exam preparation.docx

8/11/2019 Exam preparation.docx

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1. Discussion questions (DQ): Define G and its drivers and impacts. Is G reversible?

Discuss plausible scenarios.

Globalization is the process of increasing economic interdependence and

interconnectedness among nation states and sub-units that are willing and able to

participate in the global division of labor.

Globalization means a fragmentation of production processes across multiple

jurisdictions. Outsourcing to take advantage of national differences in the cost &

quality of factors of production means that more & more goods are global

products (example: Shoe industry and electronic industry put their factories in

developing countries such as China, India and Vietnam to leverage the low cost of

labor and incentives). G can also refer to non-economic aspects such as

multilingualism, cross-culture, music (traditional music and culture can be lost),

religion

Factors that have contributed to globalization include increasingly sophisticated

communications and transportation technologies, internet, services, mass

migration and the movement of people, a level of economic activity that has

outgrown national markets through industrial combinations and commercial

groupings that cross national frontiers, and international agreements that reduce

the cost of doing business in foreign countries. Globalization offers huge potential profits to companies and nations but has been complicated by widely differing

expectations, standards of living, cultures and values, and legal systems as well as

unexpected global cause-and-effect linkages.

The advantages and disadvantages of globalization have been heavily scrutinized

and debated in recent years. Proponents of globalization say that it helps

developing nations "catch up" to industrialized nations much faster through

increased employment and technological advances. Critics of globalization say

that it weakens national sovereignty and allows rich nations to ship domestic jobs

overseas where labor is much cheaper.

Lower labor cost, increase sales, profits and revenues. Dimensions of Globalization: Culture, Environment, Society, Economy and

Politics.


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Globalization s drivers:

o Technology (Internet): The Internet has dramatically lowered the cost of

transmitting and communicating information

o Transport costs and speed of transport: Costs of ocean shipping have come

down, due to containers, bulk shipping, and other efficiencies.

o End of Cold Waro Global problemso liberalization

Benefits:

o Consumers: cheaper prices. Globalization has brought in fierce

competition in the markets. Since there are varied products to select from,

the producer can sustain only when the product is competitively priced.

There is every possibility that a customer may switch over to another

producer if the product is priced exorbitantly. 'Customer is the King', and

hence can dictate the terms to a very large extent. Therefore, affordable

pricing has benefited the consumer in a great way.

o Businesses: get much wider opportunities for investment, increase sales,

profits and revenues.

o Labor: the generation of numerous employment opportunities. Companiesare moving towards the developing countries to acquire labor force. Also,

the migration of people, which has become easier has led to better jobs

opportunities. Edu cation

o Government: greater interdependence of nation-states, reduce the

likelihood of war between nations. The creation of a world government

which regulates the relationships among governments and guarantees the

rights arising from social and economic globalization.

o International Problems:

o Diminishing the role of nation state: Conventionally, people of a particular

country follow its culture and traditions from time immemorial. With large

number of people moving into and out of a country, the culture takes a


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backseat. People may adapt to the culture of the resident country. They

tend to follow the foreign culture more, forgetting their own roots. This

can give rise to cultural conflicts.

o Social dumping: is a practice involving the export of goods & services

from a country with weak or poorly enforced labor and/or environmental

standards, where the exporter s costs are artificially lower than its

competitors in countries with higher standards. Hence, it represents an

unfair advantage in international trade. Social dumping is the use of labor

with wages and benefits that do not meet the set standard in a country for

the purpose of cutting costs of production. Companies may rely on foreign

labor or specially negotiated deals to find employees amenable to

substandard conditions. Their use of cheap labor allows them to increase profits, as they can sell goods at standard prices even though they cost

less. A few days later, the Swedish Pilots Association (SPF) learned that

all Skyways Express pilots had been fired and that the company "offered"

some of them to be hired back though through a crew leasing company.

With the new status of "contract pilot" the ex-Skyways pilots will lose

their collective work contract and they will have to pay their own social

security, medical insurance, tax, etc. Their contracts are short-term (6

months) and the working relationship can be terminated unilaterally by the

company with one month's notice...

o Gulf between rich and poor, Income and wealth distribution: Globalization

generates winners and losers; and for this reason it is likely to

increase inequality, as richer nations benefit more than poorer ones. The

potential loss of jobs in domestic markets caused by increased, and in

some cases, unfair, free trade. It is said that the rich are getting richer

while the poor are getting poorer. In the real sense, globalization has not

been able to reduce poverty. Instead it has led to the accumulation of

wealth and power in the hands of a few developed economies. Therefore

the gap between the elite and the underprivileged seems to be a never

ending road, eventually leading to inequality.
http://www.economicsonline.co.uk/Global_economics/Inequality.htmlhttp://www.economicsonline.co.uk/Global_economics/Trade_protectionism.htmlhttp://www.economicsonline.co.uk/Global_economics/Trade_protectionism.htmlhttp://www.economicsonline.co.uk/Global_economics/Inequality.html


