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• Explain fixed and floating exchange rate Floating exchange rate: “flexible”, a countrys exchange rate typically fluctuates over time, CB/government make no attempt to peg the exchange rate against a base currency ( angebot und nachfrage bestimme den wechselkurs Fixed Exchange rate: “pegged”, exchange rate does not fluctuate at all (or only narrowly against some base currency over a sustained period, CB/Government intervention in the market for foreign exchange is needed to maintain the fixed exchange rate (CB kauft dollar, wenn dollar nachfrage zu gering
• Keynsian short term monetary policy changes under floating exchange rates. policy changes in home country (US) Increase of MS in home country. What are immediate consequences for us and G? LM in US shift down  (German interest rate higher than US) Imports of capital & supply of foreign exchange down i US, up in G Exports of capital & demand for foreign exchange up in US, down in G Excess demad for foreign exchange in US --> Value of currency down in US, up in G
• Short run monetary policy under floating exchange rates Adaptio of both economies due to the chage in own currencys value US home country increases MS, G no change Capital exports (buying foreign bonds are more expensiv/ cheaper for G) and demand for doreign exchange down in US, up in G Capital imports (buying domestic bonds cheaper because of weak$ for US), and supply for foreign exchange goes up in US, down in G  Exports of goods (selling domestic goods are cheaper for US), and supplz for foreign exchange goes up i US down i G Import of goods are more expensiv for US and demand for foreign ex goes down in us and up in G until supply of foreign exchange equals demand for foreign exchange •As exports of goods up­ (d) and imports of goods d(­u) (slide before)à Net exports ­ u(d) •Macroeconomic impacts due to change of interest rates:•Investment I ­ up(d) :  with idle capacities Þ Employment L, Production & Income Y up­ (d)  Þ positive  multipliers Þ macroeconomic demand Yd & Y­ up(d)
• Short-run monetary policy under floating exchange rates zwischenergebnisse a temporary monetary exoansion under fl exchange rates is effective in combating economic downturns by boosting output. It raises output at home, lowers the interest rate and reduces the value of the domestic currency. •       Floating exchange rate systems allow maintaining a Keynesian short-run monetary policy of a central bank in one country as well as a neoclassical long-run monetary policy of a central bank in another country. •       Hence, floating exchange rates are compatible with monetary policy autonomy despite diverging monetary policies as well as with free international capital mobility at the same time (the latter brings down the interest rate in the Foreign Exchange Market (“FX Market)”). •       However, as the case shows, the economic adaptation of economies with independent and diverging monetary policies and free international capital mobility requires exchange rate variations as the central adaptation mechanism in floating exchange rate regimes. As such exchange rates cannot be fixed at the same time.
• Short-run monetary policy under fixed exchange rates Assume that, in order to increase macroeconomic demand in a recession, the Keynesian British Central Bank *home" increases the money supply growth of M substantially while the neoclassical central bank in Germany leaves the money supply growth unchanged what are immediate consequences? •Central banks have to intervene if market forces push the exchange rate away from the predetermined level. LM in UK shifts down,   German interesta rate higher then UK Imports of capital and supply of foreig exchange go down in UK, up in G Export of C go up In UK down in G Excess demand for foreign exchange (Excess supply of  foreign exchange): Value of own currency: down in UK, up in G
• Short-run monetary policy under fixed exchange rates Assume that, in order to increase macroeconomic demand in a recession, the Keynesian British Central Bank *home" increases the money supply growth of M substantially while the neoclassical central bank in Germany leaves the money supply growth unchanged what is initial macroeconomic effect? and how do economies adapt? Initial dom macro effect> Investem up idle capacities god up, macroeconomic demand Yd and Y up Adaption> Value of ow currency in UK down in G up (as long as CB don ot have to intervene) When limits are reached (+- 2,5%) CB has to: sell (buy) foreign currency à Domestic MS goes down in UK, up in G  andere waehrung verkaufen (kaufen) damit angebot steigt (faellt)
