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QUESTIONS FOR FINAL EXAM INTERNATIONAL ECONOMICS

1. Process of enlargement of the European Union (which countries joined and when)?

1973 First enlargement Denmark, Ireland and the UK join the EC


1981 2nd enlargement Greece joins
1986 3rd enlargement Spain and Portugal join
1995 4th enlargement Austria, Finland and Sweden join
2004 Eastern Poland, Hungary, Slovakia, Czech Republic, Slovenia, Estonia, Latvia,
Lithuania, Malta and Cyprus join

2. Explain the Maastricht Treaty (where, when, what was it about)?

Signed in Maastricht, Netherlands in December, 1991

• outlines the transition process from a system of fixed exchange rates

• Specifies a set of macroeconomic convergence criteria to be met by EU countries

• Includes steps towards the harmonization of social policies within the EU and the centralization of decision
making on foreign policy and defense policy.

3. Explain Stability and Growth Pact and its principles?

• It reflects the view that excessive deficits are a matter of common concern in a monetary union.
• It is an application of the excessive deficit procedure envisioned in the Maastricht Treaty.
Three organizing principles:
A definiton of excessive deficits. In principle, deficts should not exceed 3% of GDP.

A preventive arm, which is designed to encourage, through peer peressure, governments to resist the defict bias.

A corrective arm, which is triggered when a country is found to have an excessive deficit.

4. Explain European System of Central Banks?

• The Eurosystem, which consists of the European Central Bank and the 12 National Central Banks of each
country, conducts monetary policy in the Euro Area.
• The ECB and the 27 NCBs constitute the ESCB (European System of Central Banks)
The Eurosystem is administering by three governing bodies:
The Governing Council is entrusted with the formulation of the monetary policy.

The Executive Board is responsible for the implementation of the monetary policy on a daily basis.

The General Council is responsible for issues pertinent to the exchange rates between Euro Area and EU non-
Euro Area countries.

5. Explain GATT (what it represents, when was it signed, why is it significant)

General Agreement on Tariffs and Trade was signed in 1947 and lasted until 1993. It was negotiated during the
UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to
create the International Trade Organization (ITO).
6. The background of Uruguay Round?

• The Round transformed the GATT into the World Trade Organization.
• The Uruguay Round Agreement on Agriculture, administered by the WTO, brings agricultural trade more
fully under the GATT.
• It provides for converting quantitative restrictions to tariffs and for a phased reduction of tariffs.
• It also imposes rules and disciplines on agricultural export subsidies, domestic subsidies, and sanitary
measures.
7. What were the main objectives of Uruguay Round?

The main objectives were:


• to reduce agricultural subsidies
• to put restrictions on foreign investment, and
• to begin the process of opening trade in services like banking and insurance.

8. World Trade Organization (when and where was founded, key roles)?

• The organization officially commenced on January 1, 1995 under the Marrakech Agreement.
• The organization deals with regulation of trade between participating countries;
• It provides a framework for negotiating and formalizing trade agreements, and a dispute resolution
process aimed at enforcing participants' adherence to WTO agreements which are signed by representatives of
member governments and ratified by their parliaments.

9. What are the functions and activities of WTO?

These are regarded as the most important:


• It oversees the implementation, administration and operation of the covered agreements.
• It provides a forum for negotiations and for settling disputes.
Review and propagate the national trade policies, and to ensure the coherence and transparency of trade policies
through surveillance in global economic policy-making.
Assistance of developing, least-developed and low-income countries in transition to adjust to WTO rules and
disciplines through technical cooperation and training.
Center of economic research and analysis: regular assessments of the global trade picture in its annual
publications and research reports on specific topics are produced by the organization.

10.What are the main principles of the WTO (describe them)?

Non-Discrimination. WTO member must apply the same conditions on all trade with other WTO members, and
was introduced to tackle non-tariff barriers to trade.
Reciprocity. It reflects both a desire to limit the scope of free-riding that may arise because of the MFN rule
Binding and enforceable commitments. A country can change its bindings, but only after negotiating with its
trading partners, which could mean compensating them for loss of trade.
Transparency. The WTO members are required to publish their trade regulations, to maintain institutions
allowing for the review of administrative decisions affecting trade.
Safety valves. In specific circumstances, governments are able to restrict trade. ”The use of trade measures to
attain noneconomic objectives”, "fair competition" and provisions permitting intervention in trade for economic
reasons.

