Question

1. What three critical factors or preconditions turned a national, U.S. problem
into a global financial crisis in 2007-2008? What were some of the
devastating effects of this crisis both in US and abroad? How did Canada
fare during the crisis?
2. Explain the key principles of the labor and environmental side agreements
to the NAFTA. Were they necessary? Why might these be controversial?
3. How did the Single European Act create economic gains in the EU? What
are some of the challenges the EU is facing currently?
4. Why has India not been able to develop a large low-wage, low-skilled,
manufacturing sector? Can it skip this stage of development and go directly
to becoming a services-based economy that exports high value-added
services?
5. What are the main exports of Canada? Explain three different ways in
which Canada can diversify its exports.

Answer 1

Ques1

To understand what caused the subprime Mortgage Crisis of 2008 lets first understand what is Mortgage.
-Someone who wants to buy a house will often borrow from banks or financial institution and in return bank or financial institution gets the paper which is called mortgage. Every month the home owner has to pay a portion of the principal and interest to bank. If they stop paying the portion it is called default. Whoever is holding the papers will suffer financial loss. Banks sold such mortgage papers to 3rd parties.  
- Traditionally it was very difficult to get a mortgage if one had a bad credit or didn’t have a steady income. Lenders didn’t want to take the risk of default.
- In 2000 investors looking for high return and low risk started throwing their money in US housing market. The idea was that they thought they will get better return on their investment from the lending to mortgages and since the mortgages are backed by the security of the house the downside risk is negligible.  
- So investors bought mortgage backed securities. Mortgage banks commonly originate hundreds or thousands of residential mortgages by lending money to homeowners. They then place the mortgages in a pool and sell shares of the pool to investors as mortgage pass- through securities, which are also known as mortgage- backed securities. All payments of principal and interest are passed through to the investors each month, after deducting the costs of servicing the mortgages. Investors who purchase these pass- through securities obtain securities that in aggregate have the same net cash flows and associated risks as the pool of mortgages.  
When financial intermediaries securitize assets, they often create several classes of securities, called tranches, that have different rights to the cash flows from the asset pool. The tranches are structured so that some produce more predictable cash flows than do others. The senior tranches have first rights to the cash flow from the asset pool. Because the overall risk of a given asset pool cannot be changed, the more junior tranches bear a disproportionate share of the risk of the pool. Practitioners often call the most junior tranche toxic waste because it is so risky.
Many of these securities were rated as AAA, they were considered safe bet however that was not the case. Also many created CDO and they were also rated very high which was not the case.
Prices of homes in US market started rising, people started buying homes thinks they will sale and make quick buck. Interest rates also started declining which attracted more investors to MBS. This bubble burst when everyone wanted to sale their house at same times , prices of homes crased and there were no buyers of property. Thousands of people defaulted on their loans. And at same time the big financial institutions stopped buying sub prime mortgages, and sub prime lenders were stuck with bad loans and many big lenders declared bankruptcy.
The complexity associated with slicing asset pools into tranches can make the resulting securities difficult to value. Mistakes in valuing these securities contributed to the financial crisis that started in 2007.
While the impact of Financial Crisis was felt by all the countries globally including Cananda , but the impact of the financial crisis in Canada was lower then US.