International Economics: Theory & Policy

Cover......Page 1
The Pearson Series in Economics......Page 3
Title Page......Page 4
Copyright Page......Page 5
Brief Contents......Page 6
Contents......Page 8
Preface......Page 20
Chapter 1 Introduction......Page 30
 What Is International Economics About?......Page 32
  The Gains from Trade......Page 33
  How Much Trade?......Page 34
  Balance of Payments......Page 35
  International Policy Coordination......Page 36
  The International Capital Market......Page 37
 International Economics: Trade and Money......Page 38
  Who Trades with Whom?......Page 39
   Size Matters: The Gravity Model......Page 40
   Using the Gravity Model: Looking for Anomalies......Page 42
   Impediments to Trade: Distance, Barriers, and Borders......Page 43
   Has the World Gotten Smaller?......Page 45
   What Do We Trade?......Page 47
   Service Offshoring......Page 48
  Do Old Rules Still Apply?......Page 50
  Summary......Page 51
 Chapter 3 Labor Productivity and Comparative Advantage: The Ricardian Model......Page 53
  The Concept of Comparative Advantage......Page 54
  A One-Factor Economy......Page 55
   Relative Prices and Supply......Page 57
  Trade in a One-Factor World......Page 58
   Determining the Relative Price after Trade......Page 59
   BOX: Comparative Advantage in Practice: The Case of Usain Bolt......Page 62
   The Gains from Trade......Page 63
   A Note on Relative Wages......Page 64
   BOX: Economic Isolation and Autarky over Time and Space......Page 65
   Productivity and Competitiveness......Page 66
   BOX: Do Wages Reflect Productivity? ......Page 67
   Exploitation......Page 68
   Relative Wages and Specialization......Page 69
   Determining the Relative Wage in the Multigood Model......Page 71
  Adding Transport Costs and Nontraded Goods......Page 73
  Empirical Evidence on the Ricardian Model......Page 74
  Summary......Page 77
 Chapter 4 Specific Factors and Income Distribution......Page 80
  The Specific Factors Model......Page 81
   Assumptions of the Model......Page 82
   Production Possibilities......Page 83
   Prices, Wages, and Labor Allocation......Page 86
   Relative Prices and the Distribution of Income......Page 90
  International Trade in the Specific Factors Model......Page 92
  Income Distribution and the Gains from Trade......Page 93
  The Political Economy of Trade: A Preliminary View......Page 96
   CASE STUDY: Trade and Unemployment......Page 97
  International Labor Mobility......Page 101
   CASE STUDY: Wage Convergence in the European Union......Page 103
   CASE STUDY: Immigration and the U.S. Economy: Future Prospects......Page 105
  Summary......Page 108
 Chapter 5 Resources and Trade: The Heckscher-Ohlin Model......Page 116
   Prices and Production......Page 117
   Choosing the Mix of Inputs......Page 120
   Factor Prices and Goods Prices......Page 122
   Resources and Output......Page 125
  Effects of International Tradebetween Two-Factor Economies......Page 126
   CASE STUDY: North-South Trade and Income Inequality......Page 129
   Skill-Biased Technological Change and Income Inequality......Page 131
   Relative Prices and the Pattern of Trade......Page 127
   Trade and the Distribution of Income......Page 128
   BOX: The Declining Labor Share of Income and Capital-Skill Complementarity......Page 135
   Factor-Price Equalization......Page 136
  Empirical Evidence on the Heckscher-Ohlin Model......Page 137
   Trade in Goods as a Substitute for Trade in Factors: Factor Content of Trade......Page 138
   Patterns of Exports between Developed and Developing Countries......Page 141
   Implications of the Tests......Page 143
  Summary......Page 144
 Chapter 6 The Standard Trade Model......Page 152
   Production Possibilities and Relative Supply......Page 153
   Relative Prices and Demand......Page 154
   The Welfare Effect of Changes in the Terms of Trade......Page 157
   CASE STUDY: Unequal Gains from Trade across the Income Distribution......Page 158
   Growth and the Production Possibility Frontier......Page 161
   World Relative Supply and the Terms of Trade......Page 163