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o Non-controllable multiso Environmental destruction: polluting corporations take advantage of weak

regulatory in developing countries. Increased trade associated with

globalization has increased pollution and helped contribute to

CO2 emissions and global warming. Trade growth has also accelerated the

depletion of non-renewable resources, such as oil. The industrial

revolution has changed the outlook of the economy. Industries are using

natural resources by means of mining, drilling, etc. which puts a burden on

the environment. Natural resources are depleting and are on the verge of

becoming extinct. Deforestation is practiced owing to the non-availability

of land, thereby drastically reducing the forest cover. This in turn creates

an imbalance in the environment leading to climate change and occurrenceof natural calamities.

o Greater risk of diseases being transported unintentionally between nations.

o As countries are increasingly dependent on each other, a negativeeconomic shock in one country can quickly spread to other countries.Most recently, the collapse of the US sub-prime housing market triggereda global crisis in the banking system as banks around the world suffered afall in the value of their assets and reduced their lending to each other.

This created a liquidity crisis and helped fuel a severe downturn in theglobal economy.

o Economic depression in one country can trigger adverse reaction acrossthe globe.

o Opening the doors of international trade has given birth to intensecompetition. This has affected the local markets dramatically. In recenttimes the standard of living has improved. People are therefore ready toshell out extra money for a product that may be available at a lower price.This is because of the modern marketing techniques like advertising and

branding. The local players thereby suffer huge losses as they lack the potential to advertise or export their products on a large scale. Thereforethe domestic markets shrink.
http://www.economicsonline.co.uk/Global_economics/The_pattern_of_trade.htmlhttp://www.economicsonline.co.uk/Global_economics/Global_shocks.htmlhttp://www.economicsonline.co.uk/Competitive_markets/The_housing_market.htmlhttp://www.economicsonline.co.uk/Global_economics/Financial_crisis.htmlhttp://www.economicsonline.co.uk/Global_economics/Financial_crisis.htmlhttp://www.economicsonline.co.uk/Competitive_markets/The_housing_market.htmlhttp://www.economicsonline.co.uk/Global_economics/Global_shocks.htmlhttp://www.economicsonline.co.uk/Global_economics/The_pattern_of_trade.html


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Future of Globalization

o Factor-driven:

Institutions: The institutional environment is determined by the legal and administrativeframework within which individuals, firms, and governments interact to generate wealth. The

importance of a sound and fair institutional environment has become all the more apparent during

the recent economic and financial crisis and is especially crucial for further solidifying the fragile

recovery, given the increasing role played by the state at the international level and for the

economies of many countries. The quality of institutions has a strong bearing on competitiveness

and growth. It influences investment decisions and the organization of production and plays a key

role in the ways in which societies distribute the benefits and bear the costs of development

strategies and policies. For example, owners of land, corporate shares, or intellectual property are

unwilling to invest in the improvement and upkeep of their property if their rights as owners are not

protected. The role of institutions goes beyond the legal framework. Government attitudes toward

markets and freedoms and the efficiency of its operations are also very important: excessive

bureaucracy and red tape, overregulation, corruption, dishonesty in dealing with public contracts,

lack of transparency and trustworthiness, inability to provide appropriate services for the business

sector, and political dependence of the judicial system impose significant economic costs to

businesses and slow the process of economic development. In addition, the proper management of

public finances is critical for ensuring trust in the national business environment. Indicators

capturing the quality of government management of public finances are therefore included here to

complement the measures of macroeconomic stability captured in pillar 3. Although the economic

literature has focused mainly on public institutions, private institutions are also an important

element in the process of creating wealth. The global financial crisis, along with numerous

corporate scandals, has highlighted the relevance of accounting and reporting standards and

transparency for preventing fraud and mismanagement, ensuring good governance, and maintaining

investor and consumer confidence. An economy is well served by businesses that are run honestly,

where managers abide by strong ethical practices in their dealings with the government, other

firms, and the public at large. 7 Private-sector transparency is indispensable to business; it can be

brought about through the use of standards as well as auditing and accounting practices that ensure

access to information in a timely manner. Infrastructure

Macroeconomic environment Health and primary education

o Efficiency-driven: Higher education and training Goods market efficiency


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Labor market efficiency Financial Market development Technological readiness Market size.

o Innovation-driven: Business sophistication Innovation

2. How is GDP calculated? How accurate are the estimates? How well do per capita GDP

comparisons indicate citizen welfare?