11.Describe the organizational structure of the WTO?

Council for Trade in Goods - There are 11 committees under the jurisdiction of the Goods Council each with a
specific task. All members of the WTO participate in the committees.
Council for Trade-Related Aspects of Intellectual Property Rights - Information on intellectual property in the
WTO, news and official records of the activities of the TRIPS Council, and details of the WTO’s work with other
international organizations in the field.
Council for Trade in Services - is responsible for overseeing the functioning of the General Agreement on Trade
in Services (GATS).
Trade Negotiations Committee - is the committee that deals with the current trade talks round.

12.Describe the voting system of the WTO?

The WTO operates on a one country, one vote system, but actual votes have never been taken. Decision making is
generally by consensus, and relative market size is the primary source of bargaining power.

13.Explain the process of becoming a member of the WTO?

• Each applicant country, and the terms of accession are dependent upon the country's stage of economic
development and current trade regime.
• The process takes about five years, on average, but it can last more if the country is less than fully committed
to the process or if political issues interfere.
• As is typical of WTO procedures, an offer of accession is only given once consensus is reached among
interested parties.

14. Define the meaning of Par value system or Bretton Wood System?

The countries that joined the IMF agreed to keep their exchange rates (the value of their currencies in terms of the
U.S. dollar and, in the case of the United States, the value of the dollar in terms of gold - $35 an ounce) pegged at
rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and only
with the IMF's agreement.

15.IMF (definition and main goal)

IMF's main goal is to ensure the stability of the international monetary and financial system. Interwar experience
had convinced the IMF`s architects that floating exchange rates were a cause of speculative instability and were
harmful to international trade. So, founder of IMF established the system to help countries resolve crises, and
work with its member countries to promote growth and alleviate poverty.

16.Activities of IMF

Policy advice to governments and central banks; based on analysis of economic trends and cross-country
experiences.
Research, statistics, forecasts, and analysis; based on tracking of global, regional, and individual economies and
markets.
Loans; to help countries overcome economic difficulties;
Concessional loans; to help fight poverty in developing countries.
Technical assistance and training; to help countries improve the management of their economies.

17. The IMF's current governance structure

Board of Governors
The Board of Governors is the highest decision-making body of the IMF. It retains the right to approve quota
increases, special drawing right (SDR) allocations, the admittance of new members, compulsory withdrawal of
members, and amendments.
Ministerial Committees
The IMF Board of Governors is advised by two ministerial committees, the International Monetary and Financial
Committee (IMFC) and the Development Committee.
The Executive Board
The IMF's 24-member Executive Board takes care of the daily business of the IMF who represents all 187
countries. The Board discusses everything from the IMF staff's annual health checks of member countries'
economies to economic policy issues relevant to the global economy.

18. Explain the membership and aspects of membership in IMF

To become a member, a country must apply and then be accepted by a majority of the existing members. Upon
joining, each member of the IMF is assigned a quota, based broadly on its relative size in the world economy.
Subscriptions
A member's quota subscription determines the maximum amount of financial resources the member is obliged to
provide to the IMF.
Voting power
The quota largely determines a member's voting power in IMF decisions. Each IMF member has 250 basic votes
plus one additional vote for each SDR 100,000 of quota.
Access to financing
The amount of financing a member can obtain from the IMF (its access limit) is based on its quota.
SDR allocations
Allocations of SDRs, the IMF's unit of account, is used as an international reserve asset. A member's share of
general SDR allocations is established in proportion to its quota.

19. What are the challenges that IMF has today related with world economic crises?

The IMF is helping many emerging market countries tackle the problems brought on by the devastating global
economic crisis.
• Its lending to low-income countries has also been stepped up, as these countries start to feel the effects of the
crisis.

• It is providing policy advice to advanced countries, for instance on how to address problems in their financing
and banking sectors, and how to design effective stimulus packages.
• As the global economy continues to struggle in 2009, and with both trade and capital flows plummeting, the
IMF is foreseeing mounting problems for many countries.
• The Fund is therefore seeking to add to its resources, and has already negotiated borrowing agreements with a
number of countries.
• The Fund is closely tracking economic and financial developments worldwide so that it can provide
policymakers with the latest forecasts and analysis of developments in financial markets.
• It is engaging with the Group of 20 (G-20) leading economies and other stakeholders on issues related to the
evolution of the international financial system.