   International Effects of Growth......Page 164
   CASE STUDY: Has the Growth of Newly Industrialized Economies Hurt Advanced Nations?......Page 165
   Relative Demand and Supply Effects of a Tariff......Page 167
   Effects of an Export Subsidy......Page 168
   Implications of Terms of Trade Effects: Who Gains and Who Loses?......Page 169
   Intertemporal Production Possibilities and Trade......Page 170
   The Real Interest Rate......Page 171
  Summary......Page 173
 Chapter 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 Market Equilibrium......Page 186
   External Economies, Output, and Prices......Page 187
   External Economies and the Pattern of Trade......Page 188
   BOX: Holding the World Together......Page 190
   Trade and Welfare with External Economies......Page 191
   Dynamic Increasing Returns......Page 192
  Interregional Trade and Economic Geography......Page 193
   BOX: Soccer and the English Premiere League......Page 195
  Summary......Page 196
 Chapter 8 Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises......Page 199
  The Theory of Imperfect Competition......Page 200
   Monopoly: A Brief Review......Page 201
   Monopolistic Competition......Page 203
   The Effects of Increased Market Size......Page 208
   Gains from an Integrated Market: A Numerical Example......Page 209
   The Significance of Intra-Industry Trade......Page 213
   CASE STUDY: Automobile Intra-Industry Trade within ASEAN-4: 1998–2002......Page 215
  Firm Responses to Trade: Winners, Losers, and Industry Performance......Page 216
   Performance Differences across Producers......Page 217
   The Effects of Increased Market Size......Page 219
  Trade Costs and Export Decisions......Page 221
  Dumping......Page 223
   CASE STUDY: Antidumping as Protectionism......Page 224
   CASE STUDY: Patterns of Foreign Direct Investment Flows around the World......Page 226
  The Firm’s Decision Regarding Foreign Direct Investment......Page 230
   Outsourcing......Page 231
   BOX: Whose Trade Is It?......Page 232
   CASE STUDY: Shipping Jobs Overseas? Offshoring and Labor Market Outcomes in Germany......Page 234
   Consequences of Multinationals and Foreign Outsourcing......Page 237
  Summary......Page 238
  Basic Tariff Analysis......Page 244
   Supply, Demand, and Trade in a Single Industry......Page 245
   Effects of a Tariff......Page 247
   Measuring the Amount of Protection......Page 248
   Consumer and Producer Surplus......Page 250
   Measuring the Costs and Benefits......Page 252
   BOX: Tariffs and Retaliation......Page 254
   Export Subsidies: Theory......Page 256
   CASE STUDY: Europe’s Common Agricultural Policy......Page 257
   Import Quotas: Theory......Page 258
   CASE STUDY: Tariff-Rate Quota Origin and its Application in Practice with Oilseeds......Page 259
   CASE STUDY: A Voluntary Export Restraint in Practice......Page 263
   Local Content Requirements......Page 264
   BOX: Healthcare Protection with Local Content Requirements......Page 265
  The Effects of Trade Policy: A Summary......Page 266
  Summary......Page 267
 Chapter 10 The Political Economy of Trade Policy......Page 275
   Free Trade and Efficiency......Page 276
   Additional Gains from Free Trade......Page 277
   Political Argument for Free Trade......Page 278
   The Terms of Trade Argument for a Tariff......Page 279
   The Domestic Market Failure Argument against Free Trade......Page 280
   How Convincing Is the Market Failure Argument?......Page 282
  Income Distribution and Trade Policy......Page 283
   Electoral Competition......Page 284
   Collective Action......Page 285
   BOX: Politicians for Sale: Evidence from the 1990s......Page 286
   Who Gets Protected?......Page 287
  International Negotiations and Trade Policy......Page 289
   The Advantages of Negotiation......Page 290
   International Trade Agreements: A Brief History......Page 291
   Trade Liberalization......Page 293
   Administrative Reforms: From the GATT to the WTO......Page 294
   Benefits and Costs......Page 295
   BOX: Settling a Dispute—And Creating One......Page 296
   CASE STUDY: Testing the WTO’s Metal ......Page 297