• Short-run monetary policy under fixed exchange rates Assume that, in order to increase macroeconomic demand in a recession, the Keynesian British Central Bank *home" increases the money supply growth of M substantially while the neoclassical central bank in Germany leaves the money supply growth unchanged what happens as domestic MS falls in UK up in G General M- i effect: 1.       Interest rate up, foreign bond profitability for domestic investors down in UK due to cheap pound --> Capital exports and demand for foreign exchange down in UK Profitabity of domestic bonds for foreigners ­up in UK dow in G) due to cheap pound   Capital imports and supply of foreign exchange ­up in UKdown in G Short run MY Effect as MS downLM down & interest rate upInvestment down,   Income Y down,     Domestic Macroeconomic demand Yd down,    Imports of goods down,    Demand for foreign currencies down Long Ru M-P effecy: Inflation rate down eports of goods are cheaper due to cheap poundExports of goods and supply of foreign exchange up, Imports of goods are more expensive due to cheap pound , Imports of goods and demand for foreign exchange down  EMS case: Under fixed exchange rate, autonomous monetary policy is not an option, because of lower I implies the exchange rate must deoreciate and rises and is inconsistent
• what are sterilized interventions? Steriliyedterventions: Cb purchase or sale of foreign exchane in the market, the aim is to influence the exchange rate. If action has no effect on short term interest rate à sterlized intervention; if i changes non-sterlized intervention •In a recession, a Keynesian British central bank will find the mandatory sales of foreign currency (German marks)  undesirable, as these reduce the British money supply M and worsen the recession.•To compensate this undesired effect, the British central bank, after having intervened =  reduced the UK money supply, may try to „sterilize“ this undesired effect with an expansionary domestic monetary policy, e.g. buying UK bonds against British pounds (open market monetary policy) Ein anderes Beispiel einer sterilisierten Intervention wäre, dass die Zentralbank ausländische Wertpapiere kauft und zugleich inländische Wertpapiere verkauft, jeweils gegen die inländische Währung. Damit bleibt die Geldmenge im Inland konstant, während im Außenverhältnis eine Abwertung der Währung stattfindet, die aus der durch den Eingriff veränderten Angebots- und Nachfragesituation der in- und ausländischen Wertpapiere resultiert.[1] Eine vollständige geldpolitische Abkoppelung ist durch Sterilisation nicht zu erreichen, da sich die Kompensation auf das Zinsgefüge auswirkt.
• What is the incompatible trinity of fixed ex r? Countries with fixed exchange rate systems cannot maintain 1) autonomous monetary policy 2) fixed exchange rates and allow for 3) capital mobility
• What is a currency crisis? •in which public confidence in the central banks’ ability to defend a certain exchange rate peg is lost•in which speculators therefore “attack” the fixed exchange rate by selling the currency speculating for a future devaluation of the currency•in which the central bank has to intervene by buying more and more domestic currency, thereby losing its official reserves
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• Fiscal policy under fixed exchange rates Increase in government spending: IS right, i goes up, raise domestic return, exchange rate would tend to appreciate away from fixed rate and monetarz authority would intervene, MS expands and shift LM down, i is unchanged, so the peg holds (higher output)
• Fiscal policy under floating exchange rates: : Increase in G -> IS right, i rises, higher domestic return-> exchange rate appreciates ( DR goes up and exchange rate left),  Y increases, equlibrium shifts along LM i rises, (decrease in I), ex appreciates (decreasing net exports), demand falls. Fiscal expansion= partial crowding out (increase in G-> decline in private spending)temporarz effective (raises domestic output and i, apperciation of ER and decreases net exports)
• Precondition and dis+advantages of fixed and flexible ER •       Preconditions of FER: Economic integration, measured by trade and other transactions (As integration rises, the efficiency benefits of a fixed exchange rate increase. Economic similarity, measured by similarity of shocks (the countries face more symmetric shocks and fewer asymmetric shocks, then the economic stabilization costs to home of fixing its exchange rate to the base become smaller) •       Harmonization of Monetary Policy measured by ability to adjust to shocks without monetary policy conflicts  (the Incompatible Trinity (Trilemma) shows, monetary policies have to be harmonized if the fixed exchange rates and capital mobility are to be maintained)
• Preconditions of Optimum currency areas and what it is To decide whether joining the currency union serves its economic interests, a country must evaluate whether the benefits outweigh the costs.Economists refer to a monetary union as an optimum currency area (OCA) when the countries involved make a decision that best serves their self-interest—that is, an optimizing decision Currency union: 1 FER Regime  2. With FER pegged to a 1:1 relation which cannot be changed in future 3. Without an explicit exit option Single currencz area is much stricter FER regime than ordinarz FERS (allow revaluations and devaluatioins and include an exit option) Characteristics FER:  1. single currency area must fulfill prerequisits of any FERS:a) economic integration      b) economic similarity    c) harmonization of monetary policy In ordinary fixed exchange rate systems, the pegs can be revaluated or devaluated if conditions a) to c) are not perfectly given or temporarily absent.