20. Chronology of CEFTA (who joined and who left and when)
21. Main objectives of CEFTA

This comprehensive Agreement’s main objectives are,


• Expand trade in goods and services and foster investment by means of fair, stable and predictable
rules
• Eliminate barriers to trade between the Parties
• Provide appropriate protection of intellectual property rights in accordance with international
standards
• Harmonize provisions on modern trade policy issues such as competition rules and state aid.
22. Explain the process of globalization

Globalization describes the process by which regional economies, societies, and cultures have become integrated
through a global network of political ideas through communication, transportation, and trade.
23. Describe the waves of globalization

1st wave: 1870-1914


Falling tariff barriers
Improved transportation
2nd wave: 1945-1980
Agreements to lower barriers again
Rich country trade specialization; growth of “agglomeration economies”
Poor nations left behind
3rd wave: 1980-present
Growth of emerging markets
International capital movements regain importance
Less immigration, more foreign outsourcing

24. What are the advantages and disadvantages of globalization?

Advantages:
• Productivity increases faster when countries produce according to comparative advantage
• Global competition and cheap imports keep prices low and inflation at bay
• An open economy encourages technological development and innovation with ideas from abroad
• Jobs in export industries pay more than those in import-competing industries
Disadvantages:
• Millions of US jobs lost to imports or production abroad; those displaced find lower paying jobs
• Millions of other Americans fear getting laid off
• Workers face pressure for wage concessions under threat of having the jobs move abroad
• Service and white-collar jobs are joining blue-collar ones in being vulnerable to moving overseas

25. Explain the “Sweatshop” term and its characteristics

Low wages in developing countries allows benefiting from comparative advantage despite lower productivity.
The “Sweatshop” argument:
• Western multinationals deliberately, and consumers unknowingly, exploit workers in third world.
• Wages very low
• Work hours too long
• Work conditions too poor/dangerous
• Workers in industrialized countries compete by lowering their wages, so they also suffer
26. Labor standards proposed by ILO

International labor Organization proposed five labor standards:


• prohibition of forced labor
• freedom of association
• the right to organize and bargain collectively
• an end to the exploitation of child labor
• nondiscrimination in employment
27. How globalization affects the environment (give examples)

The globalization of trade puts pressure on natural resources around the world, helping to drive the rapid
depletion of tropical forests, the collapse of many ocean fisheries, and even the global impoverishment of
biological diversity.
• We have released enough carbon dioxide and other greenhouse gases to have a measurable effect on global
climate, while chlorofluorocarbons and other man-made gases have attacked and depleted the stratospheric
ozone layer.
• A number of pesticides and other persistent organic pollutants are now distributed globally, and may
threaten hormonal balances and the immune system in man and other animals.
• Some toxic chemicals used in the tropics evaporate in the heat and are transported in the air to the poles,
where they condense out in the cold and accumulate in the food chain, in a global distillation process.
28. What is the link between pollution (protection) of the environment and economic development (explain
some opinions/theories)

Theories: Some argue that it may be worth slower economic growth in order to protect the environment. Others
say that the free market and technological advances are the best tools to solve environmental problems and lift
people out of poverty, rather than greater regulation.
Opinion: Protecting the environment and promoting economic growth are complementary goals. Poverty in
developing countries is a leading cause of environmental degradation. For instance, "slash-and-burn" land-
clearing by subsistence farmers has been a major cause of depletion of the Amazon rainforest. Boosting economic
growth may then be an effective tool to promote protection of the environment. This is the idea behind
the sustainable development movement, which seeks to advance economic opportunities for poorer nations in
environmentally friendly ways.