  The End of Trade Agreements?......Page 298
   BOX: Do Agricultural Subsidies Hurt the Third World?......Page 299
   Preferential Trading Agreements......Page 300
   BOX: Free Trade Area Versus Customs Union......Page 301
   BOX: Brexit......Page 302
   CASE STUDY: Trade Diversion in South America......Page 303
   The Trans-Pacific Partnership......Page 304
  Summary......Page 305
 Chapter 11 Trade Policy in Developing Countries......Page 312
   The Infant Industry Argument......Page 313
   Promoting Manufacturing through Protection......Page 315
   CASE STUDY: Export-Led Strategy......Page 317
  Results of Favoring Manufacturing:Problems of Import-Substituting Industrialization......Page 318
  Trade Liberalization since 1985......Page 320
  Trade and Growth: Takeoff in Asia......Page 322
   BOX: India’s Boom......Page 324
  Summary......Page 325
 Chapter 12 Controversies in Trade Policy......Page 327
   Technology and Externalities......Page 328
   Imperfect Competition and Strategic Trade Policy......Page 331
   BOX: A Warning from Intel’s Founder......Page 333
   CASE STUDY: When the Chips Were Up......Page 334
   The Anti-Globalization Movement......Page 336
   Trade and Wages Revisited......Page 337
   Environmental and Cultural Issues......Page 339
   The WTO and National Independence......Page 340
   CASE STUDY: A Tragedy in Bangladesh......Page 341
   Globalization, Growth, and Pollution......Page 342
   The Problem of “Pollution Havens”......Page 344
   The Carbon Tariff Dispute......Page 345
  Trade Shocks and Their Impact on Communities......Page 346
  Summary......Page 347
 Chapter 13 National Income Accounting and the Balance of Payments......Page 350
  The National Income Accounts......Page 352
   National Product and National Income......Page 353
   Gross Domestic Product......Page 354
   Investment......Page 355
   The National Income Identity for an Open Economy......Page 356
   The Current Account and Foreign Indebtedness......Page 357
   Saving and the Current Account......Page 359
   Private and Government Saving......Page 360
   BOX: The Mystery of the Missing Deficit......Page 361
  The Balance of Payments Accounts......Page 363
   Examples of Paired Transactions......Page 364
   The Fundamental Balance of Payments Identity......Page 365
   The Current Account, Once Again......Page 366
   The Financial Account......Page 367
   Statistical Discrepancy......Page 368
   Official Reserve Transactions......Page 369
   CASE STUDY: The Assets and Liabilities of the World’s Biggest Debtor......Page 370
  Summary......Page 374
 Chapter 14 Exchange Rates and the Foreign Exchange Market: An Asset Approach......Page 379
   Domestic and Foreign Prices......Page 380
   Exchange Rates and Relative Prices......Page 382
   The Actors......Page 383
   BOX: Exchange Rates, Auto Prices, and Currency Wars......Page 384
   Characteristics of the Market......Page 385
   Spot Rates and Forward Rates......Page 387
   Futures and Options......Page 388
   Assets and Asset Returns......Page 389
   BOX: Offshore Currency Markets: The Case of the Chinese Yuan......Page 390
   Risk and Liquidity......Page 392
   Exchange Rates and Asset Returns......Page 393
   A Simple Rule......Page 395
   Return, Risk, and Liquidity in the Foreign Exchange Market......Page 396
   Interest Parity: The Basic Equilibrium Condition......Page 397
   How Changes in the Current Exchange Rate Affect Expected Returns......Page 398
   The Equilibrium Exchange Rate......Page 400
   The Effect of Changing Interest Rates on the Current Exchange Rate......Page 402
   CASE STUDY: What Explains the Carry Trade?......Page 404
  Summary......Page 407
 Chapter 15 Money, Interest Rates, and Exchange Rates......Page 415
   Money as a Unit of Account......Page 416
   How the Money Supply Is Determined......Page 417
   Expected Return......Page 418
  Aggregate Money Demand......Page 419
  The Equilibrium Interest Rate: The Interaction of Money Supply and Demand......Page 421
   Equilibrium in the Money Market......Page 422
   Interest Rates and the Money Supply......Page 423