• what single currency areas? 3. To take account of this lack of adaptation alternatives, single currency areas can: - Minimize the necessity of adaptation to imbalances- Minimization of this necessity requires member countries of a single currency area to comply even more strictly with the preconditions of “economic integration”, “economic similarity” and  “harmonization of monetary policies”- Moreover, also other economic policies have to be harmonized to mitigate causes of imbalances and resulting need for adaptation (e.g.: EU fiscal policy, labor market policies etc.)
• euro-are: pre requisites of new members Rules of the Club: rules for admission to the euro zone. Convergence criteria need to bes satisfied for entry (3 nominal measure & 2 fiscal discipline) Nominal Convergence: Under a peg, ER must be fixed/ not vary beyonf limits; purchasing power parity (ppp) implies 2 countries inflation rates must be very close, uncovered interest oartity (UIP) implies 2 countries long term nominal i must be very close Exchange rate, inflation rate, long term nominal interest rate, government deficit, government debt Fiscal Discipline: causes of inflation as being fiscal;Aim openly aim at constraining fiscal policy  (governments debts and deficits cannot be above certain reference levels) - Stability and growth pact (SGP) before euro: Fiscal deficit levels <  3% of GDP, debt levels < 60% of GDP.- No bail out clause (other €-area Member States are not supposed to assist €-area countries to overcome  problems related to their excessive deficits and debts )- ECB ist not allowed to finance governments and their deficits Stability and growth pact:•Fiscal deficit levels <  3% of GDP, debt levels < 60% of GDP.
• Characteristics optimum areas 1. FER: it must fulfill the prerequisits of any fer system: economic integration,  economic similarity and harmonization of monetary policy 2. RE- Devaluation & exit:•In a single currency area revaluations and devaluations are no more possible and an exit is much more difficult and costly than with an ordinary fixed exchange rate system, e.g.: •As in a common currency area options to devaluate or revaluate are absent and an exit option is much more costly, these adaptation mechanisms of ordinary fixed exchange rates are missing.
• potential benefits of a common currency Common Monetary Policy + Nominal Anchoring: Stability gains •High-inflation countries are more likely to want to join the currency union, the larger are the monetary policy gains of this sort.cy + Nominal Anchoring: Stability gains Potential Political Objectives and benefits In the best case, for countries which do not fully comply with the preconditions of optimum currency areas , economic costs to forming a currency union exist, but these are outweighed by the political benefits.  “ also goal to achieve peace in Europe after centuries of wars”
• Weaknesses and limitations of the convergence criteria. and what is it? Nominal Convergence •Under a peg, the exchange rate must be fixed or not vary beyond tight limits.•Purchasing power parity (PPP) then implies that the two countries’ inflation rates must be very close.•Uncovered interest parity (UIP) then implies that the two countries’ long-term nominal interest rates must be very close. •The way the rules were written forces countries to converge on the lowest inflation rates in the zone.•The Maastricht criteria ensure that high-inflation countries attain credibility by demonstrating their commitment to low inflation before they are allowed in. •This process supposedly prevents governments with a preference for high inflation from entering the Eurozone.•All current euro members successfully satisfied these rules to gain membership, and the end result was marked inflation convergence as shown in Figure 10-7. Current and future ERM members are required to go through the same test. •The convergence criteria were supposed to ensure that €-area member countries would have to enter and continue with similar monetary and fiscal policies. Policy harmonization should also be identified by the exchange rate criterion (stable exchange rate without devaluation).  •Based on the convergence criteria “tests”, the EU hoped to reap the benefits of a single currency. 1. . involve asymmetric adjustments that take a long time. German preferences on inflation and fiscal policy were imposed at great cost on other countries 2. fiscal rules are seen as inflexible and arbitrary. The numerical targets have little justification, and well-established short-run arguments for the use of countercyclical fiscal policy are ignored. 3.  do governments that subjected themselves to budgetary discipline and monetary conservatism really change or did they just go along with the rules to get in?