GDP is a measurement of all the goods and services a nation produces in a year. It is used

to compare the economic output of countries.

Expenditure approach: C + I + G (X-M)C: Consumer spending on goods and services.

I: Investment by business to acquire goods and services

G: Government spending on goods and services

X: Total value of Export

M: Total value of Import.

GDP per capita only measures income; welfare measures income, leisure, life expectancy

and degree of inequality.

3. What are the "crises" the authors of the two short assignments describe? Discuss the

interdependence among the crises

4. Session 8 - Key points of the 2012 BBC video about aspects of the EZ crises from Greek

and German points of view

5. Session 10 - What factors explain Argentina's relative economic decline?

6. Session 11 - Prepare good comments and Qs on the TREs; brief comments of facts (not

just opinions) on the embargo and sanctions; comment on the Africa reading

7. Session 12 - Your views on whether the West is facing "secular stagnation"

a. Secular Stagnation


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A condition of negligible or no economic growth in a market-based

economy. When per capita income stays at relatively high levels, the

percentage of savings is likely to start exceeding the percentage of longer-

term investments in, for example, infrastructure and education, that are

necessary to sustain future economic growth. The absence of such

investments (and consequently of the economic growth) leads to declining

levels of per capita income (and consequently of per capita savings). With

the reduced percentage savings rate converging with the reduced

investment rate, economic growth comes to a standstill ie, it stagnates.

In a free economy, consumers anticipating secular stagnation, might

transfer their savings to more attractive-looking foreign countries. This

would lead to a devaluation of their domestic currency, which would

potentially boost their exports, assuming that the country did have goods

or services that could be exported. Persistent low growth, especially in

Europe, has been attributed by some to secular stagnation initiated by

stronger European economies, such as Germany, in the past few years.

The reason for the secular stagnation is excess savings. For many years,

the world has saved more than it has invested, leading to ever lower

interest rates, which still fail to establish a new equilibrium betweensavings and investment

Causes:

1. Demography

2. Exploding social welfare costs: free education, medical care,

longer vacation, less working hours

3. Growing income and wealth inequality

4. High level of debt

5. Lagging education

6. Resource and Environment constrains

7. Globalization Responses:

1. Raise inflation


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2. Expansionary fiscal policy

3. Introduce negative interest rates, to make investment attractive and

saving money less attractive

4. Give incentives to corporations to invest and use the money to

embark on credit-financed public spending on infrastructure and

other investments

b. Great Recession: Causes:

o Housing bubble

o Household debto Subprime mortgage loans, low interest rate : made home

ownership more attractive and attainable for millions of Americanso consumer debts reaching unsustainable levels

Consequences:

o The higher the rate of inflation

o GDP declinedo Companies cut their costs as well and they chuck out workers

which brings unemployment. Persistent high unemployment.

o Low consumer confidence.

8. Session 13 - Your country's debt situation and debt-sustainability

a. Public Debt (PD): the total debt of a country s governments (including state s and

local governments) owned to residents and foreigners.

b. Private Debt

c. Sovereign Debt (SD): Bonds issued by a government (include states and local

governments) in foreign currency.

d. The big difference between government debt and sovereign debt is that

government debt is issued in the domestic currency, while sovereign debt is

issued in a foreign currency.

e. External Debt: Sovereign debt + the foreign debt of the private sector

f. Internal Debt : the debt of country s government owned to local people.


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g. The Paris Club: is an informal group of financial officials from 20 of some of the

world's biggest economies, which provides financial services such as debt

restructuring, debt relief, and debt cancellation to indebted countries and their

creditors.

h. The London Club: The London Club is an informal group of private creditors on

the international stage, and is similar to the Paris Club of public lenders. The

London Club is not the only informal group of private creditors.

i. Country bailout: The financial rescue of a struggling borrower

j. Gross Domestic Product

k. Gross Debt: all debt concepts discussed so far are always gross.

l. Net Debt: difference between gross debt & the financial assets that the

Government & the Central Bank hold.m. Debt sustainability: the ability to cap debt-to-GDP ratios at the current levels or, if

too high, to bring the ratios down to managerial levels.

n. MP is the CB s management of liquidity and the steering of r s

o. Credit Default Swap: is the annual cost of insurance against the issuer of a bond

defaulting in full or in part.