   Output and the Interest Rate......Page 424
   Linking Money, the Interest Rate, and the Exchange Rate......Page 425
   Europe’s Money Supply and the Dollar/Euro Exchange Rate......Page 428
   Money and Money Prices......Page 431
   The Long-Run Effects of Money Supply Changes......Page 432
   Empirical Evidence on Money Supplies and Price Levels......Page 433
   Money and the Exchange Rate in the Long Run......Page 434
   Short-Run Price Rigidity versus Long-Run Price Flexibility......Page 435
   BOX: Money Supply Growth and Hyperinflation in Zimbabwe......Page 437
   Permanent Money Supply Changes and the Exchange Rate......Page 439
   CASE STUDY: Inflation Targeting and Exchange Rate in Emerging Countries......Page 442
  Summary......Page 445
 Chapter 16 Price Levels and the Exchange Rate in the Long Run......Page 450
  The Law of One Price......Page 451
   The Relationship between PPP and the Law of One Price......Page 452
   Absolute PPP and Relative PPP......Page 453
   The Fundamental Equation of the Monetary Approach......Page 454
   Ongoing Inflation, Interest Parity, and PPP......Page 456
   The Fisher Effect......Page 457
  Empirical Evidence on PPP and the Law of One Price......Page 460
   Trade Barriers and Nontradables......Page 462
   Departures from Free Competition......Page 463
   BOX: Measuring and Comparing Countries’ Wealth Worldwide: The International Comparison Program (ICP)......Page 464
   PPP in the Short Run and in the Long Run......Page 467
   CASE STUDY: Why Price Levels Are Lower in Poorer Countries......Page 468
   The Real Exchange Rate......Page 470
   Demand, Supply, and the Long-Run Real Exchange Rate......Page 472
   BOX: Sticky Prices and the Law of One Price:Evidence from Scandinavian Duty-Free Shops......Page 473
   Nominal and Real Exchange Rates in Long-Run Equilibrium......Page 475
  International Interest Rate Differences and the Real Exchange Rate......Page 477
  Real Interest Parity......Page 478
  Summary......Page 480
 Chapter 17 Output and the Exchange Rate in the Short Run......Page 488
   Determinants of Consumption Demand......Page 489
   Determinants of the Current Account......Page 490
   How Real Exchange Rate Changes Affect the Current Account......Page 491
   The Real Exchange Rate and Aggregate Demand......Page 492
   Real Income and Aggregate Demand......Page 493
  How Output Is Determined in the Short Run......Page 494
   Output, the Exchange Rate, and Output Market Equilibrium......Page 495
   Deriving the DD Schedule......Page 496
   Factors That Shift the DD Schedule......Page 497
   Output, the Exchange Rate, and Asset Market Equilibrium......Page 500
   Factors That Shift the AA Schedule......Page 502
  Short-Run Equilibrium for an Open Economy:Putting the DD and AA Schedules Together......Page 503
  Temporary Changes in Monetary and Fiscal Policy......Page 505
   Fiscal Policy......Page 506
   Policies to Maintain Full Employment......Page 507
  Inflation Bias and Other Problems of Policy Formulation......Page 509
   A Permanent Increase in the Money Supply......Page 510
   Adjustment to a Permanent Increase in the Money Supply......Page 511
   A Permanent Fiscal Expansion......Page 513
  Macroeconomic Policies and the Current Account......Page 514
   The J-Curve......Page 516
   Exchange Rate Pass-Through and Inflation......Page 517
   The Current Account, Wealth, and Exchange Rate Dynamics......Page 518
   BOX: Understanding Pass-Through to Import and Export Prices......Page 519
  The Liquidity Trap......Page 520
  CASE STUDY: How Big Is the Government Spending Multiplier?......Page 523
  Summary......Page 525
 Chapter 18 Fixed Exchange Rates and Foreign Exchange Intervention......Page 535
  Why Study Fixed Exchange Rates?......Page 536
   The Central Bank Balance Sheet and the Money Supply......Page 537
   Foreign Exchange Intervention and the Money Supply......Page 539
   The Balance of Payments and the Money Supply......Page 540
  How the Central Bank Fixes the Exchange Rate......Page 541
   Money Market Equilibrium under a Fixed Exchange Rate......Page 542
   A Diagrammatic Analysis......Page 543
