International Political Economy

Topics: Monetary policy, Inflation, Central bank Pages: 16 (4603 words) Published: December 8, 2013
International Political Economy – Final Exam Notes
The Rise of International Political Economy
Classical Political Economy
Origins of Political Economy
Population and economic growth in the 19th century after a period of stagnation from 1500-1800 Moral philosophy in the 18th century began to focus on the economy when previously religiously based Example: Adam Smith applied philosophical explanations to how the economy works The rise of “economic philosophy”

Smith, Ricardo, Malthus, Mill and Marx
The philosophical process became less focused on the divine and more on human order The value of a product was dependent on the cost of that product The Marginal Revolution and the Birth of Economies

Studies of Marginal Utility and that humans are inherently utility maximizers As the governments increased their wealth in the 19th century (post Industrial Revolution), the advent of national accounting occurred to control taxation and therefore further increase wealth In the 20th Century, economic models distanced themselves from their moral philosophy roots of the 19th century and became increasingly quantitative Focused on the efficiency of the market

The switch from “classical” to “neoclassical” economics The Rebirth of Political Economy
Economics had replaced the term ‘political economy’ during the marginal revolution During the independence of many states during the 1950s and 1960s, Economics did not explain the emergence of newly developed economies The Free Market only applied to industrialized markets

When industries were “too efficient,” needed government intervention and a return to politics Income distribution, infrastructure, etc.
The Development of International Political Economy
The 1970’s and the Post-War Period
The development of “soft-powers”
Militaries without monetary/economic power
The growth of International Relations and its relationship to economics, not just political empires Began on the left with Marxism and Feminism, but skewed to the right to Conservatism Economics focuses on becoming more efficient, politics focuses on becoming more powerful Money

The Role of Central Banks
An institution that manages a state’s currency, money supply and interest rates Example: United States Federal Reserve, European Central Bank (ECB) Manages a state’s money supply through managing interest rates or implementing monetary policies Manages interest rates through buying and selling government bonds Acts as a lender of last resort for financial crisis and bank insolvency (inability of debtor to pay debt)

States require a deposit in order to take out a loan
Example: Canada’s deposit is 3% of the amount of the loan Definition: “Run on the Bank”
Rapid cash withdrawal by customers of a financial institution after customers worry the bank might become insolvent Demand cash or transfer funds to government bonds or other secure institutions Central Bank will attempt to prevent bank runs

Central banks set the reserve requirement
Shadow Banking System
Institutions and markets that carry out traditional banking functions outside of traditional purview Example: Investment Banks, Mortgage Companies
Carrying out traditional banking, just not in a bank
Doesn’t report to central bank

Money Supply and Liquidity
Definition: “Liquidity”
Availability/ability to buy and sell a commodity without strongly affecting the price Excess Liquidity: too much money (inflation)
Too little Liquidity: Constrained buying and selling (recession, possible deflation) Illiquid market: price increases with more consumers (increase in demand) The central bank controls the money supply of a state

Typically includes currency in circulation and demand deposits Inflation
The declining value of money/an increase in the general price level of goods and services Discourages depositing money in the bank
Demand pull: excess demand leads to inflation
Supply push: Supply of Money > Demand for Money...
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