Define the Concept and Give an Appropriate Historical or Substantive Example - Assignment Example

 10) Gini-coefficient --- Poverty Analysis: “Gini-coefficient of inequality: This is the most commonly used measure of inequality. The coefficient varies between 0, which reflects complete equality and 1, which indicates complete inequality (one person has all the income or consumption, all others have none). Graphically, the Gini coefficient can be easily represented by the area between the Lorenz curve and the line of equality. On the figure to the right, the Lorenz curve maps the cumulative income share on the vertical axis against the distribution of the population on the horizontal axis.” (World Bank, 2010) The Gini Co-efficient shows the equality of the distribution of wealth in a society, in how many people fall below the median standards of income and how income is distributed broadly in a population demographically. This could be used to compare the income distribution in relation to poverty of the United States and Zimbabwe, for example, or any number of countries on a common statistical basis. 1) What is currency hedging and why did German-owned Volkswagen begin implementing this financial strategy in 2005? Currency hedging is a process through which companies, individuals, and other groups protect themselves from business losses stemming from changes in currency foreign exchange rates. Volkswagen implemented this due to their reliance on exports in sales volume, and the potential losses from foreign sales arising from Euro exchange rates. 2) What is leverage and why did US investment banks use this financial instrument to buy millions of dollars worth of US mortgages? Leverage is the use of borrowed money to increase investment returns, particularly in the short term. An example is a short term stock trade that would use the capital available for investment as a down-payment for a loan of a higher denomination, and then invest the loaned money in the stock rather than the original sum of primary capital. U.S. banks used leverage to purchase mortgage backed securities to take advantage of the spread between the bond yields and Federal Reserve interest rates. Short Answers (Define each of the following concepts and explain how they are interrelated. Give an example that illustrates the significance of each concept.) 1) Fixed and floating exchange rates Floating exchange rates are determined by free market movements, governed by the supply and demand of commerce for national currencies. Fixed exchange rates are set by an authoritative body such as a State or bank on political or ideological principles in a manner that market forces do not determine the rate of exchange. The U.S. has a floating exchange rate with the dollar, while China maintains a fixed exchange rate with the Yuan. 2) Inhibiting fear and sudden stops Inhibiting fear and sudden stops are related to behaviorism in market economics, or market psychology. They describe states of mind in the investment process governed by speculation. 3) Neo-realist vs. neo-liberal institutionalism A neo-realist institution is generally concerned with power structures as they impact economically through resource control and related aspects of a State’s self-interest. Neo-liberalism in institutionalism is engaged in the opening up of markets through free trade and other multi-national trade agreements. 4) Credible commitment and the time inconsistency problem Credible commitment is considered in investment analysis such as venture capital or private equity when evaluating investment potential. Time inconsistency related to return on investment and expected gains related to uncertainty, as in a start-up business. 5) Interest rate parity vs. purchasing power parity Interest rate parity makes investment returns in two countries equivalent as a benchmark guide for risk management. Purchasing power parity involves relations between national currencies, and their ability to procure goods both domestically and abroad. 6) Monetarism vs. Keynesianism Monetarism means that the central bank shall pursue a policy of regulating equilibrium with regard to the distribution of paper money & coins in the realm. Keynesianism is a broader authority of central banks to work towards social goals such as economic stimulation and full employment. 7) Coase theorem and negative externalities The Coase theorem is a means of measuring the efficiency of transactions in an industry sector due to government or regulatory control costs. Negative externalities connote an event outside the control of a business or corporation that impacts profitability or operations. 8) Systematic risk vs. moral hazard Systemic risk is the threat of failure in the over-all industry or sector, also considered in a geopolitical sense or regarding institutions of protection. Moral hazard is the possibility that businesses that enjoy a competitive advantage or unnatural monopolistic protection by government may behave differently with regard to risk management or price standards using the unfair trade advantages. 9) Capital controls vs. prudential banking regulations Capital controls regulate how currency and balance deposits are exchanged between regions, individuals, or nations. Prudential banking regulations intend to protect the deposits of investors and the long term stability of the industry through operating guidelines. 10) Structuralism vs. conjuncturalism Structuralism is concerned with the architecture of power within societies, institutions, and cultures. Conjuncturalism looks at the ways in which ideas, institutions, actions, and plans conjoin to create effects of relevance in the society. 