  Stabilization Policies with a Fixed Exchange Rate......Page 544
   Monetary Policy......Page 545
   Fiscal Policy......Page 546
   Changes in the Exchange Rate......Page 547
   Adjustment to Fiscal Policy and Exchange Rate Changes......Page 548
  Balance of Payments Crises and Capital Flight......Page 549
   Perfect Asset Substitutability and the Ineffectiveness of Sterilized Intervention......Page 552
   CASE STUDY: Can Markets Attack a Strong Currency? The Case of Switzerland......Page 553
   The Effects of Sterilized Intervention with Imperfect Asset Substitutability......Page 556
   Evidence on the Effects of Sterilized Intervention......Page 558
   The Mechanics of a Reserve Currency Standard......Page 559
   The Asymmetric Position of the Reserve Center......Page 560
   Symmetric Monetary Adjustment under a Gold Standard......Page 561
   Benefits and Drawbacks of the Gold Standard......Page 562
   The Gold Exchange Standard......Page 563
   CASE STUDY: The Cost to Become an International Currency: The Renminbi Case......Page 564
  Summary......Page 568
 Chapter 19 International Monetary Systems: An Historical Overview......Page 580
  Macroeconomic Policy Goals in an Open Economy......Page 581
   Internal Balance: Full Employment and Price Level Stability......Page 582
   External Balance: The Optimal Level of the Current Account......Page 583
   BOX: Can a Country Borrow Forever? The Case of New Zealand......Page 585
  Classifying Monetary Systems:The Open-Economy Monetary Trilemma......Page 589
  International Macroeconomic Policy under the Gold Standard, 1870–1914......Page 590
   External Balance under the Gold Standard......Page 591
   The Price-Specie-Flow Mechanism......Page 592
   Internal Balance under the Gold Standard......Page 593
   CASE STUDY: The Political Economy of Exchange Rate Regimes: Conflict over America’s Monetary Standard during the 1890s......Page 594
   The Fleeting Return to Gold......Page 596
   International Economic Disintegration......Page 597
   CASE STUDY: The International Gold Standard and the Great Depression......Page 598
   Goals and Structure of the IMF......Page 599
   Convertibility and the Expansion of Private Financial Flows......Page 600
   Speculative Capital Flows and Crises......Page 601
  Analyzing Policy Options for Reaching Internal and External Balance......Page 602
   Maintaining Internal Balance......Page 603
   Maintaining External Balance......Page 604
   Expenditure-Changing and Expenditure-Switching Policies......Page 605
  The External Balance Problem of the United States under Bretton Woods......Page 606
   CASE STUDY: The End of Bretton Woods, Worldwide Inflation, and the Transition to Floating Rates......Page 607
   The Mechanics of Imported Inflation......Page 609
   Assessment......Page 610
   Monetary Policy Autonomy......Page 611
   Symmetry......Page 612
   Exchange Rates as Automatic Stabilizers......Page 613
   CASE STUDY: The First Years of Floating Rates, 1973–1990......Page 615
   Macroeconomic Interdependence under a Floating Rate......Page 620
   CASE STUDY: Transformation and Crisis in the World Economy......Page 621
   CASE STUDY: The Dangers of Deflation......Page 627
   Monetary Policy Autonomy......Page 629
   The Exchange Rate as an Automatic Stabilizer......Page 631
   The Problem of Policy Coordination......Page 632
  Are Fixed Exchange Rates Even an Option for Most Countries?......Page 633
  Summary......Page 634
 Chapter 20 Financial Globalization: Opportunity and Crisis......Page 643
   Three Types of Gain from Trade......Page 644
   Risk Aversion......Page 645
   Portfolio Diversification as a Motive for International Asset Trade......Page 646
   The Menu of International Assets: Debt versus Equity......Page 647
   The Structure of the International Capital Market......Page 648
   Offshore Banking and Offshore Currency Trading......Page 649
   The Shadow Banking System......Page 650
   The Problem of Bank Failure......Page 651
   Government Safeguards against Financial Instability......Page 653
   Moral Hazard and the Problem of “Too Big to Fail”......Page 656
