Readings for IPE Final 2023 with complete solution

Subject 1- OATLEY What are the four areas studied in IPE? 1. Intl. Trade system (WTO and GATT) 2. Intl. Monetary System- (exchange rates) 3. MNCs 4. Economic Development Subject 1- OATLEY What are the 2 questions that all IPE theories answer? 1. How exactly does politics shape the decisions that societies make about how to use resources available to them? 2. What are the consequences of these decisions? Subject 1- OATLEY What are the 2 methods of answering the central questions of IPE: Explanatory Studies (explain policies) focus on explaining the foreign economic choices governments make. (relate to first question) Welfare Evaluation (assess policies)- determining if a decision raises or lowers national social welfare (i.e. does taking money from IMF speed-up or slow-down growth...) (relate to second question) Subject 1- OATLEY What are the 3 traditional schools of thought? 1. Mercantilism- wealth=power. Need to export and manufacture to gain wealth. Focus on state 2. Liberalism- focus on individual (anti mercantilism). Free market=all benefit 3. Marxism- concentration of wealth by capitalists. Inequality causes revolution Subject 1- OATLEY What lead to the first global economy? 19th century telegraph and steam engine Subject 1- OATLEY What are the four types of production factors? 1)Labor, 2) financial capital, 3)material capital, 4) human capital- social, initiatives Subject 1- OATLEY What is the Malthusian Tragedy? The Malthusian tragedy- cycle; not enough resources for growing human population. Leads to famine and bring population back to a sustainable level. Subject 1- OATLEY What is the principle of opportunity cost? The Principle of Opportunity cost (עלות האלטרנטיבה)- the value of the best alternative which was forfeited Subject 2- Homer-Dixon Environment, Scarcity, and Violence What are the sources of environmental scarcity? Sources of Environmental Scarcity: 1. Resource depletion and degradation- decrease supply. 2. Population growth and change in consumption- increase demand. 3. Severed imbalance in distribution of wealth and power. (structural scarcity) Heavy debts, and dependence often reinforce structural scarcity. The three sources are interconnected and should be dealt with together. Subject 2- Homer-Dixon Environment, Scarcity, and Violence What is resource capture? Resource capture- when powerful members of society recognize a resource is becoming scarce and shift laws (not so different from Rent Seeking or engaging in or involving the manipulation of public policy or economic conditions as a strategy for increasing profits) Subject 2- Homer-Dixon Environment, Scarcity, and Violence What is ecological marginalization? Ecological marginalization- when structural scarcity and rapid population growth force resource-poor people to vulnerable areas that are then depleted and destroyed and leads to further migration to big cities. Subject 2- Homer-Dixon Environment, Scarcity, and Violence 3 reasons why policy makers trying to prevent conflict should pay heed to environmental scarcity: 1. Environmental scarcity itself influences institutions and policy and is not only affected by it. 2. Environmental scarcity is not only a factor of economic, political, and social factors but also of the particular physical characteristics of society's surrounding environment. 3. If the scarcity becomes irreversible, it will place an eternal burden on society, even if the political issues are solved. Subject 2- Homer-Dixon Environment, Scarcity, and Violence What is the ingenuity gap? Ingenuity gap- as the need to be clever and creative rises (due to more environmental scarcity) the supply of ingenuity stalls or drops due to it. Subject 2- Homer-Dixon Environment, Scarcity, and Violence What are the 3 main positions in the population growth and resource scarcity debate? 1. neo-Malthusians (Thoman Malthus) Biologists and ecologists- finite natural resources places limits on growth of population and consumption and too much causes issues. 2. Economic optimists- no need for limits, innovation, institutions, and incentives will overcome the issue. 3. Distributionists- real problem is maldristribution of resources and wealth. Poverty and inequality are causes not consequences of high population growth rates and practives that deplete natural resources. World Bank and institutions subscribe to the optimist view, media and green movement take the neo- Malthusian view. The author believes that neo-malthusians are wrong as technological innovation rapidly improved productivity and yields. Subject 2- Homer-Dixon Environment, Scarcity, and Violence What is induced innovation theory? Developments in the US and Japan show that in successful economies, changes in land, labor, energy are reflected in market price signals (signal to change supply or demand). These signals stimulate technological innovation that loosen constraints on growth. However, social institutions (i.e. property rights) play an important role in this process. (via resource substation, opening new lands for agriculture, new technology development...) Subject 2- Homer-Dixon Environment, Scarcity, and Violence What are threshold effects? The effects on environmental systems that respond incrementally and slowly to human intervention over a long time until their character is suddenly changed (when it reaches a threshold). Eventually when they reach a threshold the results are irreversible. Subject 