Chap.

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International political economy (IPE);
● States act on their own and they are the 2nd important actors after security affairs.
● The role of trade in the economy varies somewhat from one nation to another.
● Trade isn't only an economic issue but a highly political one.
○ Crosses state defined borders.
○ Regulated and negotiated by states.

Liberalism
● Liberal economics emphasizes international cooperation especially through worldwide
free trade to increase the total creation of wealth (regardless of its distribution among
states).

Mercantilism
● Mercantilism emphasizes the use of economic policy to increase state power relative to
that of other states. It mirrors realism in many ways. Mercantilists favor trade policies
that produce a trade surplus for their own state. Such a positive trade balance generates
money that can be used to enhance state power.

The balance of trade

● Is the value of a state’s imports relative to its exports. A state that exports more than it
imports has a positive balance of trade, or trade surplus.

Trade deficit; A state that imports more than it exports.

Comparative advantage;
The overall success of liberal economics is due to the substantial gains that can be realized by
trade.

Transaction costs; Are the costs of the transportation and the processing the trade.

Political interference in markets;

● The willingness of participants to deal with each other by price and quality
considerations.

Market imperfections
● Reduces efficiency when one participant uses personal political preference.
● No world government owns industries, provides subsidies or regulates prices.
● 4 market imperfections the suppliers use to price up;
○ 1.Personal preference
○ 2.Monopoly; One suppliers of an item in the trade market
○ 3.Oligopoly; A monopoly shared by just few large sellers
○ 4.Corruption; Individuals receiving payoffs to trade at nonmarket prices.

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2 ways to prevent the market interference;
1.Legal framework
● Ensuring that participants keep their commitments, contracts are binding, buyers pay for
goods they purchase, counterfeit money is not used, and so forth.

2.Taxation (Tariffs)
● Used both to generate revenue for the government and to regulate economic activity by
incentives.
● Taxes applied to international trade itself.

Sanctions;
● Happens when a state breaks any law.
● They can be applied to one state or between two states.
Autarky;
● One way to be independent, especially for weak states whose trading partners tend to
be powerful.
Protectionism;
● Protection of domestic industries from international competition.
● Many states try to manipulate international trade to strengthen one or more domestic
industries and shelter them from the world market.

2 Motivations to protectionism
1. To lobby or give campaign contributions in order to win special tax breaks, subsidies, or
restrictions on competing imports.
2. To give a domestic industry breathing room when market conditions shift or new
competitors arrive.

Infant industry; Is a state that just started its international trade in the world market.
Predatory; Is the effort to unfairly capture a large share of the world market or even near
monopoly.
Non-tariffs; Is the discourage of an imports
Quota; The restriction of the growth of imports. Meaning the limitation of the import.

Two Non-tariffs barriers;

1. Subsidies; Payments by the government to a domestic industry to lower their price
without losing money.
2. Regulation; Environmental and labor regulations can function as non-tariffs barriers.

Economic nationalism; The use of economics to influence international power and relative
standing in the international system.

World Trade Organization (WTO);

● Global, multilateral IGOs that promotes, monitors, and adjudicates international trade.
● Shapes the overall expectations and practices of states regarding international trade.

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 ● Central international institution governing trade.
● Doesn't get rid of barriers to trade altogether but equalizes them in a global framework to
create a level playing field for all member states.

General Agreement on Tariffs and Trade (GATT);

● Facilitate freer trade on a multilateral basis.
● Helped arbitrate trade disputes, clarifying the rules and helping states observe them.

Most Favored Nation (MFN); Is the most favored nation in the world trade market.
Generalized System of Preferences (GSP); Unlike MFN, the rich states give trade concessions
to poor states to help their economic development.
Bilateral Agreement; A treaty about lowering the barriers to trade between two states.
Free Trade Area;
● States that agreed to remove or lower the barriers between each other to trade freely
and lower the tariffs.
Custom Union; When states agree on reducing trade barriers and adopt common tariffs.
Common Market; When custom union members decide to coordinate other policies.
Cartel; Is an association of producers or consumers to manipulate their price on the world trade
market.

Industries and interest groups;

● Industries that are advanced and competitive in world markets try to influence their
governments to adopt free trade policies.

Enforcement of trade rules;

● If one state protects its industries, or puts tariffs on the goods of other states, or violates
the copyright on works produced in other countries, the main resort that other states
have is to apply similar measures against the offending state.
Chap.9
Globalization and Finance;
● It offers investors and businesses access to overseas markets to spur economic growth.
● An economic crisis can spread from one country to another and so on, and it can lead to
a global economic crisis.

Currency system;
● Nearly every state prints its own money.
● In a globalized system of trade and finance, businesses and individuals often need other
states currencies to do business.

About money;
● The nature of state sovereignty, the international economy is based on national
currencies, not the world currency.
● Gold and silver became valuable, because they were a world currency, due to some
people believing that metal can be exchanged for future goods.

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International Currency Exchange;
● National currencies are valued against each other, not against gold and silver.
● A strong currency makes imports more affordable, while a weak currency makes exports
more competitive.

● Exchange rate;
● The equivalent of two national currencies.
● They affect almost every international economic transaction (trade, investment, tourism,
etc.)
● Exchange rates that most affect the world economy are those within the largest
economies;
● U.S. dollars, euros, yen, British pounds, and Canadian dollars.
● Hyperinflation; Extremely high, uncontrolled inflation (more than 50% per month or
13,000% per year)
● Hard Currency; Money that can be readily converted to leading world currencies.
● Fixed exchange rate; governments decide individually or jointly to establish official rates
of exchange.
● Floating exchange rates; rates determined by global currency markets in which private
investors and governments alike buy and sell currencies.
● Managed float; government intervention to manage the otherwise free-floating currency
rates.
● A successful intervention can make money for governments at the expense of private
speculators.

