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McGraw Hill’s
Economics Web Newsletter
Fall Issue, Number 5 of 7
Covering Week of October 29, 2001
Do You Remember
Article Analysis
Note to Instructors
The Economics Web Newsletter is for use as a tool when teaching the principles of economics. It
specifically references the Wall Street Journal editions of selected McGraw-Hill Principles of Economics
texts. Do You Remember presents five or more quick factual questions and answers covering several
articles that have appeared in the Wall Street Journal in the week preceding the newsletter. They make
good in-class quizzes when reading the Wall Street Journal is required. Article Analysis reprints one article
from the Wall Street Journal and poses five or more analytical questions and their answers with references
to text chapters.
The Economics Web Newsletter is written by Jenifer Gamber.
Publication Date: 11/5/01.
©Published by McGraw Hill. All Rights Reserved, 2001.
DO YOU REMEMBER?
If you have read the Wall Street Journal from October 29 th- November 2nd you should be able to answer the
following questions based upon important articles relating to economics. The reference at the end of the
answer tells you the date and page number where you can find the article that provides the basis for the
question.
1. Name one of the three steps Monday’s Outlook discusses in a trade-based strategy
designed to unite the world. Click for answer.
2. Which company recently won the largest government defense contract—Boeing
or Lockheed? Click for answer.
3. What is OPEC’s forecast for next year’s oil prices? Click for answer.
4. October is expected to be one of the best auto sales months in history. Why? Click
for answer.
5. Has the President signed an economic stimulus package after September11th to
jump-start the economy? Click for answer.
6. In Thursday’s Capital column, does reporter David Wessel believe economic
forecaster’s predictions of a mild recession is accurate, too pessimistic, or too
optimistic? Click for answer.
7. As a leading indicator what is the stock market predicting for the economy five to
six months from now? Click for answer.
8. Is manufacturing activity pulling the economy down or lifting it out of recession?
Click for answer.
ANSWERS TO “DO YOU REMEMBER?” QUESTIONS
1. Any one: (1) give foreign aid, (2) write off debt, (3) slash tariffs and quotas. (See
“Trade Craft Is Employed on War’s Economic Front” October 29, page A1.)
2. Lockheed. (See “Fighter-Jet Contract Adds Crucial Thrust to Lockheed
Rebound” October 29, page A1)
3. It is forecasting a price collapse for next year, unless OPEC members cut
production. (See “OPEC Warns of Price Collapse Next Year,” October 30, page
A2)
4. GM has offered 0% financing to counter the expected decline in auto demand
following the September 11th terrorist attack. (See “GM’s 0% Finance Plan Is
Good for Economy, Risky for the Company” October 30, A1)
5. No. The stimulus packaged is stalled in congressional debate. (See “Bush Urges
Action on Stimulus Package,” October 31, page A21)
6. Too optimistic. (See “Economists Confront Surplus of Uncertainty,” November 1,
page A1)
7. Expansion. (See “As Downturn Seems To Deepen, Stocks May Point to
Recovery,” November 1, page A1)
8. Pulling it down. The National Association of Purchasing Management’s index fell
from 47 in September to 39.8 in October. (See “Factor Activity Plummeted in
Wake of Attacks” November 2, page A2)
Return to Questions
The Outlook
The U.S. and Europe are counting on international trade as their longest-range weapon in
the war against terrorism.
The theory behind this strategy goes like this: Expanded trade wraps the world more
tightly in a web of commerce, lifting living standards in impoverished regions and
eliminating an important cause of war and terror. Since the Sept. 11 attacks, U.S. and
European trade hands have been working in overdrive: The White House has pushed
through Congress trade deals with Vietnam and Jordan and started advising Russia on
joining the World Trade Organization. The European Union has proposed cutting tariffs
on Pakistani textiles and lobbied for new global trade talks.
1. Use the concept of comparative advantage to explain how trade can lift living
standards. Why would this reduce the threat of terrorism?
"Trade cannot make peace, but trade can help," European Union trade minister Pascal
Lamy says. "If you look at history, strong trading relationships have very rarely led to
conflict."
But trade is a far more complicated phenomenon than the strategy suggests -- and can
work at cross-purposes to U.S. aims. In Southeast Asia and South Korea, trade played an
important role in lifting living standards. But equally strong commitments to universal
education and well-run governments were also in place.
Elsewhere, trade has been a destabilizer, opening traditional societies to modern
influences that have produced significant backlashes. That is especially true in the
Muslim world. Indonesia's government fell in bloody riots in 1998, in large part as a
result of the International Monetary Fund pressing Jakarta to further open the country's
trade and finance. Karl Marx praised free trade precisely because he believed it was a
force for revolution.
The growth of world trade provides succor for separatist groups in Sri Lanka and the
Basque region of Spain, who argue that their terror-laden campaigns for independence
make economic sense because new nations can thrive in the global economy. "When the
terrorist groups and their supporters speak in an international context, they want to be a
new country in Europe -- a part of the EU," says Edurne Uriarte, a political scientist at the
University of the Basque Country.
