International Economics: Theory and Policy

Cover
Title Page
Copyright
Brief Contents
Contents
Preface
Chapter 1. Introduction
What Is International Economics About?
The Gains from Trade
The Pattern of Trade
How Much Trade?
Balance of Payments
Exchange Rate Determination
International Policy Coordination
The International Capital Market
International Economics: Trade and Money
Part 1: International Trade Theory
Chapter 2. World Trade: An Overview
Who Trades with Whom?
Size Matters: The Gravity Model
Using the Gravity Model: Looking for Anomalies
Impediments to Trade: Distance, Barriers, and Borders
The Changing Pattern of World Trade
Has the World Gotten Smaller?
What Do We Trade?
Service Offshoring
Do Old Rules Still Apply?
Summary
Chapter 3. Labor Productivity and Comparative Advantage: The Ricardian Model
The Concept of Comparative Advantage
A One-Factor Economy
Production Possibilities
Relative Prices and Supply
Trade in a One-Factor World
Determining the Relative Price after Trade
Box: Comparative Advantage in Practice: The Case of Usain Bolt
The Gains from Trade
A Note on Relative Wages
Box: Economic Isolation and Autarky Over Time and Over Space
Misconceptions about Comparative Advantage
Productivity and Competitiveness
Box: Do Wages Reflect Productivity?
The Pauper Labor Argument
Exploitation
Comparative Advantage with Many Goods
Setting Up the Model
Relative Wages and Specialization
Determining the Relative Wage in the Multigood Model
Adding Transport Costs and Nontraded Goods
Empirical Evidence on the Ricardian Model
Summary
Chapter 4. Specific Factors and Income Distribution
The Specific Factors Model
Box: What is a Specific Factor?
Assumptions of the Model
Production Possibilities
Prices, Wages, and Labor Allocation
Relative Prices and the Distribution of Income
International Trade in the Specific Factors Model
Income Distribution and the Gains from Trade
The Political Economy of Trade: A Preliminary View
The Politics of Trade Protection
Trade and Unemployment
Case Study: U.S. Manufacturing Employment and Chinese Import Competition
Box: The Trump Trade War
International Labor Mobility
Case Study: Wage and Social Benefits Convergence: Migrant Mobility in China
Case Study: Immigration and the U.S. Economy
Summary
Appendix to Chapter 4: Further Details on Specific Factors
Marginal and Total Product
Relative Prices and the Distribution of Income
Chapter 5. Resources and Trade: The Heckscher-Ohlin Model
Model of a Two-Factor Economy
Prices and Production
Choosing the Mix of Inputs
Factor Prices and Goods Prices
Resources and Output
Effects of International Trade between Two-Factor Economies
Relative Prices and the Pattern of Trade
Trade and the Distribution of Income
Case Study: North-South Trade and Income Inequality
Skill-Biased Technological Change and Income Inequality
Box: The Declining Labor Share of Income and Capital-Skill Complementarity
Factor-Price Equalization
Empirical Evidence on the Heckscher-Ohlin Model
Trade in Goods as a Substitute for Trade in Factors: Factor Content of Trade
Patterns of Exports between Developed and Developing Countries
Implications of the Tests
Summary
Appendix to Chapter 5: Factor Prices, Goods Prices, and Production Decisions
Choice of Technique
Goods Prices and Factor Prices
More on Resources and Output
Chapter 6. The Standard Trade Model
A Standard Model of a Trading Economy
Production Possibilities and Relative Supply
Relative Prices and Demand
The Welfare Effect of Changes in the Terms of Trade
Box: U.S. Consumer Gains from Chinese Imports
Determining Relative Prices
Economic Growth: A Shift of the RS Curve
Growth and the Production Possibility Frontier
World Relative Supply and the Terms of Trade
International Effects of Growth
Case Study: Has the Growth of Newly Industrialized Economies Hurt Advanced Nations?
Box: The Exposure of Developing Countries to Terms of Trade Shocks and the COVID-19 Pandemic
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD
Relative Demand and Supply Effects of a Tariff
Effects of an Export Subsidy
Implications of Terms of Trade Effects: Who Gains and Who Loses?
International Borrowing and Lending
Intertemporal Production Possibilities and Trade
The Real Interest Rate
Intertemporal Comparative Advantage
Summary
Appendix to Chapter 6: More on Intertemporal Trade
Chapter 7. External Economies of Scale and the International Location of Production
Economies of Scale and International Trade: An Overview
Economies of Scale and Market Structure
The Theory of External Economies
Specialized Suppliers
Labor Market Pooling
Knowledge Spillovers
External Economies and Market Equilibrium
External Economies and International Trade
External Economies, Output, and Prices
External Economies and the Pattern of Trade
Trade and Welfare with External Economies
Box: Holding the World Together
Dynamic Increasing Returns
Interregional Trade and Economic Geography
Box: The City and the Street
Summary
Chapter 8. Firms in the Global Economy: Export and Foreign Sourcing Decisions and Multinational Enterprises
The Theory of Imperfect Competition
Monopoly: A Brief Review
Monopolistic Competition
Monopolistic Competition and Trade
The Effects of Increased Market Size
Gains from an Integrated Market: A Numerical Example
The Significance of Intra-Industry Trade
Case Study: Automobile Intra-Industry Trade within ASEAN-4: 1998–2002
Firm Responses to Trade: Winners, Losers, and Industry Performance
Performance Differences across Producers
The Effects of Increased Market Size
Trade Costs and Export Decisions
Dumping
Case Study: Antidumping as Protectionism
Multinationals and Foreign Direct Investment
Patterns of Foreign Direct Investment Flows around the World
Case Study: COVID-19 and Foreign Direct Investment Flows around the World
Foreign Direct Investment and Foreign Sourcing Decisions
The Horizontal FDI Decision
The Foreign Sourcing Decision
The Outsourcing Decision: Make or Buy
Box: Whose Trade Is It?