9. Session 14 - How do low interest rates impact you and your firm?

a. The Cost of Borrowing: When interest rates rise, banks charge more for business

loans. This means businesses must use more of their earnings to pay interest on

their loans. That decreases profits. Some business owners may decide not to start

new projects or expansions during periods of high interest rates. This hampers the

growth of the company. When interest remains low, businesses may borrow more

readily. Low-interest loans can fund business growth and increase profitability

because businesses can earn enough off of new ventures to pay for the loan

interest and have money left over for profits.

b. Customer Ability to Pay: Customers have to pay interest on their personal loans,

home loans and car loans. The higher the interest, the less money in customers'

pockets. This can reduce their ability to buy products and services, so businesses

may suffer from a decrease in sales. When interest rates remain low, customers

have more cash after they pay their loan payments, and they can spend this cash


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with businesses. This principle applies whether your customers are the public or

other businesses. Both have to pay interest on their loans, so the lower the

interest, the more they can buy

c. Boosting the Business Investment: Businesses can invest their excess cash in

interest-bearing accounts to make more money. During periods of high interest

rates, businesses earn more from these investments. When rates are low,

businesses may be more likely to use their cash for new equipment and plant

improvements. While this can be good for equipment sellers and construction

firms, banks lose out. Banks make their money from providing loans. When they

don't get business investments to boost their assets, they can't make as much

money because they have less to loan out.

d. Too low, too long: The interest rates banks charge are their income afterexpenses. When banks don't see an opportunity to make a reasonably-high interest

rate on their money, they become less likely to take risks on loans. Businesses

therefore can't borrow money for start-up and expansion expenses. Business can

slow down to a crawl because there's no way to fund innovation. In addition,

short-term loans to cover cash-flow problems can be hard to come by. This could

cause businesses to be unable to deliver goods and services to their customers

because they don't have the cash to continue operating.

The interest rate will stay low for years:

The economic remains weak: Great Recession "scarred households and

businesses," which is likely to dampen their spending and investment for a long

time.

Our future potential is declining: Lower economic potential implies interest

rates will have to remain low, even after the economy starts revving up again.

Bank regulation : Following the massive crash in 2008. Traditionally, banks

make their money by taking in your deposits and paying you a certain interest

rate, but then lending that money out to someone else at a higher rate. If banks are

forced to hold more cash on the sidelines, they may become less profitable and

may slow their lending


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10. Session 15 - Making use of readings assigned for this session, fill in the blank bullet

points on the lecture slides:

a. The key points of Shifting World Economy The European Union is heading toward the type of long-lasting stagnation

from which Japan is desperate to escape.

The euro s design which was modeled on the Deutsche Mark has a fatal

flaw. Creating a common central bank without a common treasury means that

government debts are denominated in a currency that no single member

country controls, making them subject to the risk of default.

Future crises will be political in origin In contrast to Europe, the United States is emerging as the developed world s

strongest economy

The major uncertainty facing the world today is not the euro but the future

direction of China.

The absence of proper global governance. The lack of agreement among

the United Nations Security Council s five permanent members . In

contrast to the Chinese conundrum, which will come to a head in the next

few years, the absence of global governance may continue indefinitely

b. Global Economy in 2030 Distribution of global power: A much bigger group of countries now

dominates global economic debate.

Resources scarcity and competition: The competition for natural resources will become more intense.

The future of financial markets: Global markets are expected to grow but in

markedly different ways, depending on regions, resources and partnerships The corporate ecosystem: Specialization continues as businesses look for costand scale advantages by placing elements of their value chains in optimal

locations.

Governance and government: The future role of governments is defined by anemphasis on either the facilitation of private enterprise or policing the system .


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Five foundation for sustainable growth:

Stability as the foundation: First comes political and economic stability.

Stability is essential to allow both entrepreneurs and businesses to take advantage

of markets and resources, and to develop a strong educational infrastructure.

Tapping into a domestic market: Those with a large domestic market have an

obvious advantage. Access to a large domestic market fuels growth. This does not

have to be the country s own; countries can take advantage of those close to their

borders.

Access to natural resources : There continue to be clear benefits of being able to

use and sell commodities, as long as countries have the infrastructure and political

will.

Education as growth enabler: There are parts of the world that really value

education. Where people work very, very hard to seize the kinds of opportunities

that education can deliver... and in these parts of the world we could see

something pretty impressive. The panel highlighted the benefits of a well-

educated population as a strong enabler of growth. And to cultivate their global

perspective, higher education institutions need to become universities of the

world. Currently, the highest-ranked universities are in the West. Some panelists

assert that unless the West adapts its institutions to become true universities of the

world, the globalists of the next generation will come from the emerging

economies.

Enterprise:

Gorbachev introduced a wide ranging program of reform. His major reforms were glasnost

(openness), perestroika (restructuring) and demokratizatsiya (democratization)

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