11) Fixed vs. mobile assets Fixed assets relate to structural, real estate, transportation, and other hard assets of a corporation or individual as they relate to capital invested in products, objects, or property. Mobile assets are those that can be transported between properties. 12) Convergence vs. divergence Convergence is the development of events in accordance with the business or investment plan as designed in advance and tested through experience. Divergence is when the business or investment plan is not reflective of events and developments in society and fails in maintaining its goals. 13) Free riding and the tragedy of the commons Free riding is essentially riding the bus without a fare or otherwise escaping required cost for services, as in using subsidies. The tragedy of the commons is where the best laid business plans are destroyed upon entry into the realities of the consumer and competition in the marketplace. 14) Competitive advantage vs. comparative advantage Competitive advantage is achieved through out-producing or outperforming another business in the same sector due to greater efficiency, speed, or product valuation by the consumer. Comparative advantage is quality based an relational, as in the difference between products when factored by relative cost. 15) Modular production revolution and outsourcing Modular production connotes the manufacture of products by an engineering plan that compartmentalizes both production and functionality into modules which are able to be produced autonomously but joined to the whole in the assembly process. Outsourcing is contracting with a third party business to provide traditional business process services at a lesser rate for service. 16) Arms length vs. hierarchical control Arms length refers to local control and local management in business production or management. Hierarchical control means management through pyramidal power structures that may position executive command at a distance, or at the very top of a hierarchy as in the military general organization. 17) Utilitarianism vs. Rawlsianism Utilitarianism is a concept associated Jeremy Bentham and John Stuart Mill and based in rationalism, empiricism, and skepticism. Utilitarianism posits that the good of an action can be calculated scientifically through its usefulness or efficiency to the greatest number. Rawlsianism is based on the writings of the American John Rawls, and is a philosophy largely concerned with the role of justice in a society as well as its negotiation. 18) Prebisch-Singer thesis and import substitution industrialization (ISI) The Prebisch-Singer thesis relates to the degeneration of material goods, real estate, equipment, technology, and the like over the course of time, and relating that decay economically for accounting and planning purposes. Import substitution industrialization (ISI) is a local policy initiative by governments to alter economic conditions which determine a dependency on foreign sources for a vital material or commodity. 19) Washington Consensus vs. state-led industrial policy Washington consensus refers to accord in agreement between various aspects of the political class in Washington D.C., and may include the Executive, Legislative, & Judicial branches of government, as well as the bureaucracy, Pentagon, lobbyist, staff, and civil service dimensions of government. State-led industrial policy is related to Federalism in the U.S. Constitution and local business initiatives in industry. 20) Millennium Development Goals and Monterrey Consensus Essays (Make sure you demonstrate a knowledge of both theoretical concepts and substantive issues.) The Millennium Development Goals were negotiated under international frameworks to encourage development in the undeveloped countries characterized by global poverty. This involved on one hand donations from rich industrial nations that were related to a percentage of their GDP, and on the other hand, grass-roots initiatives to eradicate global poverty, hunger, and disease. The Monterrey Consensus was a meeting of developed and undeveloped nations seeking a broader accord and progress towards implementing the Millennium goals in public policy internationally through co-operation. 1. “Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate…Even a panic is not altogether a bad thing. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.” –Andrew Mellon, Secretary of Treasury for President Herbert Hoover (1930) For many economists, the Great Depression underscored the necessity of government intervention in forestalling financial crises and demonstrated the shortcomings of Mellon’s laissez-faire approach to governing the economy. That said, was the United States decision to inject $200 billion in capital into banking institutions the most appropriate policy response? Mellon suggests liquidation is not a problem and that lower prices are not a problem. In the modern banking crisis of 2007-8, there was a crisis of liquidity in TBTF institutions following the collapse of Lehman Brothers that was exacerbated by innumerable other causes. The important point relevant to the $200 billion cash injection is that financial institutions were dumping assets into the free market simultaneously, in large quantities, both to meet margin calls and to cover other trades that went bad. This resulted in contagion between commodities, equities, bond markets, as the liquidity crisis caused institutions to dump assets, largely held in the form of paper contracts, into the market simultaneously. The cash injection arguably could have alleviated the pressure to liquidate