2- Homer-Dixon Environment, Scarcity, and Violence What is social friction? Social friction- scarcity which causes competition among elites to protect their narrow interests. This impedes Subject 3- Adam Smith- Wealth of Nations What is the concept of self-love and what does it teach us? Self-love is man's rational concern for himself. Man is a rational actor and we expect the butcher and others to provide us not out of humanity but out of their own self interest. Subject 3- Adam Smith- Wealth of Nations What is the biggest achievement of wealthy countries? Why? Adam Smith wants us to know that one of the biggest achievements of many wealthy countries is something called the "division of labor." In other words, the fact that we have specialized people for specialized tasks makes us much more productive than having a bunch of people who try to do every job well. (gives pin making as an example) but one thing Smith thinks is even more important for creating a wealthy nation is to have open trade with other people and other countries. In other words, he thinks of trade as the killer app of modern capitalism. Subject 4- Oatley- Interests and institutions- What are the 2 main approaches to trade politics? In what ways are they different? Society centered approach: This approach is based on a relationship between politicians and interest groups by claiming that policy decisions are formed around the demands of interest groups. An example given would be of the EU's refusal to liberalize European agriculture because of pressure from local farming groups. State centered approach: national policy makers intervene in the economy in pursuit of objectives that are determined independent of domestic interest groups narrow concerns The primary differences are that the society approach weakens aggregate social welfare while the state centered one strengthens social welfare and that in society centered approach the government is intrinsically connected to interest groups while in the state centered they are sometimes independent of them. Subject 4- Oatley- Interests and institutions- What are the 2 models of understanding the preferences of interest groups? Factor Model- trade policy preferences are driven by production factors such as labor and capital. 222 If two countries specialize in what they are better at (i.e. USA capital-intensive and China labor-intensive) then the second industry will be slowly liquidated and will try to influence policy to protect its interests (i.e. in USA labor and in China capital) Sector Model- trade politics are driven by competition between industries. Tariff raising/reduction affect different industries differently. The different factors don't have mobility and can't be liquidated leading to heavy competition between industries that support trade and those that oppose it to protect their interests respectively. Subject 4- Oatley- Interests and institutions- How do political institutions affect competition between interest groups? Institutions create the rules of the game. For example in a majoritarian system, politicians need to satisfy district residents' demands causing politicians to work with industry leaders to raise wages in exchange for the workers support. In a PR system, the candidates need to appeal to a broader range of interests, often focused around class and production factors. Subject 4- Oatley- Interests and institutions- What two factors prevent budding industries from becoming successful and efficient in the short run? 1. Economies of scale- unit price production cost falls as number of units increases making it difficult to get ahead of the major producers 2. Economies of experience- The Ikea effect. The more you produce the better you get at producing it. Because skill is lacking early on its hard to get going. Tariffs aid in protecting infant industries so they can build such experience and compete against the big boys Subject 4- Oatley- Interests and institutions- How is state strength measured and in what does it reflect itself? State strength = the degree to which governments are isolated from interest group pressure. Strong states are characterized by central organization and communication between agencies and weak denotes states that are highly disorganized allowing interest groups to influence through various channels. (Japan is a strong state while US is a weak state with decentralized power and interest groups with heavy influence) Subject 4- Oatley- Interests and institutions- 1. What is an oligopoly? 2. What leads societies to complete over oliogopolic industries? 1. Industries in which only a few firms compete. 2. Industries with high entrance fees and high returns and the limited competition makes them especially attractive, because being a leader means major returns (i.e. auto industry) Subject 5- Supply and Demand- Economist Article on Organ Donation What is the main argument of the author? Main point: Due to lack of (legally) available organs suggestions to legally sanction payment or compensation as exists in Iran (and now Israel to an extent) Subject 5- Supply and Demand- Economist Article on Organ Donation What is causing the issue of lack of organ supply to be aggravated? 1. Less people dying in road accidents 2. More countries cracking down on organ harvesting/selling 3. Populations live longer and have more diseases/obesity that affect kidneys Subject 5- Supply and Demand- Economist Article on Organ Donation What is causing the issue of increased organ demand to be aggravated? 