Deck 15: Trade and Policy Reform in Latin America

Question 1

Import substitution industrialization in Latin America

A)relied on increased exports.
B)provided subsidies for exports.
C)shifted the bulk of exports away from primary commodities.
D)created disincentives to export.
E)Answers A and C are correct.

Answer 1

D

Question 2

Describe the policies that would be associated with Import Substitution Industrialization.What are the primary criticisms of these policies?

Answer 2

Replacing imported manufactured goods with domestically produced products is the basis of import substitution.Tariffs and other trade restrictions were used,the government created or supported new industrial development,and in general the policies were aimed at reducing the need for foreign exchange earnings.Criticisms include that governments misallocate resources when they become too involved in the production process.Exchange rates were often overvalued.The policies favored urban over rural areas.Inequality often worsened.There was widespread rent seeking activity.

Question 3

Indirectly,overvalued exchange rates in Latin America caused

A)a capital shortage in agriculture.
B)a capital shortage in industry.
C)a capital abundance in agriculture.
D)a growth in incomes in rural areas.
E)an increase in competitive pressures faced by industry.

Answer 3

A

Question 4

Raul Prebisch was an Argentine economist who argued that

A)the terms of trade would decline for primary commodity exports.
B)the terms of trade would decline for manufactured goods exports.
C)imports substitution policies were a solution to export pessimism.
D)Both A and C.
E)Both B and C.

Question 5

The terms of trade (TOT)is defined as

A)(index of export prices)/(index of import prices).
B)(home-country currency)/(foreign-country currency).
C)
D)
E)having a competitive advantage over other nations.

Question 6

What benefits did an overvalued currency offer a domestic economy in the ISI period? Which sectors were typically harmed by overvalued currencies?

Question 7

ISI policies were brought to an end primarily by

A)their inability to solve the crises of the 1980s.
B)authoritarian governments interested in total control over the economy.
C)populist politicians.
D)the growing perception that they were creating long-term economic inefficiencies.
E)Both A and D.

Question 8

Proponents of ISI assumed that governments

A)were capable of identifying and correcting market failures.
B)were capable of identifying and correcting the excesses of economic populists.
C)should enact orthodox stabilization plans.
D)could control the terms of trade.
E)Both A and D.

Question 9

Overvalued exchange rates were a persistent problem under ISI policies.In part,this was a deliberate policy in order to

A)increase imports.
B)discourage exports.
C)help targeted industries sell their exports.
D)help targeted industries buy imports.
E)increase the competition for targeted industries.

Question 10

Latin America

A)is significantly smaller than the NAFTA market in terms of population.
B)has a smaller population,but a larger GDP than the NAFTA market.
C)has a larger population than the NAFTA market.
D)is similar in population to the NAFTA market.

Question 11

The first phase of a typical cycle of economic populism is usually

A)hyperinflation.
B)rising growth and rising wages.
C)falling growth and falling wages.
D)rising unemployment.
E)severe disinflation.

Question 12

From 1900 to 1960,Latin America's real GDP grew

A)slower than Europe,Asia,and the U.S.
B)as fast or faster than Europe,Asia,and the U.S.
C)faster than Europe and the U.S.but slower than Asia.
D)faster than Asia,but slower than Europe and the U.S.

Question 13

The concept of "economic pessimism" stems from

A)the theory and empirical fact which states that developing nations face declining export prices relative to increasing import prices.
B)the fact that economic growth in an era of globalization is difficult to attain.
C)the fact that smaller countries would not enjoy comparative advantage unless they are allowed to subsidize some of their industries.
D)the fact that it is impossible to achieve desired economic development without adopting full democratic principles.
E)None of the above.

Question 14

What is the primary reason exchange rates were overvalued under ISI?

Question 15

The terms of trade are

A)the terms negotiated in a trade agreement.
B)exports plus imports divided by GDP.
C)the value of the real exchange rate.
D)taxes plus transaction costs paid on imports.
E)the ratio of export prices to import prices.

Question 16

According to Prebisch and other ISI theoreticians,countries should begin to shift their comparative advantage away from primary commodity production by first producing

A)industrial goods such as pumps and generators.
B)complex consumer goods such as autos and appliances.
C)advanced industrial goods such as chemical and electronics.
D)simple consumer goods such as food products and textiles.
E)minerals and agricultural products.

Question 17

Rent seeking

A)is unlikely the more heavily engaged government planners are with the economy.
B)is more likely where institutions are strong.
C)is not likely to lead to waste and efficiency.
D)is more likely when government policy creates something of value that government officials are charged with distributing.

Question 18

Which four nations account for most of the population and economic activity in Latin America?

Question 19

Latin America has more trade agreements than any other region,and it has some of the oldest as well.