assets in a panic environment that would cause further downward trends of assets in the global markets. What are the tradeoffs between quelling systemic risk vs. fostering moral hazard? Is the US at risk of creating a financial oligarchy or a Wall-Street Treasury complex? Systemic risk accepts the system as natural, and subject to creation, evolution change, destruction, & rebirth. There is a larger view of cyclical causality and means of regeneration. Moral hazard is the assumption of non-rational business prices designed to maximize return from an unnatural or corruptly attained advantage. Thus, moral hazard represents the cyclical nature of corruption in business and society, 2. What were the major causes of the 2008 US credit crisis? Looking forward, in light of the considerable financial volatility of recent decades, what governance measures—both nationally and internationally—could be adopted to reduce the likelihood of future financial crises? The major causes of the 2008 credit crisis was the further unraveling of the Lehman Brother’s bankruptcy in ripples across the global financial sector. Lehman largely imploded by over-leveraging in speculative investments and not being able to meet margin requirements. The root cause was in the unplanned and unexpected default of large number of consumers from mortgage loans. Some claim that this was based in reduced standards in the sub-prime mortgage sector, Mortgage loans, commercial and consumer, were packaged together by issuing banks into larger packets of securities, largely similar to and marketed to bond investors. These bonds were attractive to financial institutions like banks, hedge funds, and pension investment funds – essentially, all of the major financial investments with budgets sufficient to buy a billion dollar bond packaged of mortgage payment commitment. When consumers defaulted on mortgage loans, the expected rate of return on these bonds plummeted, as did their worth as resale on the bond markets. Mark to market accounting laws meant these securities should be discounted under public accounting rules, creating a crisis in market value for major banks and insurance companies like AIG. From this liquidity crisis, came the need for the bailouts, stimulus, TARP re-purchases of securities by the Fed, Quantitative Easing, etc. The important aspect is the ripple effect and contagion in global markets from local causes. 3. What are the differences between a structural, conjectural, and constructivist interpretation of deepening globalization? Has deepening globalization led to a “race to the bottom”? In other words, to what extent has the liberalization of foreign direct investment flows led to policy convergence versus policy divergence? Structurally, the technology of modernism has fueled and driven globally. Conjecturally, this can be seen as progress, evolution, divine plan, organized chaos, or nature. In a constructivist sense, global civilization is built on communal shared science and ideals. Deepening globalization races to the bottom to find the next developing country with lower wages than the last developing country, in that labor can be procured at the lowest possible cost per hour by multi-nationals or proxies for manufacture, service, etc. Liberalizing foreign investment flows has increased to spread market capitalism in countries like India, China, Russia, and Brazil which were predominately Socialist in structure, thus leading to a convergence of economic and foreign policy. 4. What is modularity, and how does it increase opportunities for global production? How does the governance of the global value chain affect the prospects for upgrading in a developing country? When is foreign direct investment most beneficial to economic development? Modularity involves parts that can be assembled autonomously and fit together with other modules in a production process that favors specialization and decentralization. To the degree that the developing world and its institutions are aware of the need for workers in a country as part of a multi-national corporate interest, there will be more attention to the affairs of that state due to economic respect. Foreign direct investment fuels development in emerging countries by providing much needed capital for expansion and growth in markets where the return can quickly be regained through sales, population growth, rise of the middle class, etc. 5. Should one be concerned about rising levels of inequality in the global economy? Is income inequality a necessary condition for economic development? Or alternatively, should national governments and global governance institutions aim to reduce widening income gaps? Evaluate these two competing intellectual perspectives and offer your opinion on the appropriate role of government in the global economy. Despite the huge wealth of the richest billionaires, there is improvement in many developing countries such as the BRIC nations that is drastically improving economic freedom and prosperity for the poorest as well as expanding the middle classes. Capitalism does require economic inequality fundamentally. There would be no concept of “rich” without a disparity of wealth economically. National governments should assist developing nations immediately and critically in addressing the emergency of global poverty. In comparison to the real suffering of Wall St. and the comparative good a “bailout” of the world’s poor would do, it is an important humanitarian policy response to meet the Millennium goals immediately, and expand from there. However, altruism and volunteerism is preferable to coercion in economic policy. Read More