International Economics: Theory And Policy

Cover......Page 1
Title Page......Page 8
Copyright Page......Page 9
Acknowledgments......Page 33
Contents......Page 12
Preface......Page 26
1 INTRODUCTION......Page 36
What Is International Economics About?......Page 38
The Gains from Trade......Page 39
How Much Trade?......Page 40
Exchange Rate Determination......Page 41
International Policy Coordination......Page 42
International Economics: Trade and Money......Page 43
Who Trades with Whom?......Page 45
The Changing Pattern of World Trade......Page 51
Do Old Rules Still Apply?......Page 56
Summary......Page 57
3 LABOR PRODUCTIVITY AND COMPARATIVE ADVANTAGE: THE RICARDIAN MODEL......Page 59
The Concept of Comparative Advantage......Page 60
A One-Factor Economy......Page 61
Trade in a One-Factor World......Page 64
Box: Comparative Advantage in Practice: The Case of Babe Ruth......Page 68
Box: The Losses from Nontrade......Page 71
Misconceptions about Comparative Advantage......Page 72
Box: Do Wages Reflect Productivity?......Page 73
Comparative Advantage with Many Goods......Page 75
Adding Transport Costs and Nontraded Goods......Page 79
Empirical Evidence on the Ricardian Model......Page 80
Summary......Page 83
4 SPECIFIC FACTORS AND INCOME DISTRIBUTION......Page 86
The Specific Factors Model......Page 87
Box: What Is a Specific Factor?......Page 88
International Trade in the Specific Factors Model......Page 98
Income Distribution and the Gains from Trade......Page 99
The Political Economy of Trade: A Preliminary View......Page 102
CASE STUDY: Trade and Unemployment......Page 103
International Labor Mobility......Page 105
CASE STUDY: Wage Convergence in the Age of Mass Migration......Page 107
CASE STUDY: Immigration and the U.S. Economy......Page 108
Summary......Page 111
Appendix: Further Details on Specific Factors......Page 115
5 RESOURCES AND TRADE: THE HECKSCHER-OHLIN MODEL......Page 119
Model of a Two-Factor Economy......Page 120
Effects of International Trade between Two-Factor Economies......Page 129
CASE STUDY: North-South Trade and Income Inequality......Page 132
CASE STUDY: Skill-Biased Technological Change and Income Inequality......Page 134
Empirical Evidence on the Heckscher-Ohlin Model......Page 138
Summary......Page 145
Appendix: Factor Prices, Goods Prices, and Production Decisions......Page 149
6 THE STANDARD TRADE MODEL......Page 153
A Standard Model of a Trading Economy......Page 154
CASE STUDY: Has the Growth of Newly Industrializing Countries Hurt Advanced Nations?......Page 164
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD......Page 167
International Borrowing and Lending......Page 170
Summary......Page 173
Appendix: More on Intertemporal Trade......Page 177
7 EXTERNAL ECONOMIES OF SCALE AND THE INTERNATIONAL LOCATION OF PRODUCTION......Page 180
Economies of Scale and International Trade: An Overview......Page 181
Economies of Scale and Market Structure......Page 182
Specialized Suppliers......Page 183
Labor Market Pooling......Page 184
Knowledge Spillovers......Page 185
External Economies and International Trade......Page 187
BOX: Holding the World Together......Page 190
Interregional Trade and Economic Geography......Page 193
BOX: Tinseltown Economics......Page 195
Summary......Page 196
8 FIRMS IN THE GLOBAL ECONOMY: EXPORT DECISIONS, OUTSOURCING, AND MULTINATIONAL ENTERPRISES......Page 199
The Theory of Imperfect Competition......Page 200
Monopolistic Competition and Trade......Page 208
CASE STUDY: Intra-Industry Trade in Action: The North American Auto Pact of 1964 and the North American Free Trade Agreement (NAFTA)......Page 215
Firm Responses to Trade: Winners, Losers, and Industry Performance......Page 216
Trade Costs and Export Decisions......Page 220
Dumping......Page 223
CASE STUDY: Antidumping as Protectionism......Page 224
CASE STUDY: Patterns of Foreign Direct Investment Flows Around the World......Page 225
The Firm's Decision Regarding Foreign Direct Investment......Page 229
CASE STUDY: Shipping Jobs Overseas? Offshoring and Unemployment in the United States......Page 232
Summary......Page 235
Appendix: Determining Marginal Revenue......Page 240
Basic Tariff Analysis......Page 241
Costs and Benefits of a Tariff......Page 247
BOX: Tariffs for the Long Haul......Page 251
Other Instruments of Trade Policy......Page 252
CASE STUDY: Europe's Common Agricultural Policy......Page 253
CASE STUDY: An Import Quota in Practice: U.S. Sugar......Page 256
CASE STUDY: A Voluntary Export Restraint in Practice......Page 259
Local Content Requirements......Page 260
BOX: Bridging the Gap......Page 261
The Effects of Trade Policy: A Summary......Page 262
Summary......Page 263
Appendix: Tariffs and Import Quotas in the Presence of Monopoly......Page 267
10 THE POLITICAL ECONOMY OF TRADE POLICY......Page 271
The Case for Free Trade......Page 272
