Complementing trade theories with relevant trade empirics, this book covers three aspects of the study of International Economics: pure theory of trade, trade policy, and theory of Balance of Payments (BoP) and exchange rate. In the first part, it discusses the basic principles of international trade between dissimilar countries as well as between similar countries, and implications thereof in terms of welfare, income distribution, and growth. The approach taken here is distinctly different from that in most of the existing textbooks on international economics. Instead of model-specific discussions of the basic issues, it discusses the basic principles governing trade, gains from trade, and characteristics of international equilibrium in the context of a general trading environment of open economies. Subsequently, specific models of trade are introduced as alternative theoretical explanations for the basic principles of trade. In the second part, a wide range of policy issues are
analysed including unilateral trade restrictions and promotions; reciprocatory trade policy choices through regionalism; product standards that regulate trade between developed and developing countries; and implications of capital inflow, FDI, fragmentation, and global value chains. In the third part, the book discusses different currency and exchange rate regimes and their implications for a country's balance of payments and foreign exchange reserves. Drawing upon the basic theories, it studies expenditure-reducing and expenditure-switching policies to correct for BoP imbalances under a pegged exchange rate regime. Finally, some reflections on the choice of exchange rate regime and optimum currency area wind up discussions of monetary issues in international economics.
Author(s): Rajat Acharyya
Edition: 2
Publisher: Oxford University Press
Year: 2022
Language: English
Pages: 655
City: Oxford
cover
Title
Copyright
Contents
Part I Basis and Gains from Inter-industry Trade
1 Basis of Inter-industry Trade
1.1 Arbitrage and Inter-industry Trade
1.2 Comparative Advantage
1.2.1 Public Policy and Induced Comparative Advantage:Fundamental Sources
1.2.2 Selective Factor Disadvantage, Innovations, and ShiftingComparative Advantage
1.2.3 Comparative Advantage in vertical stages of production:Global Value Chain
1.3 Digital and Virtual Trade
1.4 Advanced Topic: Revealed Comparative Advantage
2 Gains from Trade
2.1 Trade, Gains, and Redistribution
2.2 Resource Reallocation and Gains from Trade
2.3 Decomposition of GFT: Specialization and Exchange Gains
2.3.1 Substitution Possibility in Consumption and the Exchange Gain
2.3.2 Substitution Possibility in Production and Specialization Gain
2.4 Sufficient Conditions for GFT
2.5 Pollution: A Trade-Off between GFT and Environmental Degradation
2.6 Increasing Returns to Scale (IRS) and GFT
2.6.1 Case I: GFT under Weak IRS and Violation of Tangency Condition
2.6.2 Case II: GFT under Strong IRS and Non-convexity
Appendix A2
I. Returns to Scale and Convexity of the Production Set
3 Test of Comparative Advantage andMeasuring GFT
3.1 Measuring the Welfare Change: Compensating and Equivalent Variations
3.2 GFT by CV Measure
3.3 Equivalent Variation and GFT
3.4 A Test of Comparative Advantage: The Case of Japan
4 International Equilibrium and theTerms of Trade
4.1 Offer Curve of the Home Country
4.2 Backward Bending Offer Curve
4.3 Offer Curve under Constant Opportunity Cost
4.4 Foreign Offer Curve and the International Equilibrium
4.5 Welfare Properties of the International Equilibrium
4.5.1 Gains from trade revisited
4.5.2 Global Pareto optimality of free trade bundle
Appendix A4
I. Geometric Measurement of the Import Demand Elasticity alongOffer Curve
II. Existence, Uniqueness, and Stability of International Equilibrium
III. Trade Indifference Curves and Alternative Derivation of Offer Curves
IV. Measurement and Trends in Barter TOT
Part II Theories of Comparative Advantage andPattern of Trade
Chapter 5 Technology and Trade
5.1 Constant Opportunity Cost, Technology, and Trade
5.2 Role of Relative Size of Trading Nations and Distribution of GFT
5.3 Advanced Topics
