Chapter 9 Outline - Chapter 9 Fundamentals of International...

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Chapter 9 Fundamentals of International Political Economy Liberalization – reducing barriers to trade (increasing free trade) 1) The importance of International Economics a) International Political economy – two way relationship between international politics and international economics i) Events in international economy often have political consequences ii) US subsidies for ethanol production reduce dependence on petroleum, but reduce amt of crops available for food, drives up world prices iii) International Repercussions iv) Globalization – International trade increases relative to domestic trade – goods/people/info/money and cost of moving them are decreasing. World increasingly defined by single markets rather than many separate markets b) Trade and Domestic Policy i) Economics is central in contemporary politics ii) Govt responsibility for economy – FDR. Prior seen as natural calamities. iii) Economists have accepted that fiscal and monetary policies can influence the economy. (1) Fiscal – refers to government budgets, and if they are in surplus or deficit. When economy slow, govt can run a budget deficit (spending more than it takes in) to stimulate econ growth (2) Monetary – govts ability to influence economy through control of interest rates 2) Key Economic Concepts and Theories a) Why do states trade..what are the benefits…who gets the benefits? b) Theory of Comparative Advantage i) David Ricardo. Shows logically how and why trade is beneficial to both partners. ii) By specializing and trading, states and individuals can increase overall consumption and efficiency
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iii) Imagine only factor in production of two products labor. Labor can move between production of wheat/textiles. iv) Must compare productivity across sectors within the two countries. v) “How much labor must be diverted from one sector to produce more in the other” vi) Different in relative prices that creates basis for profitable trade. Both countries recive benefits of lower prices and increased output. vii) Two Conclusions (1) With specialization, overall amount of production and consumption increases without any increase in inputs.
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