27. Monetary Policy. Монетарная политика.

M onetary policy is the process by which the monetary authority of a country controls the M^S, often targeting i for the purpose of promoting economic growth and stability. Expansionary monetary policy is monetary policy that increases aggregate demand. Contractionary monetary policy is monetary policy that reduces aggregate demand. The goal of monetary policy is a "macroeconomic stability", thus - low unemployment, low inflation, economic growth, and a balance of external payments.

I nflation targeting (Fed) occurs when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target. However, it may damage economy by too high price level (inflation).In fact, there is monetary neutrality: changes in the M^S have no real effect on the economy. So, monetary policy is ineffectual in the long run.

The commonly used monetary policy instruments are the following:

Reserve Requirement is minimum reserve ratio for banks’ checkable deposits. If bank can’t meet the requirements, it borrows from federal funds market at federal funds rate determined by S&D for funds.

Open Market Operations: the Fed can increase or reduce the monetary base by buying government debt from banks or selling government debt (T-bills) to banks. An open-market purchase of T-bills increases the monetary base and the money supply and vice versa.

Lending by the Central Bank.

Federal Funds Market Rate.

Discount window is an arrangement in which the Federal Reserve stands ready to lend money to banks in trouble.

Exchange Rate. A country has a fixed exchange rate when the government keeps the exchange rate against some other currency at or near a particular target. A country has a floating exchange rate when the government lets the exchange rate go wherever the market takes it. Government purchases or sales of currency in the foreign exchange market are exchange market interventions. Foreign exchange reserves are stocks of foreign currency that governments maintain to buy their own currency on the foreign exchange market. Foreign exchange controls are licensing systems that limit the right of individuals to buy foreign currency.

Global Economics, International Financial Markets and International Banking

28. The Theories of International Trade. Теории международной торговли.

International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP).

Mercantilism is a trade theory that states that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports is called mercantilism. According to this theory other measures of countries' well being, such as living standards or human development, are irrelevant. Mainly Great Britain, France, the Netherlands, Portugal and Spain used mercantilism during the 1500s to the late 1700s. Mercantilist countries practiced the so-called zero-sum game, which meant that world wealth was limited and that countries only could increase their share at expense of their neighbors.

The Scottish economist Adam Smith developed the trade theory of absolute advantage in 1776. A country that has an absolute advantage produces greater output of a good or service than other countries using the same amount of resources. Smith stated that tariffs and quotas should not restrict international trade; it should be allowed to flow according to market forces. Contrary to mercantilism Smith argued that a country should concentrate on production of goods in which it holds an absolute advantage. The theory of absolute advantage destroys the mercantilist idea that international trade is a zero-sum game. According to the absolute advantage theory, international trade is a positive-sum game, because there are gains for both countries to an exchange. Unlike mercantilism this theory measures the nation's wealth by the living standards of its people and not by gold and silver.

Principle of comparative advantage, first introduced by David Ricardo in 1817. It states that a country should specialize in producing and exporting those products in which it has a comparative, or relative cost, advantage compared with other countries and should import those goods in which it has a comparative disadvantage.

In the early 1900s the Heckscher-Ohlin theory stresses that countries should produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. It states that a country should specialize production and export using the factors that are most abundant, and thus the cheapest. Not produce, as earlier theories stated, the goods it produces most efficiently. In 1953, Wassily Leontief published a study (Leontief Paradox), where he tested the validity of the Heckscher-Ohlin theory. Leontief found out that the U.S's export was less capital intensive than import, therefore the U.S would export capital-intensive goods and import labor-intensive goods.

Raymond Vernon developed the international product life cycle theory in the 1960s. It stresses that a company will begin to export its product and later take on foreign direct investment as the product moves through its life cycle. Eventually a country's export becomes its import.

New Trade Theory tries to explain empirical elements of trade that comparative advantage-based models above have difficulty with. These include the fact that most trade is between countries with similar factor endowment and productivity levels, and the large amount of multinational production (i.e. foreign direct investment) that exists. New Trade theories are often based on assumptions such as monopolistic competition and increasing returns to scale. One result of these theories is the home-market effect, which asserts that, if an industry tends to cluster in one location because of returns to scale and if that industry faces high transportation costs, the industry will be located in the country with most of its demand, in order to minimize cost.