5.3.1 Many Commodity Extension
5.3.2 World Production Possibility Frontier and Many Countries Extension
5.3.3 Technology for Sale
5.4 International Trade and Technology Choice
Chapter 6 Factor Endowment and Trade
6.1 Assumptions and the Structure of the HOS Model
6.2 Autarchic Equilibrium and the Pattern of Trade
6.3 Two Properties of the Model: Output and Price Magnification Effects
6.3.1 Endowment Shock and Output Changes
6.3.2 Price Magnification Effect
6.4 Factor Prices at the Post-trade Equilibrium
Appendix A6
I. Full Employment Output Levels and Conditions forIncomplete Specialization
II. Price Magnification Effect
III. Algebraic Derivation of the Relative Supply Curve
IV. Output Magnification Effect or the Rybczynski Theorem
V. A Fixed Coefficient HOS Model
Chapter 7 Digressions on Factor Endowment Theory and Trade Empirics
7.1 Empirical Tests of the HO Theorem: Leontief Paradox
7.2 Factor Content and the HOV Theorem
7.3 Price Magnification Effect and FPE Revisited
7.3.1 Factor Immobility and Specific Factors
7.3.2 Non-traded Goods
7.3.3 Advanced Topic: FPE in Higher Dimensions
7.4 Advanced Topic: Evidence on Within Country Wage Movements and theWage Gap Debate
Appendix A7
I. Price Magnification Effect in the SF Model
II. Growth in Labour Force and Relative Supply
Part III Basis and Gains from Intra-industry Trade
Chapter 8 Theories of Intra-industry Trade
8.1 IIT in Identical Products
8.2 IIT in Horizontally Differentiated Products
8.2.1 Love for Variety Approach, Monopolistic Competition, and IIT
8.2.2 Characteristic Approach
8.3 Product Development and IIT in Vertically Differentiated Products
8.4 Firm Heterogeneity and Export Decision
8.5 Advanced Topic: Intra-industry Trade Indices
8.5.1 The Grubel–Lloyd (GL) Index of Intra-industry Trade
8.5.2 Other Measures and Refinements of the GL Index ofIntra-industry Trade
Appendix A8
I. Algebra of Brander (1981) Model with Transport Cost: LinearMarket Example
II. Monopolistic Competition and IIT in Differentiated Goods:Krugman (1979)
Part IV Trade Intervention and Coordination
Chapter 9 Import Tariff and Export Subsidies
9.1 Economic Effects of an Import Tariff: A Partial Equilibrium Analysis
9.2 Revenue Motive and Revenue Maximizing Tariff
9.3 General Equilibrium Analysis: TOT and Volume of Trade (VOT) Effects
9.3.1 Change in Output, Consumption, and Volume of Trade for aSmall Economy
9.3.2 TOT Effect, Welfare Change, and the Optimum Tariff for aLarge Country
9.3.3 Tariff Retaliation and Trade War among Countries
9.4 Tariffs and Protection of Domestic Industries
9.4.1 Infant Industry Argument for Protection
9.4.2 Imported Input and Effective Rate of Protection
9.4.3 Tariff Protection in a Large Country: The Metzler Paradox
9.5 Tariff and Income Distribution
9.6 Export Subsidy, TOT Deterioration, and Welfare Loss
Appendix A9
I. Import Demand Elasticity and Its Decomposition
II. Change in Real Income and the Optimum Tariff
III. Revenue Maximizing and Optimum Tariffs
IV. Welfare Reaction Curves
V. Lerner’s Symmetry Result
VI. Lerner’s Case: Government Spending and TOT Deterioration
VII. Symmetry of Lerner’s Case and the Metzler Paradox
Chapter 10 Quantitative Restrictions, Non-tariff Barriers, and Equivalence
10.1 Import Quota, Implicit Tariff, and Scarcity Rent
10.2 Voluntary Export Restraints
10.3 Other Non-tariff Barriers
Chapter 11 Market Imperfection and Trade Policy
11.1 Competitive World Production and Domestic Monopoly
11.2 Protection of a Domestic Monopoly
11.2.1 Competitive Foreign Supply: Non-equivalence of Tariff and Quota
11.2.2 Monopoly Foreign Supplier and Strategic Competition
11.3 International Price Discrimination and Dumping
11.4 International Market Share Rivalry and Strategic Trade Policy
11.4.1 Export Subsidies and Market Share Rivalry
11.4.2 Tariff as an Export Promotion Strategy
11.5 Advanced Topic: Monopoly, Pareto Sub-Optimality, and GFT
Appendix A11
I. Decomposition of the Change in Real Income in aNon-competitive Economy
Chapter 12 Political Economy of Trade Policy
12.1 DUP Lobbying Activities
12.2 Political Economy of Trade Policy Choice
12.2.1 Democracy, Political Risk, and Political Support Approach