1. Media reporting on medical malpractice and fraud. 2. Fears of risk of surgery 3. Relatives often stop donations of organ donors who wish to donate post-mortem 4. Religious obstacles to donation at brain death Subject 5- Supply and Demand- Economist Article on Organ Donation Ways to increase donations: 1. Opt-out system requiring donors to opt out instead of in such as in Spain 2. Iranian Way- officially sanctioned living-donor donations. Only country in world and it has the highest living- donor rate to show for it. In 1999, they eliminated their waiting list altogether. (The official fee is $1,200 plus free year of health insurance plus a lump sum of $2,300- $4,500 from the recipient or if he/she is poor, a charity.) Subject 6- McGrew- Logics of Economic Globalization- 1. Main argument of article: 2. What is globalization? 3. Difference between globalization and globalism: 1. Talk that globalization has come to an end after financial crisis in 2008 are wrong. 2. The process of the 'emergence and operation of a single worldwide economy measured by reference to the growing intensity, extensity and velocity of worldwide economic actions and interconnectedness, from trade, production and finance, and migration', creating a 'denationalization' of economic relations. 3. Globalization= a historical process. Globalism = the resulting condition of globalization at any point in History. Subject 6- McGrew- Logics of Economic Globalization- What is the domestic Feldstein-Horioka Puzzle? Economic theory assumes that if investors can easily invest anywhere in the world, acting rationally they would invest in countries offering the highest return per unit of investment. This would drive up the price of the investment until the return across different countries is similar. Feldstein and Horioka argued that if the assumption is true and there is perfect capital mobility, we should observe low correlation between domestic investment and savings. Borrowers in a country would not need the funds from domestic savers if they could borrow from international markets at world rates. Similarly, savers as savers would show no preference for investing within their own country, but would lend to foreign investors and would not need to lend domestically. Yet studies show that levels of national savings and national investment seem to be highly correlated. Since the 1990s we have seen empirical evidence that the puzzle has been solved and savings-investment correlation has weakened. Zelikha- Changes in consumption habits What are some of the market failures in Israel? 1. Policy which favors factor that produces capital production (i.e. machines that produce capital) over factor of production (i.e. public sector workers) reducing production supply and workers and enabling increase in prices. 2. Mobile and Credit Card market which have built in methods to prevent competition (i.e. charging out of network higher rates, banks controlling cards...) The suppliers do this through a network economy which favors those with the most subscribers/clients. Milton Friedman- Freedom and Capitalism What are Friedman's main ideas? Private initiative is more effective than government management but they need a framework of personal and organizational freedoms that protect from government and power groups damaging property and individual rights. There is an intimate connection between economics and politics and only certain arrangements of political and economic arrangements are possible. (a society which is socialist cannot be democratic in a sense of guaranteeing personal freedom) Milton Friedman- Freedom and Capitalism 1. What questions does Friedman aim to answer in his book? 2. What question should every citizen ask of himself? 1. How does capitalism benefit the economy and society, and specifically minorities. 2. "What can I and my companions do through government" to help us achieve our several goals and purposes and above all, to protect freedom? and how can we prevent the government from becoming a Frakenstein? Milton Friedman- Freedom and Capitalism How can we benefit from govt. while avoiding the threat? 1. limit scope of government 2. Disperse governmental power among different levels, areas. Milton Friedman- Freedom and Capitalism Why is economic freedom important? 1. As an end itself promoting freedom in the economic realm. This is an important freedom! 2. Means towards achieving political freedom Milton Friedman- Freedom and Capitalism Under which conditions do we prefer government to the market? Areas in which market cannot handle or would be handled at a great cost and therefore we prefer government such as: 1. Government as a rule maker and umpire for deciding and arbitrating differences and enforcing contracts. 2. Action Through Government on Grounds of Technical Monopoly and Neighborhood Effects- 3. Actions through government on paternalistic grounds Marx- Communist Manifesto Main ideas: 1. The working class, or proletriat, is exploited by the bourgeois or factory owners. 2. All the surplus which goes to the capital owners is really the property of the workers who create the profit. 3. All of history is a class struggle between those who have and those who don't. 4. At some point there would be a violent revolution in which the proletriat would overthrow and eliminate all classes ending the class struggle and leading to equality. Ending need for government, classes, property, money...