• Shortcoming of the stability and growth pact and what it is The Stability and Growth Pact •Thus, before the introduction of the € in 1997, at Amsterdam, the EU adopted the Stability and Growth Pact (SGP). Its rules include: •Fiscal deficit levels <  3% of GDP, debt levels < 60% of GDP.•Beyond surveillance, the SGP includes enforcement devices, e.g. early warning policy advices and for euro area Member States the possibility of financial sanctions like penalty payments of up to 0.1 % of a country’s GDP Surveillance failed because member states concealed the truth about their fiscal problems. Punishment was weak, so even when “excessive deficits” were detected, not much was done about it.surveillance, punishment, and commitment all quite predictably weakened once the euro was up and running.When countries suffered from high debts in the crisis, they were forced to save which accelerated the crisis as well as unemployment and social problems. With the conomic and fiscal crisis many countries ran into fiscal deficits which challenged the sustainability of their state debts.As the Stability and Growth pact was violated by all countries, €-countries established very different fiscal policies violating the necessary economic similarity a) real GDP b) unemployment rate c)government struuctural budget balance d) government long term interest raate e) government gross debt/gdp ratio f)nominal bank credit to residents
• general deficits and limitations of the euro zone •       No Fiscal UnionThe Eurozone lacks a political-fiscal union, and has no fiscal policy tools, because there is no central budget that can be used to engage in cross-country stabilization of shocks. This is in large part due to the absence of a central European government (executive power) standing above the sovereigns (the member states). •       No Banking UnionThe Eurozone also has lacked even the minimal political-fiscal cooperation to create a banking union, meaning that responsibility for supervising banks, and resolving or rescuing them when they are insolvent, rests with national sovereigns. •       Exit Risk Events have shown that the risk of a country’s exit can put financial pressure on that country. If investors/speculators suspect that a country will exit the Eurozone, they will want to pull their capital out of the country’s banks and sell its debt to avoid potential losses.
• alternative adjustment channels for European union Labor market Integration: In an asymmetric shock, labor market integration provides an alternative adjustment mechanism through migration Fiscal Transfers: if fiscal policy is not independent -> Fiscal federalism; if home suffers a negative shock, fiscal transfers from foreign allow more expansionarz fiscal policy in home
• What is the theory of currencz optimum areas? and characteristics •To decide whether joining the currency union serves its economic interests, a country must evaluate whether the benefits outweigh the costs.•Economists refer to a monetary union as an optimum currency area (OCA) when the countries involved make a decision that best serves their self-interest—that is, an optimizing decision •To assess the preconditions, costs and benefits of a single currency area, a currency union can be characterized as:1.a fixed exchange rate regime2.with fixed exchange rates pegged to a 1:1 relation which cannot be changed any more in the future3.and without an explicit exit option. A Single Currency Area is a much stricter fixed exchange rate   regime than ordinary fixed exchange rate systems which allow   revaluations and devaluations and include an exit option.
• the euro area, an optimal currency area? OCA Criteria for the Eurozone and the United States Most economists believe that the United States is much more likely to satisfy the OCA criteria than the EU is. Why? Data in panel (a) show that interregional trade in the United States rises to levels much higher than those seen among EU countries. OCA Criteria for the Eurozone and the United States (continued) Data in panel (b) show that U.S. and EU shocks are comparably symmetric. •On the OCA criteria, the €-area falls short of the United States as a successful optimum currency area.•Relative to the U.S., in the €-area goods market integration is weaker, fiscal transfers are negligible, and labor mobility is low. At best, economic shocks in the EU are fairly symmetric, but this gives only limited support for a currency union given the other shortcomings.•Most economists think there are still costs involved when a country sacrifices monetary autonomy. •On balance, economists tend to believe that the EU, and the current Eurozone within it, were not an optimum currency area in the 1990s and that nothing much has happened yet to alter that judgment.