12.2.2 Lobbying and Contribution Approaches
Appendix A12
I. Comparison of Profits Under Import Quota and Import Tariff
Chapter 13 Market Failure, Distortions, and Trade Policy
13.1 Taxonomy of Distortions
13.1.1 Types of Distortions
13.1.2 Causes of Distortions
13.2 Optimal Intervention
13.2.1 Tariff or Quota as Optimal Policy Intervention for Foreign Distortion
13.2.2 Optimal Policy Intervention for Production Distortion
13.2.3 Optimal Policy Intervention for Consumption Distortion
Appendix A13
I. Product Distortion under Wage Differential
Chapter 14 Multilateralism and Regionalism
14.1 Typology of Regional Trading Agreements (RTAs) andEconomic Cooperation
14.1.1 Different Stages of Regional Economic Cooperation
14.1.2 Evolution of the European Union through Successive Stagesof Cooperation
14.1.3 Open and Unanimous Regionalism
14.1.4 Scope and Coverage of RTAs
14.2 Bilateralism and Regionalism: Old and the Contemporary
14.2.1 Pre–World War I Bilateralism and Regionalism
14.2.2 Post–World War and Contemporary Regionalism
14.3 Regional Trading Agreements: Trends, Causes, and Effects
14.3.1 Growth, Composition, and Distribution of RTAs
14.3.2 Economic Effects and Gains from Regionalism
14.3.3 Why are RTAs Formed?
14.4 Multilateralism in the Post-WTO Era and Global Free Tra
14.4.1 From Regionalism to Multilateralism?
Part V Input Trade, Services, and Growth
Chapter 15 Trade, Growth, and Inclusion
15.1 International Trade and Growth
15.1.1 Trade as an Engine of Growth
15.1.2 Trade as Vent for Surplus
15.1.3 Trade, Redistribution, and Growth
15.1.4 Trade, Variety, and Growth
15.1.5 Import-led Growth (ILG)
15.1.6 Country Experiences
15.2 Growth, TOT, and Welfare
15.2.1 Secular Deterioration in TOT for a Primary Good Exporter
15.2.2 Immiserizing Growth
15.3 Trade, Growth, and Inclusion
Appendix A15
I. Diversification of the Export Basket
II. Composition of the Export Basket: Manufacturing andHigh-Technology Exports
Chapter 16 Foreign Capital Inflow, Multinationals, and Migration
16.1 Factor Flows and the Goods Price Equalization (GPE) Theorem
16.2 Foreign Capital Inflow: Causes and Consequences
16.2.1 Growth, Welfare, and Distributional Consequences of ForeignCapital Inflow
16.2.2 Foreign Capital Inflow and Aggregate Employment in the Host Country
16.3 Foreign Direct Investment and Multinational Corporations (MNCs)
16.3.1 Tariff Jumping Theory
16.3.2 Fragmentation and Economies of Scale
16.3.3 Fragmentation, Vertical Specialization and Global Value Chain
16.3.4 Government Policies in Developing Countries: Export ProcessingZones (EPZs)
16.4 Asymmetry between Labour Migration and Capital Flow
Chapter 17 Services Trade
17.1 Conceptual Issues
17.2 Services Trade: Types and Trends
17.3 Determinants of Services Trade
17.4 Services Trade, Welfare Gains, and Growth
17.4.1 Welfare Gains and Income Distribution
17.4.2 Services Export-Led Growth
Part VI Standards, Regulations, and MultilateralTrade Agreements
Chapter 18 Product Standards, Regulations, and Trade
18.1 Quality Standards, Trade, and Employmen
18.2 Labour Standards and Trade Sanctions
18.3 Environmental Standards, Trade, and FDI
18.3.1 Standards, Comparative Advantage, and Unfair Trade
18.3.2 Trade, Income Gains, and Demand for Higher Standards
18.3.3 Capital Flight, Pollution Havens, and Migration of Dirty Industries
Chapter 19 World Trade Organization and Trade Agreements
19.1 Structure and Functions of the WTO
19.1.1 Structure of the WTO
19.1.2 Functions of the WTO
19.2 Decision Making
19.3 WTO Rules and Principles of Trade Policy
19.4 WTO Agreements
19.4.1 Multilateral Agreements on Trade in Goods
19.4.2 Agreement on Trade Related Intellectual Property Rights (TRIPS)
19.4.3 Plurilateral Trade Agreements: Agreement on GovernmentProcurement (GPA)
Appendix A19
I. Tariff Reductions and Market Access for Non-agriculturalProducts (NAMA)
Part VII Theory of Balance of Payments and OpenEconomy Macroeconomics
Chapter 20 Balance of Payments and National Income Accounting
20.1 Classification of Transactions and Sub-accounts
20.2 BOP Accounting: An Example
20.3 Autonomous and Accommodating Transactions and BOP Equilibrium