Question 20

Inflationary tendencies and even hyperinflation in many Latin American countries have been exacerbated by the tendency of governments to

A)tax too heavily.
B)regulate too heavily.
C)print money to finance policies to stimulate the economy.
D)keep out foreign competition.
E)use industrial policies to foster growth.

Question 21

The Baker Plan for addressing the debt crisis was based on the assumption that

A)most countries would eventually default on their debt.
B)forgiveness of some of the debt was inevitable.
C)renewed lending by U.S.and European banks would undermine push for economic reforms.
D)hyperinflation would eventually reduce the real value of the debt.
E)renewed lending by U.S.and European banks would restore growth and make the debt manageable.

Question 22

What do structural reform policies emphasize?

Question 23

The main difference between stabilization policies and structural reform policies is that stabilization policies

A)focus on microeconomic issues and structural reform policies focus on the macroeconomic environment.
B)focus on macroeconomic issues and structural reform policies focus on the microeconomic environment.
C)are rarely used by reform governments;they prefer to use structural reform policies in their place.
D)have smaller economic impacts than structural reform policies.
E)create less unemployment than structural reform policies.

Question 24

The external shock that hit Mexico and other Latin American countries in the early 1980s that caused the Lost Decade was a collapse in world oil prices.

Question 25

The Lost Decade began in 1990 when Colombia announced that it lacked the international reserves it needed to pay the interest and principle due on its foreign debt.

Question 26

At the end of the populist cycle,workers are better off than they were before the populist cycle began in terms of real wages and job creation.

Question 27

The reform movements that began in many Latin American economies in the late 1980s favored

A)competitive devaluations.
B)stronger military budgets.
C)imports substitution policies.
D)a stronger role for markets and more openness.
E)more government regulation of industry.

Question 28

Latin American economies have become relatively more closed to international trade since 1985.

Question 29

Most analysts in the United States and the international financial community initially perceived the debt crisis as a temporary,short-run liquidity problem so they advised increasing capital flows to Latin America.

Question 30

The Baker Plan emphasized renewed commercial bank loans as a way to restart capital flows to Latin America.

Question 31

The difference between an orthodox stabilization plan and a heterodox stabilization plan is that the orthodox plan

A)targets the problem of inflation,while the heterodox plan targets unemployment.
B)reduces trade flows less than the heterodox plan.
C)does not include higher taxes and the heterodox plan does.
D)does not include wage and price controls and the heterodox plan does.
E)eliminates budget deficits,while the heterodox plan only reduces them.

Question 32

While the Brady Plan did not end the debt crisis,it was a significant step toward greater stability in the Latin American region.

Question 33

The Lost Decade refers to the years between approximately

A)1975 and 1985.
B)1980 and 1990.
C)1987 and 1997.
D)1972 and 1980.
E)1960 and 1970.

Question 34

Populist policies are not successful even in the immediate short run at stimulating the economy and creating jobs.

Question 35

The accumulation of international debt increased the debt service requirements of the indebted countries.After the debt crisis began,this caused

A)the adoption of expansionary policies to return to growth.
B)large capital inflows to service the debt.
C)the adoption of strongly contractionary policies to reduce consumption and government deficits.
D)an intensification of industrial policies targeted on import substitutes.
E)a reduction in inequality.

Question 36

Private capital flows in the form of both direct and portfolio investment began to return to Latin America after 1989,effectively marking the end of the Lost Decade.

Question 37

Which of the following is NOT a characteristic of populist regimes?

A)Nationalistic ideologies
B)Focus on economic growth
C)Focus on income redistribution
D)Using economic tools to reach specific goals regarding labor,the orientation of business or the role of foreigners
E)Focus on controlling inflation

Question 38

One of the main causes of economic inequality in Latin America is the

A)failure of governments to support urban consumers.
B)lack of progress in raising agricultural productivity.
C)lack of governmental interest in solving the problem of inequality.
D)focus of governments on agricultural exports to the detriment of food production.
E)oil crisis of the 1970s.

Question 39

Alan Garcia

A)in his first Presidency in Peru,followed free market economic policies.
B)nationalized the property of the financial services sector during his first Presidency.
C)was never freely elected in Peru and ruled with the support of the military.
D)maintained balanced budgets and helped Peru avoid the economic problems most Latin American nations were experiencing in the 1980s.

Question 40

Reform of a country's trading system,including the reduction or elimination of trade barriers,is an example of

A)an orthodox stabilization plan.
B)a heterodox stabilization plan.
C)economic populism.
D)import substitution industrialization.
E)structural reform.

Question 41

A heterodox model would not call for freezing wages and prices,but an orthodox one would.

Question 42

An orthodox model calls for cutting government spending,reforming the tax system to increase compliance and revenues,and limiting the creation of new money.

Question 43

Briefly describe orthodox stabilization policies.

Question 44

What economic problems persist in Latin America? How has this shaped recent policy in the region and why are changes particularly challenging?

Question 45

What is called for with heterodox stabilization policies?