• Why does trade occur? (1)Non-availability of goods➤permanent or temporal? (2)Market size and distance between markets (“gravity models”)(3)Economies of scale and imperfect competition create productive advantages for countries  (4)  International differences in relative prices and costs ➤due to differences in labor, physical capital, natural resources and technology create productive advantages for countries.➤Ricardo: differences in productivity of labor crucial➤Heckscher-Ohlin: differences in relative factor endowments with labor, labor skills, physical capital and land are crucial➤due to differences in demand conditions
• explain the Ricardian model Ricardian Model I 2 countries: Domestic and foreign, 2 goods cars (PC) and sugar (PS); labor is only resource important for production and is in both fully employed (supply of labor is constant and given), no migration, Labor productivity can vary across cosntant but is constant across time, Peferct competition (labor theory of value), Competition leads to equal wages in both industries within a country, constant economies of scal , no transportation cost , no trade barriers You start with two nations and 2 products: sugar and cars. Same workload (100h)An absolute advantage is when one nation produces one good cheaper (sugar) and the other nation produces the other good much cheaper, so each nation has a positive advantage of producing one goodRicardian says that even if one nation is producing both products much cheaper than the other nation, one nation has a relative advantage over the other nation. That happens if the opportunity costs of producing one good is lower in the country than in the other country. Each nation has to concentrate on producing on good. Eg country A produces sugar for 10h   per kg and meat for 20h  country B sugar for 5h and meat in 15 h per kilo.  Country A can produce 1 kg sugars for 0,5 kg meat  and 1 kg meat for 2 kg sugar, B can produce 1kg sugar for 1/3 kg meat and 1 kg meat for 3 kg sugar. A has a comparative advantage in producing meat (cheaper)  (producing only meat now!) AND B has a comparative advantage in producing sugar
• what is a comparative advantage? A “comparative advantage” (or “relative advantage”) compares the degree of (dis-)advantage. A country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower in the country than it is in other countries. A country with a comparative advantage in producing a good uses its resources most efficiently when it produces that good compared to producing other goods. Ricardo shows that both countries can gain from trade if each country specializes on the production of the good with a comparative advantage.
• what instruments directly affect import or export prices? Tariffs Export Subsidies Export Credit Subsidies Red Tape: Obstacles and barriers caused by excessive bureaucratic regulation
• which instruments directly affect trade quantities? Import Quotas Voluntary Export Restraints Local Content Requirements National Procurement Red Tape
• What happens when a tariff on a small country is introduced? 1. “Price effects”: As a consequence of the import tariff in a small country, the world market price Pw is not affected. The domestic price increases to Pw+t.2- “Effect on demand”: Due to higher domestic prices, domestic demand will decrease to D2.3. “Effect on domestic production”: Due to higher domestic prices, domestic production will increase to S2.4. “Trade balance effect”: The country’s trade balance = Ex - Im improves due to lower imports.5. “Terms of trade effect”: The terms of trade of the small country will not change as the world market price is not affected. Winner: Domestic producers who receive higher prices gain producer surplus +a & domestic government due to tariff revenues of +c Losers: Domestic consumers who have to pay higher prices Loss of consumer surplus –(a+b+c+d) è Net welfare loss: -(b+d)     (efficiency loss due to productio distortion b and consumption distrortion d)
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• what happens when a tariff on a large coutry is introduced? 1. “Price effects”: As a consequence of the import tariff in a large country, demand at the world market will decrease, i.e. the world market price decreases to Pw+t. The domestic price increases to Pw+t.2. “Effect on demand”: Due to higher domestic prices, domestic demand will decrease to D2.3. “Effect on domestic production”: Due to higher domestic prices, domestic production will increase to S2.4. “Trade balance effect”: The country’s trade balance = Ex-Im improves due to lower imports.5. “Terms of trade effect”: The terms of trade of the country will improve as a consequence of lower import prices PW’ at the world market. Winners> Domestic produces who receive higher prices gains of producer surplus +a, domestic governemnt due to tariff revenues of +c+e Loosers: Domestic consumers who have to pay higher prices loss of consumer surplus – (a+b+c+d) è Net welfare effect> +e – (b+d)Terms of trade gains          Efficiency loss due to production distortion b and consumption distortion d