Why Currencies Rise and Fall?;

● Short term; exchange rates depend on speculation about the future value of currencies.
● Long term; the value of a state's currency tends to rise/fall relative to others because of
changes in the long-term supply and demand for the currency.
● Supply; determined by the amount of money a government prints.
● Demand; for a currency depends on the state's economic health and political stability.

● More printed money --> lowering its price --> Inflation.

● Low value --> turns trade deficits into surpluses.
● Overvalued currency --> trade deficit (they fix this by printing more money)

Devaluation; changing the exchange rate of one's own currency.

Stable exchange rate is seen as a collective good for international currency.

International exchange rate stability should be more readily achieved in two circumstances;
1. Under hegemony; the dominance principle
2. Under an arrangement among a small group of key states; the reciprocity principle
operates effectively .

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Central Bank;
● Government controls the printing of money. But in some states, the politicians or general
who control the government directly control the printed money amount (which mostly
lead to inflation)
● The long-term, relatively nonpartisan perspective of central bankers makes it easier for
states to achieve the collective good of a stable world monetary system.

Discount Rate; the interest rate the government charges when it loans money to private banks.

● States care about other states monetary finance;

● Higher interest rates in one state --> foreign capitals are attracted.
● Higher economic growth --> more export goods.
● Mostly politics can solve international conflicts.

The World Bank and The IMF;

● The source of loans to reconstruct the Western European economics after the war
● Help states through future financial difficulties.
● The Bretton Woods system established --> the International Bank for Reconstruction and
Development (IBRD) --> which is called the World Bank.

International Monetary Fund (IMF)

● Coordinate international currency exchange
● The balance of international payments and national accounts.
● A state is assigned a Quota (based on the size and strength of a state's economy) for
such deposit, partly hard currency and state's own currency.
● A state can borrow against its quota to stabilize its economy and then repay the IMF.
● Price under 1% --> using hard currency to buy their own currency to shore up their
currency
● Price above 1% --> selling their currency to drive the price down.

IMF and The World Bank have in common;

● Are the international finance system for states.
● Use Weighted voting system; Each state has a vote equal to its quota.
Tried to accomplish three major missions;
1. providing stability and access to capital for states ravaged --> great success
2. promoting economic development in poor countries --> less successful
3. integrating of Eastern Europe and Russia into the world capitals economy --> success

Special Drawing Right (SDR)

● Gold replacement, which is a hard currency that can be exchanged for international
currencies only.
● Owned by the state only (central bank IMF).
● The SDR rises/drops only when there is worldwide inflation.

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State Financial positions;
National Accounts;
● Keeps track of the overall monetary position of each state in the IMF
● Balance of payments in a state is a summary of all the flow of money in and out of the
state.

Three types of international transactions that goes into the Balance of payment;
1.Current account;
● The balance of trade.
● Government transactions; Military and foreign aid grants, salaries, and pensions paid to
government employees abroad.
● Remittances; Funds sent home by companies or individuals outside a country.

2.Capital flow;
● Foreign investments in and by a country.
● Measured in net terms = total investment and loans foreigners make in a country -
investment and loans that country's companies, citizens, and government invest in other
countries.
● Foreign direct investment; owning a factory, company, or real estate in a foreign country.
● Indirect portfolio investment; buying stocks and bonds or making loans to a foreign
company.

3.Changes in foreign exchange reserves;

● Makes the national accounts balance.
● Any difference between the inflows and outflows of money is made up by an equal but
opposite change in reserves.

International Debt;
Most Standing wealth;
1. Capital goods (factories)
2. Hard currency

● Interest rate; Reflect this inherent growth dynamic

● Real Interest rate; the rates for borrowing money above and beyond the rate of inflation.

Why do states go into debt?

1. trade deficit.
2. the income and consumption pattern among households and business.
3. National debt is government spending relative to taxation.

Two tools for government to manage an economy;

1. Fiscal policy; Government decisions about spending and taxation
2. Monetary policy; Decisions about printing and circulating money

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Multinational Business;
● Transactions are carried out mainly by private firms and individuals, not Government.
● Most important among these private actors are MNCs
● A strong force for liberalism in the world economy, despite the fact that particular MNCs
in particular industries push for certain mercantilist policies to protect their own interests.

Multinational corporations (MNCs);

● Companies based in one state with affiliated branches or subsidiaries operating in other
states.
● Large corporation that operates on worldwide basis in many countries simultaneously,
with fixed facilities and employees in each

Individual corporations;
● Makes goods in factories in various countries and sell them to businesses and
consumers in various countries

Financial corporations;
● Operate multinationals although often with more restrictions than industrial MNCs

Foreign Direct Investment;

● Investment means exchanging money for ownership of capital.
● involves tangible goods such as factories and office buildings

Host and Home Government Relations;

Host country; A state in which a foreign MNC operates.
Home country; The state where the MNC has its headquarters.

● MNCs try to negotiate favorable terms and look for states with stable currencies and
political environments in which to make direct investments. Governments seek such
foreign investments on their territories so as to benefit from the future stream of income.

● MNCs try to influence the international political policies of both their headquarters state
and the other states in which they operate. Generally, MNCs promote policies favorable
to business—low taxes, light regulation, stable currencies, and free trade. They also
support stable international security relations, because war generally disrupts business.

● Increasingly, MNCs headquartered in different states are forming international alliances

with each other. These inter-MNC alliances, even more than other MNC operations
across national borders, are creating international interdependence and promoting
liberal international cooperation.