2. How can trade be destabilizing?
Harvard University economist Jeffrey Sachs says a trade-based strategy designed to unite
the world would require a far greater investment of money and political capital than the
U.S. and Europe have demonstrated. Economic policy would have to be focused on
aiding poor regions. As a first step, that means substantial aid for countries battered by
disease, drought and famine. Improvements in the health of those nations, and in their
environments, would be necessary before the countries could be expected to participate
fully in a global economy, Mr. Sachs says.
For decades, the U.S. has been moving in the opposite direction, with foreign aid now
accounting for only 0.6% of the federal budget; in 1962, it accounted for 3%. "We have
globalization on the cheap," Mr. Sachs says. "But we pay for it in the many cases of state
failure that lead to violence and war."
As a second step, the U.S. and Europe must push for massive debt write-offs and forget
about requiring impoverished nations to sign financial-reform plans in exchange for the
help, says Barry Eichengreen, an economist at the University of California at Berkeley.
The U.S. Treasury and IMF sometimes withhold debt relief until countries slash budget
deficits and state subsidies. But Mr. Eichengreen says many countries lack the political
will to take such steps and remain crushed by debt.
3. What is the role of the IMF? What is the downside to debt forgiveness?
A third step involves slashing tariffs and quotas for the steel, textiles, clothing and crops
produced by poor nations, even though increased imports could harm U.S. and European
producers. Until recently, the U.S. had been fighting with Pakistan in the WTO about
cotton-yarn imports and warning WTO members that it wouldn't change laws blocking
imports from poor nations that are "dumped" at below-market prices. A WTO
ambassador from a developing country says the U.S. talk of aid through trade amounts to
"self-serving statements."
This very issue will highlight next month's WTO meeting in Doha, Qatar. The U.S. wants
to launch a new round of trade talks. But developing countries, much as they did in
Seattle, say they won't sign on unless the U.S. addresses some of their concerns. These
countries have long complained that they benefit less from WTO rules than their richer
counterparts, partly because the products they care about are subjected to higher tariffs
and quotas than the products from the U.S. and EU.
4. What do the above statements about unequal tariff treatment suggest about who gains
from trade?
Demonstrating the tough road ahead, WTO diplomats in Geneva Sunday released a draft
declaration for the upcoming meeting. The draft avoids mention of a "new round" of
trade talks. Indeed, WTO officials say it remains unclear whether the organization will
manage to pave over the differences between the U.S. and the EU, on one side, and the
developing countries, on the other, in launching a new round of trade talks.
U.S. Trade Representative Robert Zoellick believes the U.S. can use trade to ease
political strife. "If we want to support countries over the long term in a conflict with
terror," he says, "we'll have to pay attention to the economic problems they have."
-- Bob Davis
ANSWERS TO ARTICLE ANALYSIS QUESTIONS
Refer to chapters 2, 3, 19, and 32 in Colander’s Economics and chapters 2, 3, and 16
Macroeconomics.
Refer to chapters 6 and 37 in McConnell and Brue’s Economics and chapter 6, 20, 22 in
Macroeconomics.
1.
The principle of comparative advantage says that if nations specialize in producing
those goods for whom they have a comparative advantage (lowest opportunity cost)
and trade for other goods, total production (and income, and therefore livings
standards) will rise. Although the article doesn’t tell us why higher living standards
will reduce terrorism, this idea is predicated on the belief that terrorism is in part
caused by unstable governments and a sense of unfairness as some people remain in
poverty while others live lives of plenty. Return to article.
2. Trade means the exchange of goods and services. Often with those goods and services
come the spread of ideas and a way of doing things that are at odds with a country’s
culture. Dramatic changes and/or introduction of new ideas can lead to unrest and
feelings that the dominant culture will subvert other cultures. Trade could also be
destabilizing if one country receives more of the gains from trade than another. The
article also mentions the observation that trade allows smaller sustainable nation sizes
so that small separatist groups can rally to break away from a “parent” country to
establish a new nation. This is politically destabilizing. Return to article.
3. The IMF deals with international financial arrangements. It offers loan repayment
plans to developing countries facing financial difficulties. The downside to debt
forgiveness is that countries may not develop the fiscal discipline needed to repay
loans and private banks may then be unwilling to extend new loans. Return to article.
4. Larger nations with greater economic, political, and military might will get a greater
share of the gains from trade. Return to article.
5. In the short run the winners are the insurance companies as well as the stockholders
of that insurance. In the longer run, the winners are also the firms who will continue
to be able to purchase insurance. The losers are taxpayers who will have to foot the
bill. The general rule of political economy is “when small groups are helped by a
government action and large groups are hurt by that same action, the small group
tends to lobby far more effectively than the large group; thus, policies tend to reflect
the small group’s interest. Not the interest of the large group. The small group in this
case is the insurance companies who will be far more effective at lobbying than
taxpayers as a whole. I would expect the bill to pass. Return to article.
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