   BOX: Does the IMF Cause Moral Hazard?......Page 657
  The Challenge of Regulating International Banking......Page 658
   The Financial Trilemma......Page 659
   International Regulatory Cooperation through 2007......Page 660
   CASE STUDY: The Global Financial Crisis of 2007–2009......Page 661
   BOX: Foreign Exchange Instability and Central Bank Swap Lines......Page 664
   International Regulatory Initiatives after the Global Financial Crisis......Page 666
  How Well Have International Financial Markets Allocated Capital and Risk?......Page 668
   The Extent of International Portfolio Diversification......Page 669
   The Extent of Intertemporal Trade......Page 671
   The Efficiency of the Foreign Exchange Market......Page 672
  Summary......Page 677
 Chapter 21 Optimum Currency Areas and the Euro......Page 682
   What Has Driven European Monetary Cooperation?......Page 684
   BOX:Brexit......Page 685
   The European Monetary System, 1979–1998......Page 687
   German Monetary Dominance and the Credibility Theory of the EMS......Page 688
   European Economic and Monetary Union......Page 690
  The Euro and Economic Policy in the Euro Zone......Page 691
   The Maastricht Convergence Criteria and the Stability and Growth Pact......Page 692
   The Revised Exchange Rate Mechanism......Page 693
   Economic Integration and the Benefits of a Fixed Exchange Rate Area: The GG Schedule......Page 694
   Economic Integration and the Costs of a Fixed Exchange Rate Area: The LL Schedule......Page 696
   The Decision to Join a Currency Area: Putting the GG and LL Schedules Together......Page 699
   Other Important Considerations......Page 700
   CASE STUDY: Is Europe an Optimum Currency Area?......Page 702
   Origins of the Crisis......Page 705
   Self-Fulfilling Government Default and the “Doom Loop”......Page 711
   A Broader Crisis and Policy Responses......Page 713
   ECB Outright Monetary Transactions......Page 714
   The Future of EMU......Page 715
  Summary......Page 716
 Chapter 22 Developing Countries: Growth, Crisis, and Reform......Page 721
   The Gap between Rich and Poor......Page 722
   Has the World Income Gap Narrowed Over Time?......Page 723
   The Importance of Developing Countries for Global Growth......Page 725
  Structural Features of Developing Countries......Page 726
   BOX: The Commodity Supercycle......Page 728
  Developing-Country Borrowing and Debt......Page 731
   The Economics of Financial Inflows to Developing Countries......Page 732
   The Problem of Default......Page 733
   Alternative Forms of Financial Inflow......Page 735
   The Problem of “Original Sin”......Page 736
   The Debt Crisis of the 1980s......Page 738
   Reforms, Capital Inflows, and the Return of Crisis......Page 739
  East Asia: Success and Crisis......Page 742
   BOX:Why Have Developing Countries Accumulated Such High Levels of International Reserves?......Page 743
   Asian Weaknesses......Page 745
   BOX:What Did East Asia Do Right?......Page 747
   The Asian Financial Crisis......Page 748
  Lessons of Developing-Country Crises......Page 749
  Reforming the World’s Financial “Architecture”......Page 750
   Capital Mobility and the Trilemma of the Exchange Rate Regime......Page 751
   “Prophylactic” Measures......Page 753
   Coping with Crisis......Page 754
  Understanding Global Capital Flows and the Global Distribution of Income: Is Geography Destiny?......Page 755
   BOX:Capital Paradoxes......Page 756
  Summary......Page 760
  Factor Prices and Costs......Page 765
  Goods Prices and Factor Prices......Page 767
  Factor Supplies and Outputs......Page 768
  Supply, Demand, and Equilibrium......Page 769
  Supply, Demand, and the Stability of Equilibrium......Page 771
  Economic Growth......Page 773
  A Transfer of Income......Page 774
  A Tariff......Page 775
 Postscript to Chapter 8: The Monopolistic Competition Model......Page 777
  An Analytical Derivation of the Optimal Portfolio......Page 779
  A Diagrammatic Derivation of the Optimal Portfolio......Page 780
  The Effects of Changing Rates of Return......Page 782
Index......Page 786
Credits......Page 802