29.Reason for last economic crisis by Robert Badaracco (explain)

We borrow more than we can responsibly pay back


Government sets a bad example by spending more each year than it receives, then money flows overseas to
foreign nations in the form of interest on loans. US consumers borrow more than they can pay back, and banks let
them do it.
We produce less than we consume
We have been running a trade deficit for years and it only seems to get worse not better. As a result nations like
China have all our money.
It's not profitable to hire people to manufacture things
Since it's not profitable to hire people to manufacture things we produce less than we consume.
Government imposes excessive taxes and regulations on businesses
Government imposing excessive taxes and regulations explains why it's not profitable to hire people to
manufacture things.
All nations that went the socialist route and to the extent they did suffer financial crisis
The reason, of course, is when you're in financial crisis every penny really counts and for the have-nots socialism
is a real tough situation.
30. The definition of economic crises and its types

A situation in which the economy of a country experiences a sudden downturn brought on by a financial crisis.
An economy facing an economic crisis will most likely experience a falliing GDP, rising/falling prices due to
inflation/deflation. Type of economic crises:
• Food Crisis
• Financial Crisis
• Oil Crisis
• Industrial Crisis
• Export Crisis

31. Great depression – (where, when and why it started and how it spread across the world)

Great Depression may be said to have begun with a catastrophic collapse of stock-market prices on the New
York Stock Exchange in October 1929. The United States had emerged from the war as the major creditor and
financier of postwar Europe, whose national economies had been greatly weakened by the war itself, by war
debts, and, in the case of Germany and other defeated nations, by the need to pay war reparations. So once the
American economy slumped and the flow of American investment credits to Europe dried up, prosperity tended to
collapse there as well.
32. Explain three ways of internationalization of the last crises

The first of these is the effect of current developments on so-called `emerging market economies’. Nobel
Prize winning economist Paul Krugman gives the example of Russia where `while the Russian government was
accumulating an impressive $560bn hoard of foreign exchange, Russian corporations and banks were running up
an almost equally impressive $460bn foreign debt.
Secondly, countries like the UK and USA which have been at the centre of the crisis see their currencies in
danger of sliding, both because their governments need to borrow abroad and because of a general lack of
confidence. At the time of writing the dollar remains relatively strong simply because of the weakness of other
currencies, but sterling has fallen dramatically against both the dollar and the euro.
The third factor is increasing pressure on countries to devalue their currencies in order to boost exports at a
time of falling demand. Even the Chinese government is now considering this to American consternation.
33. Explain types of economies of scale
External economies of scale occur when cost per unit of output depends on the size of the industry.

External economies of scale may result if a larger industry allows for more efficient provision of services or
equipment to firms in the industry.

Internal economies of scale occur when the cost per unit of output depends on the size of a firm.

Internal economies of scale result when large firms have a cost advantage over small firms, causing the industry
to become uncompetitive

34. Definitions of intra-industry and inter-industry trade

Trade occurs within the cloth industry: intra-industry trade

Gains from intra-industry trade reflect economies of scale (lower costs) and wider consumer choices.

Trade occurs only between industries: inter-industry trade

Gains from inter-industry trade reflect comparative advantage.

35. What is dumping (definition and when it can occur)

Dumping is the practice of charging a lower price for exported goods than for goods sold domestically.

Dumping may occur only if:

Imperfect competition exists: firms are able to influence market prices.

Markets are segmented so that goods are not easily bought in one market and resold in another.
36. The reasons of existence of external economies

Specialized equipment or services may be needed for the industry, but are only supplied by other firms if the
industry is large and concentrated.

Labor pooling: a large and concentrated industry may attract a pool of workers, reducing employee search and
hiring costs for each firm.

Knowledge spillovers: workers from different firms may more easily share ideas that benefit each firm when a
large and concentrated industry exists.

37. Movements in factors of production include…

• labor migration

• the transfer of financial assets through international borrowing and lending

• transactions of multinational corporations involving direct ownership of foreign firms

38. What is inter-temporal trade?

International capital mobility refers to mobility of financial assets, or capital, across countries also can be
interpreted as intertemporal trade

39. Definition of multinational corporations, why are they created and why do they undertake direct foreign
investment?

If a foreign company invests in at least 10% of the stock in a subsidiary, the two firms are typically classified as a
multinational corporation.

Production occurs in separate locations is often determined by the location of necessary factors of production:

• mining occurs where minerals are; labor intensive production occurs where relatively large numbers of
workers live.

• transportation costs and other barriers to trade may also influence the location of production.

Internalization occurs because it is more profitable to conduct transactions and production within a single
organization than in separate organizations

• Technology transfers: transfer of knowledge or another form of technology may be easier within a single
organization than through a market transaction between separate organizations.

• Vertical integration involves consolidation of different stages of a production process.

40. Definition of foreign direct investments

Foreign direct investment refers to investment in which a firm in one country directly controls or owns a
subsidiary in another country.