CASE STUDY: The Gains from 1992......Page 275
National Welfare Arguments against Free Trade......Page 277
Income Distribution and Trade Policy......Page 281
BOX: Politicians for Sale: Evidence from the 1990s......Page 284
International Negotiations and Trade Policy......Page 287
BOX: Settling a Dispute—and Creating One......Page 294
CASE STUDY: Testing the WTO's Metal......Page 295
The Doha Disappointment......Page 296
BOX: Do Agricultural Subsidies Hurt the Third World?......Page 297
BOX: Free Trade Area versus Customs Union......Page 300
BOX: Do Trade Preferences Have Appeal?......Page 301
CASE STUDY: Trade Diversion in South America......Page 302
Summary......Page 303
Appendix: Proving that the Optimum Tariff Is Positive......Page 307
11 TRADE POLICY IN DEVELOPING COUNTRIES......Page 310
Import-Substituting Industrialization......Page 311
CASE STUDY: Mexico Abandons Import-Substituting Industrialization......Page 315
Results of Favoring Manufacturing: Problems of Import-Substituting Industrialization......Page 316
Trade Liberalization since 1985......Page 317
Trade and Growth: Takeoff in Asia......Page 319
Summary......Page 322
12 CONTROVERSIES IN TRADE POLICY......Page 325
Sophisticated Arguments for Activist Trade Policy......Page 326
BOX: A Warning from Intel's Founder......Page 331
CASE STUDY: When the Chips Were Up......Page 332
Globalization and Low-Wage Labor......Page 334
CASE STUDY: A Tragedy in Bangladesh......Page 339
Globalization and the Environment......Page 340
Summary......Page 345
13 NATIONAL INCOME ACCOUNTING AND THE BALANCE OF PAYMENTS......Page 348
The National Income Accounts......Page 350
National Income Accounting for an Open Economy......Page 353
BOX: The Mystery of the Missing Deficit......Page 360
The Balance of Payments Accounts......Page 361
CASE STUDY: The Assets and Liabilities of the World's Biggest Debtor......Page 369
Summary......Page 372
14 EXCHANGE RATES AND THE FOREIGN EXCHANGE MARKET: AN ASSET APPROACH......Page 377
Exchange Rates and International Transactions......Page 378
The Foreign Exchange Market......Page 381
BOX: Exchange Rates, Auto Prices, and Currency Wars......Page 382
The Demand for Foreign Currency Assets......Page 387
BOX: Nondeliverable Forward Exchange Trading in Asia......Page 388
Equilibrium in the Foreign Exchange Market......Page 396
Interest Rates, Expectations, and Equilibrium......Page 401
CASE STUDY: What Explains the Carry Trade?......Page 403
Summary......Page 405
Appendix: Forward Exchange Rates and Covered Interest Parity......Page 411
15 MONEY, INTEREST RATES, AND EXCHANGE RATES......Page 414
Money Defined: A Brief Review......Page 415
The Demand for Money by Individuals......Page 417
Aggregate Money Demand......Page 418
The Equilibrium Interest Rate: The Interaction of Money Supply and Demand......Page 420
The Money Supply and the Exchange Rate in the Short Run......Page 424
Money, the Price Level, and the Exchange Rate in the Long Run......Page 429
Inflation and Exchange Rate Dynamics......Page 433
BOX: Money Supply Growth and Hyperinflation in Zimbabwe......Page 435
CASE STUDY: Can Higher Inflation Lead to Currency Appreciation? The Implications of Inflation Targeting......Page 440
Summary......Page 443
16 PRICE LEVELS AND THE EXCHANGE RATE IN THE LONG RUN......Page 448
The Law of One Price......Page 449
Purchasing Power Parity......Page 450
A Long-Run Exchange Rate Model Based on PPP......Page 452
Empirical Evidence on PPP and the Law of One Price......Page 458
Explaining the Problems with PPP......Page 460
BOX: Some Meaty Evidence on the Law of One Price......Page 462
CASE STUDY: Why Price Levels Are Lower in Poorer Countries......Page 466
Beyond Purchasing Power Parity: A General Model of Long-Run Exchange Rates......Page 467
BOX: Sticky Prices and the Law of One Price: Evidence from Scandinavian Duty-Free Shops......Page 470
International Interest Rate Differences and the Real Exchange Rate......Page 475
Real Interest Parity......Page 476
Summary......Page 478
Appendix: The Fisher Effect, the Interest Rate, and the Exchange Rate under the Flexible-Price Monetary Approach......Page 483
17 OUTPUT AND THE EXCHANGE RATE IN THE SHORT RUN......Page 486
Determinants of Aggregate Demand in an Open Economy......Page 487
The Equation of Aggregate Demand......Page 490
How Output Is Determined in the Short Run......Page 492
Output Market Equilibrium in the Short Run: The DD Schedule......Page 493
Asset Market Equilibrium in the Short Run: The AA Schedule......Page 497
Short-Run Equilibrium for an Open Economy: Putting the DD and AA Schedules Together......Page 501
Temporary Changes in Monetary and Fiscal Policy......Page 503
Inflation Bias and Other Problems of Policy Formulation......Page 506
Permanent Shifts in Monetary and Fiscal Policy......Page 507
