International Economics

War II
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types of international economic organizations.
2.2 Identify economic circumstances in which

the IMF, the World Bank, and the WTO are active.
2.3 Compare the different levels of integration found in regional trade agreements with examples.

economic organizations.
2.5 Debate the pros and cons of international organizations.

rules that govern and constrain behavior.
Institutions define what is permitted

and what is prohibited.
Institutions can be formal or informal.
Formal institutions are written, often embodied in laws, codes, constitutions.
Informal are customs or tradition such as manners and etiquette.
Formal institutions are often be embodied in a organization.

written set of rules governing behavior.
C) associations of individuals

or groups. D) embodied in traditions and customs.

play major roles in international economic relations:

The International Monetary Fund

(IMF)
The World Bank
The World Trade Organization (WTO)

at Bretton Woods, New Hampshire, was a gathering of leaders

from the Allied Powers.
The goal was to create a more stable and prosperous world economy.
They wished to avoid the problems of the 1930s by creating institutions and organizations that would define rules for trade and international payments.

Woods in 1944.
It began operation in 1945 with 29 members;

today it has 188.
It is funded by a quota each member pays; the quota is proportional to the size of their economy and determines how many votes it has.
The primary purpose of the IMF is to assist in the creation of a stable, crisis free, system of international payments between countries.
Its main activities are to provide technical and financial assistance to countries that have debt problems or an unstable currency.

of last resort.
It provides loans to countries that cannot make

payments on their debts and that cannot borrow elsewhere.
The loans are limited in size and come with a set of requirements, called IMF conditionality.
The IMF monitors exchange rates and assists countries when their currencies collapse in value.
An increasingly important role is to provide standards and technical assistance for the international reporting of economic and financial data.

and structure similar to the IMF.
Countries buy shares and the

number of shares determines their voting rights.
Originally intended as a mechanism to rebuild Europe after World War II
Its main function today is to provide capital and technical assistance for economic development.

Trade (GATT) was envisioned at Bretton Woods but did not

start until 1950.
Its main purpose is to provide a forum for discussing trade rules and a mechanism for gradually opening markets to more international trade.
The GATT works through trade rounds.
Trade rounds are formal discussions about new rules for reducing trade barriers.

tariff reductions and elimination of quotas.
It did not promote free

trade, it promoted “freer” trade.
Proportional tariff reductions require each country to reduce tariffs by the same percentage but tariffs remain different.
By the 1970s, new issues arose that required discussion and negotiations:
Subsidies for industry that gave advantages;
Problems of selling goods at artificially low prices;
Barriers to trade in new areas, such as services

set of rules that began in 1995.
It created the World

Trade Organization to serve as the umbrella organization for all agreements.
It extended trade agreements into services, agriculture, patent protections, international investment rules, and others.
In 2001, the Doha Round opened discussion.
Its primary focus was meant to be on the issues of concern to developing countries.
It proposed a Doha Development Agenda
It is the first round of talks to fail; a major reason is the inability of advanced economies to lower their trade barriers in agriculture.

is the primary agreement overseen by the WTO.
The two guiding

principles of the GATT are national treatment and nondiscrimination.
National treatment means that foreign goods must be treated the same as national goods.
Nondiscrimination prohibits different tariffs or rules for different countries. This is the principle of most favored nation status.
All WTO members must adhere to these rules when trading with other WTO members.

for trade discussions and the development of trade rules is

called
A) the World Bank. B) the WTO.
C) the IMF.
D) the APEC.

of the IMF is to
A) hold regular negotiations over tariff

reductions. B) intercede by invitation when countries cannot pay their international debts.
C) investigate countries that are charged with being unfair traders. D) provide capital to countries that need capital to develop their economies.

was primarily responsible for conducting rounds of trade negotiations was

the
A) World Bank. B) IMF.
C) GATT.
D) WTO.

to firms around the world. B provide capital to underdeveloped countries. C)

provide financial assistance for the reconstruction of war-damaged nations.
D) provide a safe place for people around the world to put their money.

gives. B) minimum size of a national debt problem that a

country must have before the IMF gets
involved. C) changes in policies a country must make in order to receive IMF financial assistance.
D) minimum-sized loan the IMF will make.

France, it means that

A) France is treated better than

Germany’s other trading partners. B) France is treated worse than Germany’s other trading partners. C) France is treated the same as Germany’s other trading partners.
D) France is better than all other nations in the WTO.

be:
Bilateral (two members);
Plurilateral (several members);
Multilateral (open to everyone that wants

to join).
There are five levels of RTA:
Partial agreement
Free trade area
Customs union
Common market
Economic union

and includes the prior levels.
Partial agreement: Free trade in one

or a few products.
Free trade area: Free trade in all goods and services (outputs).
Customs union: An FTA plus a common external tariff.
Common market: A customs union plus free movement of labor and capital (inputs).
Economic union: A common market plus substantial harmonization of economic policies.

Free Trade Agreement (NAFTA);
Common Market of the South (Mercosur);
ASEAN Free

Trade Area (AFTA);
Economic Community of West African States (ECOWAS);
Gulf Cooperation Council (GCC);
The European Union (EU).

is being progressed into

A) a Free Trade Area. B) a

customs union. C) an economic union.
D) a common market.

tariffs toward non-members plus free movement of factors of production

is called
A) a common market. B) a free trade area.
C) a customs union.
D) an economic union.

In 2012, 338 were active, most of them created since

1990.
Most agreements have exceptions: free trade agreements do not usually have 100% free trade.
RTA violate the nondiscrimination rule of the GATT and WTO; countries treat member countries better than others.
The WTO allows this as long as trade creation is greater than trade diversion.
Trade creation: New trade created by the agreement;
Trade diversion: Trade that is diverted from a non-member to a member.

following:
They help world trade by reducing some barriers;
They allow countries

to try new agreements that can potentially be used later in WTO negotiations;
They encourage WTO agreement by offering an alternative in case the WTO is stalled.
Opponents argue:
They divert attention from multilateral negotiations and undermine the WTO;
They rarely, if ever, lead to a WTO agreement;
They often discriminate against poorer nations.

nonexcludable: Everyone benefits even if they do not pay.
Public goods

are nonrival (nondiminishable): They are not diminished by consuming them.
Public goods have a free rider problem.
The two most important characteristics of public goods provided by international institutions are:
Increased international economic order;
Increased certainty about the behavior of other nations.

(GATT/WTO);
Capital flows to less-developed countries (World Bank);
International money for paying

international debts (IMF);
Last resort lending (IMF).

assistance, particularly from the IMF, are sometimes required to give

up the ability to set their own policies.
Decision making in the institutions is not transparent; because the U.S. and Europe have the largest voting bloc, decisions are sometimes viewed as having been directed by rich countries.

advice, technical assistance, and negotiating positions are often a reflection

of the biases and ideologies of high income countries and do not adequately consider alternative policies.
Implementation and adjustment costs.
There are asymmetries in the fiscal burdens associated with implementing agreements and adjusting to the changes they create; richer countries do better at this than poorer ones.