• what is an import quota? Restriction on the quantity of a good that may be importet.A binding import quota will push up the price of the import because the quantity demanded will exceed the quantity supplied by domestic producers and from imports An import quota always raises the domestic price of the imported good When a quota instead of a tariff is used to restrict imports, the government receives no revenue.Instead, the revenue from selling imports at high prices goes to quota license holders: either domestic firms or foreign governments. these extra revenues are called quota rents
• Import quotas and VER Welfare effects of import quotas depend on the allocation of the quota rent and thus on the way the import quota is managed1. Issuing import licenses free of charge to domestic firm ( importing firms will buy the good in a quanitytz of licenses they hold, pay world market price and sell it locally at higher price àQuota rent accrues to domestic firm but Rent seeking activities reduce national welfare 2. Auctioning off the import licenses (Domestic country’s government adopts the quota rent which still remains in domestic country) 3. Voluntary export restraints (VER) – next subsection  (As the government of the exporting country will implement the quota, the quota rent accrues to the exporting country)
• What is a VER? limits import quantities like an import quota except that the quota is imposed by the exporting c rather than the importing c. Licenses are assigned to foreign goverments or foreign corporations. Usually requested by the importig c VER negotiated by governments and imposed on exporters are no longer allowed under WTO rules. However, in the 2013 EU-China solar panel dispute, Chinese producers (not the government) “agreed” to limit their exports to the EU. àThe profits or rents from this policy are earned by foreign governments or foreign producers.  Foreigners sell a restricted quantity at an increased price. A VER is more costly to a country than a tariff that limits exports by the same amount. What would have been revenue under a tariff becomes rents earned by foreigners under the VER – and foreign country’s terms of trade increase. Compared with free trade, its second best alternative for foreign country but less disadvantages than other trade policies (red tape)The VER causes an extraordinarily high loss for importing countries.
• what is the theory of collective action? •Political activity on behalf of a group, notably lobbying, is a public good: benefits accrue to all members – also to free-riders. While consumers as a group have an incentive to advocate free trade, each individual consumer has no incentive because the individual benefit is not large compared to the cost and time required to advocate free trade.Each consumer will try to benefit as free-rider from other consumers fightig for free trade, thus C not able to effectively organize their interests in groups (collective action problem)
• how can problem of collective action be best overcome? the group is small, because members can monitor and sanction each other’s free-riders more easily than in large groups and each individual can then expect a significant share of the benefits from the joint political activity; individual gains from the collective actions are large; group members are homogenous = share the same interests large groups provide ‘selective incentives’ exclusively to members
• Problem of Trade warfare Each country is better off with protecting   (prisoners dilemma). If countries both act unilaterally to protect there is a trade war  both worse off. Best is for both free trade. A trade war could result if each country has an incentive to adopt protection, regardless of what other countries do. All countries could enact trade restrictions, even if it is in the interest of all countries to have free trade.
• WTO and International Trade Negotiations •Multilateral negotiations help avoid a trade war between countries, where each country enacts trade restrictions.•If Japan and the U.S. can establish a binding agreement to maintain free trade, both can avoid the temptation of protection and both can be made better off.In doing so, if the damage has already been done, both countries can agree to return to free trade. •Countries need an agreement that prevents a trade war or eliminates the protection from oneThe General Agreement on Tariffs and Trade was begun in 1947 as a provisional international agreement and was replaced by a more formal international institution called the World Trade Organization in 1995
• WTO trade restricition ways: 1.Reduction of tariff rates through multilateral negotiations.2.Binding: a tariff is “bound” by having the imposing country agree not to raise it in the future.3.Prevention of non-tariff barriers: quotas and export subsidies are changed to tariffs because the costs of tariff protection are more apparent.Subsidies for agricultural exports are an exception. Exceptions are also allowed for “market disruptions” caused by a surge in imports or “urgent national security issues”.