20.4 Basic Identities in BOP and National Income Accounting
Chapter 21 National Income and Current Account Balance:The Income Approach
21.1 Effective Demand, National Income, and Trade Balance: Income Approach
21.2 Expenditure and Foreign Trade Multipliers Without the InternationalTransmission Effect
21.2.1 Foreign Trade Multipliers
21.2.2 Expenditure Multipliers
21.3 International Transmission Mechanism
21.4 Transfers and Trade Balance: The Transfer Problem
21.4.1 The Classical Case
21.4.2 Under-Effected Transfer in a Keynesian World
Appendix A21
I. Foreign Trade and Expenditure Multipliers withoutTransmission Mechanism
II. Expenditure Multiplier with Transmission Mechanism
III. Transfer, TOT, and Real Income of the Donor
IV. Under-Effected Transfer in an Effective-Demand Model
Chapter 22 International Currency Systems and Exchange Rate Regimes
22.1 The International Monetary System
22.1.1 Gold Standard
22.1.2 Bretton Woods and Thereafter
22.1.3 Different Currency and Exchange Rate Regimes in the Post-BrettonWoods Era
22.2 Exchange Rate under a Clean Float
22.3 Interventions in the Foreign Exchange Market
22.3.1 A Dirty or Managed Float
22.3.2 Over-Valued Pegged Exchange Rate Regime
22.3.3 Exchange Control and Black Market for Foreign Exchange
22.3.4 BOP Crisis under Over-Valued Pegged Exchange Rate Regime
22.3.5 Target Zone
22.4 India’s BOP Crisis and Its Exchange Rate Policies
Appendix A22
I. Existence, Uniqueness, and Stability in the Foreign Exchange Marketunder Clean Float
II. The Optimal Under-Invoicing of Exports
III. Allocation of Expenditure and Black Market Dollar Demand
Chapter 23 BOP Adjustment Policies in a Pegged Exchange Rate Regime
23.1 Two Types of Adjustment Policies
23.1.1 Expenditure Reducing Policies: Absorption Approach
23.1.2 Expenditure Switching Policy: Elasticity Approach
23.2 Synthesis Approach
23.2.1 Expenditure Reducing Policy
23.2.2 Expenditure Switching Policies
23.3 Internal and External Balance and the Policy Conflict
23.4 Advanced Topics on Devaluation
23.4.1 The Laursen–Metzler Effect
23.4.2 Non-traded Good, Real Exchange Rate, and Devaluation
Appendix A23
I. Elasticity Approach
II. Synthesis Approach: Slopes of YiYi and TBi = 0 Curves
III. Devaluation and Trade Balance
IV. Tariff, National Income, and Trade Balance
V. Devaluation and the Real Exchange Rate
Chapter 24 Money, Price, and Exchange Rate
24.1 The Monetarist Approach to BOP
24.1.1 Hume’s Price-Specie Flow Mechanism
24.1.2 Building Blocks of the Monetarist Model
24.1.3 Monetary Adjustment under Fixed Exchange Rate
24.1.4 Monetary Adjustment under Flexible Exchange Rate
24.2 Monetary Adjustment under Keynesian Assumption
24.2.1 Mundell’s Income-Specie Flow Mechanism
24.2.2 Capital Mobility and Stabilization Policies under PeggedExchange Rate
24.2.3 Capital Mobility and Stabilization Policies under Clean Float
24.3 Asset Market, Portfolio Choice, and the Exchange Rate
24.4 Purchasing Power Parity and the Exchange Rate
24.4.1 Wage-Price Flexibility and the Long-Run Exchange Rate
24.4.2 The Purchasing Power Parity Puzzle
24.4.3 Exchange Rate Pass-Through
Appendix A24
I. Price Changes in Monetarist Model under Flexible Exchange Rate
II. Mundell–Fleming Model under Flexible Exchange Rate: Shift of theIS Curve and the B = 0 Locu
Chapter 25 Financial Crises in the Developing World
25.1 Latin American Debt Crisis of the 1980s
25.1.1 Austerity measures and management of the Debt Crisis
25.2 Financial Crisis in Asia in late 1990s
25.2.1 Nature, Dimension and Cause of the crisis
25.2.2 Measures to manage the crisis
25.3 Current Scenario: Another Debt Crisis on the card?
Chapter 26 Currency Regimes Revisited
26.1 Policy Targets and Choice of Exchange Rate Regime
26.1.1 Targeting BOP Equilibrium
26.1.2 Insulating the Domestic Economy: Inflation and Output
26.1.3 Uncertainty and Destabilizing Speculative Activity
26.1.4 Internal Balance and Effectiveness of Domestic Stabilizing Policies
26.1.5 Autonomy of Domestic Monetary Policy
26.2 Capital Flows, Money Supply, and Exchange Rate: The Impossible Trinity
26.3 Optimum Currency Area
Glossary of International Agencies
Index
About the Author