Macroeconomic Policies and the Current Account......Page 512
Gradual Trade Flow Adjustment and Current Account Dynamics......Page 513
The Liquidity Trap......Page 516
CASE STUDY: How Big Is the Government Spending Multiplier?......Page 519
Summary......Page 520
Appendix 1: Intertemporal Trade and Consumption Demand......Page 525
Appendix 2: The Marshall-Lerner Condition and Empirical Estimates of Trade Elasticities......Page 527
18 FIXED EXCHANGE RATES AND FOREIGN EXCHANGE INTERVENTION......Page 530
Why Study Fixed Exchange Rates?......Page 531
Central Bank Intervention and the Money Supply......Page 532
How the Central Bank Fixes the Exchange Rate......Page 536
Stabilization Policies with a Fixed Exchange Rate......Page 539
Balance of Payments Crises and Capital Flight......Page 544
Managed Floating and Sterilized Intervention......Page 547
CASE STUDY: Can Markets Attack a Strong Currency? The Case of Switzerland......Page 548
Reserve Currencies in the World Monetary System......Page 553
The Gold Standard......Page 555
CASE STUDY: The Demand for International Reserves......Page 558
Summary......Page 562
Appendix 1: Equilibrium in the Foreign Exchange Market with Imperfect Asset Substitutability......Page 567
Appendix 2: The Timing of Balance of Payments Crises......Page 570
19 INTERNATIONAL MONETARY SYSTEMS: AN HISTORICAL OVERVIEW......Page 573
Macroeconomic Policy Goals in an Open Economy......Page 574
BOX: Can a Country Borrow Forever? The Case of New Zealand......Page 578
Classifying Monetary Systems: The Open-Economy Monetary Trilemma......Page 582
International Macroeconomic Policy under the Gold Standard, 1870–1914......Page 583
CASE STUDY: The Political Economy of Exchange Rate Regimes: Conflict over America’s Monetary Standard during the 1890s......Page 587
The Interwar Years, 1918–1939......Page 588
CASE STUDY: The International Gold Standard and the Great Depression......Page 590
The Bretton Woods System and the International Monetary Fund......Page 591
Analyzing Policy Options for Reaching Internal and External Balance......Page 595
The External Balance Problem of the United States under Bretton Woods......Page 599
CASE STUDY: The End of Bretton Woods, Worldwide Inflation, and the Transition to Floating Rates......Page 600
The Case for Floating Exchange Rates......Page 603
CASE STUDY: The First Years of Floating Rates, 1973–1990......Page 607
Macroeconomic Interdependence under a Floating Rate......Page 611
CASE STUDY: Transformation and Crisis in the World Economy......Page 612
What Has Been Learned since 1973?......Page 618
Are Fixed Exchange Rates Even an Option for Most Countries?......Page 621
Summary......Page 622
Appendix: International Policy Coordination Failures......Page 629
20 FINANCIAL GLOBALIZATION: OPPORTUNITY AND CRISIS......Page 632
The International Capital Market and the Gains from Trade......Page 633
International Banking and the International Capital Market......Page 637
Banking and Financial Fragility......Page 640
BOX: The Simple Algebra of Moral Hazard......Page 646
The Challenge of Regulating International Banking......Page 647
CASE STUDY: The Global Financial Crisis of 2007–2009......Page 650
BOX: Foreign Exchange Instability and Central Bank Swap Lines......Page 653
How Well Have International Financial Markets Allocated Capital and Risk?......Page 657
Summary......Page 664
21 OPTIMUM CURRENCY AREAS AND THE EURO......Page 669
How the European Single Currency Evolved......Page 671
The Euro and Economic Policy in the Euro Zone......Page 676
The Theory of Optimum Currency Areas......Page 678
CASE STUDY: Is Europe an Optimum Currency Area?......Page 686
The Euro Crisis and the Future of EMU......Page 690
Summary......Page 700
22 DEVELOPING COUNTRIES: GROWTH, CRISIS, AND REFORM......Page 705
Income, Wealth, and Growth in the World Economy......Page 706
Structural Features of Developing Countries......Page 709
Developing-Country Borrowing and Debt......Page 712
East Asia: Success and Crisis......Page 723
BOX: Why Have Developing Countries Accumulated Such High Levels of International Reserves?......Page 724
BOX: What Did East Asia Do Right?......Page 727
Lessons of Developing-Country Crises......Page 729
Reforming the World's Financial "Architecture"......Page 731
CASE STUDY: China's Pegged Currency......Page 735
Understanding Global Capital Flows and the Global Distribution of Income: Is Geography Destiny?......Page 738
BOX: Capital Paradoxes......Page 739
Summary......Page 743
Postscript to Chapter 5: The Factor-Proportions Model......Page 748
Postscript to Chapter 6: The Trading World Economy......Page 752
Postscript to Chapter 8: The Monopolistic Competition Model......Page 760
Postscript to Chapter 20: Risk Aversion and International Portfolio Diversification......Page 762
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CREDITS......Page 788