced.
In the Marxist view, not only is full employment not guaranteed, but the outflow of money from Harvania means that their interest rates rise. This creates an obstacle to the needed depreciation of the $ since it makes it attractive to financial investors. Thus, the $ falls insufficiently to restore balanced trade &, instead, there is a rise in unemployment, a fall in output, & a chronic trade deficit that leads to rising external debt.
What is it in the Marxist view that is really driving trade flows & what can make it appear as if Purchasing Power Parity holds, even though it does not?
-Relative labor productivity, the nation w/more productive labor gets a trade surplus, drives trade flows.
-General domestic price inflation that is not reflective of changes in relative labor productivity, will simply cause exchange rate movements which will restore the original trade flows.
-If US prices double, international value of the dollar would halve (1/2) to compensate & make US no more or less competitive than before.
-Presence of high rates of general domestic price inflation, will make it appear as if this is causing exchange rate movements & that PPP holds, even though it does not.
Shaikh, Anwar. "Explaining Long Term Exchange Rate Behavior in the United States and Japan," Working Paper #250, Levy Institute.

Conventional exchange rate models are based on what fundamental hypothesis?
in the long run, real exchange rates will move in such a way as to make countries equally competitive.
Shaikh, Anwar. "Explaining Long Term Exchange Rate Behavior in the United States and Japan," Working Paper #250, Levy Institute.

Supporters of purchasing power parity who have suggested that it may time a long time for it to act have what time frame in mind?
Perhaps 75 years or longer.
Shaikh, Anwar. "Explaining Long Term Exchange Rate Behavior in the United States and Japan,"

Under what circumstances does purchasing power parity appear to hold?
Particular case of high inflation.
Anwar Shaikh, "The Trade Deficit: Beyond the Myth of Currency Manipulation" Public Seminar, vol.1, no.1, Fall 2013.

Many say that the US problem with chronic trade deficits stems not from our reduced international competitiveness, but what?
manipulation of exchange rates by our more successful trading partners.
If one goal of an international payments system is a tendency for exchange rates to move toward balanced trade, then what issue is most important?
The issue is whether or not AER is attracted to BTER. If there exists any demand for currency not associated with goods & services trade, then AER will not end up equal to BTER.
What does it mean to say that an international monetary system has a deflationary bias?
When addressing a trade imbalance requires taking action that lowers the overall level of economic activity in the system. This is especially likely when the burden of adjustment is on the deficit country.
Harvey, John. "Chapter Three: Psychology and Decision Making in the Foreign Exchange Market."

List and explain the three heuristics.
-Availability : used to decide how often you think something happened in the past, or how likely it is in the future. Easier something is to imagine, the more often you think it happened or the more likely you think it is to happen.
-Representativeness : used when you are deciding what process created a certain outcome or what outcome a process will cause. People expect the outcome to closely resemble the process.
-Anchoring : when the individual makes an estimate by starting at some initial value. People tend to anchor to that initial value very firmly.
Harvey, John. "Chapter Three: Psychology and Decision Making in the Foreign Exchange Market."

List and explain Keynes' five observations regarding the workings of asset markets (uncertainty, low confidence, convention, quick results, and animal spirits).
1. Uncertainty - Because our knowledge of the future is vague & scanty, the information we are aware of plays a disproportionate role in our forecasts.
2. Convention - Adoption of the convenient convention "that the existing market valuation, however arrived at, is uniquely correct in relation to our existing knowledge of the facts which will influence the yield of the investment, and that it will only change in proportion to changes in this knowledge; cannot be uniquely correct, since our existing knowledge does not provide a sufficient basis for a calculated mathematical expectation.
3. Low Confidence - Since knowledge of the future is vague & scanty, confidence levels are likely to be fairly low in asset markets. Forecasts are therefore liable to change violently as the result of a sudden fluctuation of opinion.
4. Quick Results - human nature desires quick results; a particular zest in making money quickly, & remoter gains are discounted by the average man at a very high rate.
5. Animal Spirits - spontaneous urge to action rather than inaction. Offsets any misgivings about making important decisions in an uncertain world & allows us to act despite our ignorance.
Harvey, John. "Chapter Three: Psychology and Decision Making in the Foreign Exchange Market."

Explain how volatility is created by uncertainty, availability, representativeness, anchoring, the desire for quick results, animal spirits, and convention (no need to define each factor, just tell how it contributes to volatility). What stops it?
-Uncertainty: As events emerge, agents, whom lack the whole picture, are likely to give them disproportionate weight & react accordingly.
-Representativeness: encourages people to think that they can & should make forecasts based on small samples.
-Availability: If event was dramatic, it leads to overweight forecasts;
-Anchoring: once volatility starts, this may exacerbate it as attention shifts from price levels to price changes.
-Agents' desire for quick results & willingness to act, even when lacking a firm basis for decision making, makes emergence of sudden & violent price movements certainly not surprising.
-Convention: new event occurs, agents bound to assume further prices changes are inevitably warranted.
-Volatility feeds on volatility, only to an extent. If it becomes too great, rising lack of confidence may eventually win out, causing agents to withdraw from market. Calm will then be restored, until events conspire to create a new period of volatility.
Harvey, John. "Chapter Three: Psychology and Decision Making in the Foreign Exchange Market."

Explain how bandwagons are created by availability, anchoring, representativeness, increasing confidence /forecast substantiation, and credit/blame issues.
-Availability: As a price movement begins, it is a salient event, thus more available in memory; plays a disproportionate role in market participants' forecast-particularly if it was dramatic.
-Anchoring: agents may also be expected to anchor to movement, contributing to emerging trend as they begin to expect change rather than stability.
-Representativeness: convinces that there must be some reason for movement even if they do not understand it. Hence, market participants assume that they should be taking the positions implied by the recent price changes.
-Price continues in the same direction, forecasters will be encouraged by the apparent substantiation of their predictions & thus become increasingly confident, willing to commit funds.
-Ignoring the bandwagon runs the risk of being thought foolish, while jumping on it, only to have it go bust, allows for the excuse, "But everyone else was doing it!" -Bandwagons continue until events indicate otherwise. If events are sufficiently out of synch w/ current run then the confidence of agents may be shattered & a collapse, panic may result.
Harvey, John. "Chapter Five: Post Keynesian Exchange Rate Modeling."

On the complete mental model with medium term expectations, technical analysis, bandwagon, confidence, and cash in, why are some of the variables marked with a superscript "e?" What do they represent?
What agents expect to occur.