• How does the independence of monetary policies differ depending on the choice of a floating or fixed exchange rate system? Explain your answer Under fixed exchange rate, autonomous monetary policy is not an option, because of lower I implies the exchange rate must deoreciate and rises and is inconsistent, fixing Er equals giving up  monetary policy  autonomous à fixed er and free international capital mobility requires variations of MS à incompatible trinityMonetarz poliy more effective under floating ER only short run (requires harmonization)Fiscal policy more effective with fixed er
• Explain why fixed exchange rates, independent monetary policy and free capital mobility are incompatible in the long run. Incompatible trinity -> only till reserveses run put. CB can not forever buy/sell foreign currency, at some point there is no more money.  DECLINE OF CURRENCY RESERVES
• 16. How well does the €-area fit with the optimal currency area theory’s requirements? Which requirements are met more which less? What are the consequences? Integration Criterion: interregional trade is much less the US;  Shocks are comparably symmetric (Symmetry Criterion); US labor markets are very integrates compared to those of EU (Labor mobility criterion); Fiscal Criterion : interstate fiscal stabilizers are large in US but nonexistent in EZ Relative to the U.S., in the €-area goods market integration is weaker, fiscal transfers are negligible, and labor mobility is low. At best, economic shocks in the EU are fairly symmetric, but this gives only limited support for a currency union given the other shortcomingsOn balance, economists tend to believe that the EU, and the current Eurozone within it, were not an optimum currency area in the 1990s and that nothing much has happened yet to alter that judgment.
• 13. Explain why the last two fiscal rules are also supposed to be obeyed by members even after entry. openly aimed at constraining fiscal policy. The rules say that government debts and deficits cannot be above certain reference levels. A country with high nominal debt will lobby for high inflation once in the union (because inflation destroys the real value of the government’s debt). è Policy harmonization; provide political evidence about the similarity of countries regarding inflation and interest rates; rising symmetrie Because they strengthen economic similarities between future euro area member countries
• 4) Explain the determinants of wages in a Ricardian world with international trade. 1)    As higher wages can be paid if labor productivity is higher, there may be large differences in wages between domestic country and foreign country if labor productivity differs in both countries. If the relative productivity of a country in producing a good is higher than the relative wage, then the good will be produced with cost advantages in that country. If it is lower, it will be imported
• Does international trade reduce low-skill wages and exploit workers in poor countries? Explain your argument by using a Ricardian framework. No, because specializing on their comparative advantage low-wage foreign country focuese on the production on the good with comparative advantage. If they do not trade they would also have to produce the good with comparative disadvantage. This production has lower wages. Average wages would be below the wages of production of the good with comparative advantage
• 1) What are the main differences in consequences of international trade if we do not suppose a Ricardian world but open economies with two or more production factors? 1)    That one country loses and one wins. A country will specialize on the production (and thus the export) of a good which uses the relatively abundant (and thus relatively cheap) production factor with relatively high intensity Trade due to differences in relative factor endowments leads to an               equalization of (relative) factor prices (wage-interest-ratio)               between trading countries
• 2) Which production factors will countries specialize on with multiple factors of production? They specialize on a good which uses relatively abundant production factor (relatively cheap) with relatively high intensity.
• Please reflect why labor unions may sometimes – from the viewpoints of their organization and members – rationally oppose global trade. Because in the short run both firms loose Because specialization = outsorcing, less low skilled work or unemployment or they have to learn smth new. Wages wouldnt be as high as with global trade
• explain Heckscher ohlin thesis heckscher-Ohlin theory / “Factor-Proportions Theorem”   A country will specialize on the production (and thus the export)   of a good which uses the relatively abundant (and thus relatively   cheap) production factor with relatively high intensity Thesis 2: “Factor Price Equalization Theorem”   Trade due to differences in relative factor endowments leads to an   equalization of (relative) factor prices (wage-interest-ratio)   between trading countries
• basic assumptions of Heckscher ohlin •Two homogeneous production factors: labor (L), capital (C)•Two countries with different relative factor endowmentsHome country: capital-abundant Foreign country: labor-abundant •Two homogeneous goods with different relative factor intensitiesCapital-intensive commodity: production requires a relatively high capital intensity (= capital/labor ratio C/L), e.g. cars (Low-skilled) labor-intensive commodity: production requires a relatively low capital intensity, e.g. textiles •Technology of production is identical in both countries•Tastes and preferences are the same in both countries •Perfect competition on goods and factor markets in both countries•Factors are perfectly mobile between industries within each country and immobile between countries. This implies equal wage-levels in both industries and equal interest rates in both industries.•There are no transportation costs•Final output of goods can be traded freely

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