Case Study: Shipping Jobs Overseas? Offshoring and Labor Market Outcomes in Germany
Consequences of Multinationals and Foreign Outsourcing
Summary
Appendix to chapter 8: Determining Marginal Revenue
Part 2: International Trade Policy
Chapter 9. The Instruments of Trade Policy
Basic Tariff Analysis
Supply, Demand, and Trade in a Single Industry
Effects of a Tariff
Measuring the Amount of Protection
Costs and Benefits of a Tariff
Consumer and Producer Surplus
Measuring the Costs and Benefits
Case Study: Winners and Losers of the Trump Trade War
Box: Tariffs and Retaliation
Other Instruments of Trade Policy
Export Subsidies: Theory
Box: The Unfriendly Skies: Settling the Longest Running Trade Dispute
Import Quotas: Theory
Case Study: Tariff-Rate Quota Origin and its Application in Practice with Oilseeds
Voluntary Export Restraints
Local Content Requirements
Box: Healthcare Protection with Local Content Requirements
Other Trade Policy Instruments
The Effects of Trade Policy: A Summary
Summary
Appendix to Chapter 9: Tariffs and Import Quotas in the Presence of Monopoly
The Model with Free Trade
The Model with a Tariff
The Model with an Import Quota
Comparing a Tariff and a Quota
Chapter 10. The Political Economy of Trade Policy
The Case for Free Trade
Free Trade and Efficiency
Additional Gains from Free Trade
Rent Seeking
Political Argument for Free Trade
National Welfare Arguments against Free Trade
The Terms of Trade Argument for a Tariff
The Domestic Market Failure Argument against Free Trade
How Convincing Is the Market Failure Argument?
Income Distribution and Trade Policy
Electoral Competition
Collective Action
Box: Politicians for Sale: Evidence from the 1990s
Modeling the Political Process
Who Gets Protected?
International Negotiations and Trade Policy
The Advantages of Negotiation
International Trade Agreements: A Brief History
The Uruguay Round
Trade Liberalization
Administrative Reforms: From the GATT to the WTO
Benefits and Costs
Box: Settling a Dispute—and Creating One
Case Study: Testing the WTO’s Metal
The End of Trade Agreements?
Box: Do Agricultural Subsidies Hurt the Third World?
Preferential Trading Agreements
Box: Free Trade Area Versus Customs Union
Box: Brexit
Case Study: Trade Diversion in South America
The Trans-Pacific Partnership
Summary
Appendix to Chapter 10: Proving That the Optimum Tariff Is Positive
Demand and Supply
The Tariff and Prices
The Tariff and Domestic Welfare
Chapter 11. Trade Policy in Developing Countries
Import-Substituting Industrialization
The Infant Industry Argument
Promoting Manufacturing through Protection
Case Study: Export-Led Strategy
Results of Favoring Manufacturing: Problems of Import-Substituting Industrialization
Trade Liberalization since 1985
Trade and Growth: Takeoff in Asia
Box: India’s Boom
Summary
Chapter 12. Controversies in Trade Policy
Sophisticated Arguments for Activist Trade Policy
Technology and Externalities
Imperfect Competition and Strategic Trade Policy
Box: A Warning From Intel’s Founder
Case Study: When the Chips Were Up
Globalization and Low-Wage Labor
The Anti-Globalization Movement
Trade and Wages Revisited
Labor Standards and Trade Negotiations
Environmental and Cultural Issues
The WTO and National Independence
Case Study: A Tragedy in Bangladesh
Globalization and the Environment
Globalization, Growth, and Pollution
The Problem of “Pollution Havens”
The Carbon Tariff Dispute
Trade Shocks and Their Impact on Communities
Summary
Part 3: Exchange Rates and Open-Economy Macroeconomics
Chapter 13. National Income Accounting and the Balance of Payments
The National Income Accounts
National Product and National Income
Capital Depreciation and International Transfers
Gross Domestic Product
National Income Accounting for an Open Economy
Consumption
Investment
Government Purchases
The National Income Identity for an Open Economy
An Imaginary Open Economy
The Current Account and Foreign Indebtedness
Saving and the Current Account
Private and Government Saving
Box: The Mystery of the Missing Deficit
The Balance of Payments Accounts
Examples of Paired Transactions
The Fundamental Balance of Payments Identity
The Current Account, Once Again
The Capital Account
The Financial Account
Statistical Discrepancy
Box: Multinationals’ Profit Shifting and Ireland’s Volatile GDP
Official Reserve Transactions
Case Study: The Assets and Liabilities of the World’s Biggest Debtor
Summary
Chapter 14. Exchange Rates and the Foreign Exchange Market: An Asset Approach
Exchange Rates and International Transactions
Domestic and Foreign Prices
Exchange Rates and Relative Prices
The Foreign Exchange Market
The Actors
Characteristics of the Market
Spot Rates and Forward Rates
Foreign Exchange Swaps
Futures and Options
The Demand for Foreign Currency Assets
Assets and Asset Returns
Risk and Liquidity
Interest Rates
Exchange Rates and Asset Returns
A Simple Rule
Return, Risk, and Liquidity in the Foreign Exchange Market
Equilibrium in the Foreign Exchange Market
Interest Parity: The Basic Equilibrium Condition
How Changes in the Current Exchange Rate Affect Expected Returns
The Equilibrium Exchange Rate
Interest Rates, Expectations, and Equilibrium
The Effect of Changing Interest Rates on the Current Exchange Rate
The Effect of Changing Expectations on the Current Exchange Rate
Case Study: What Explains the Carry Trade?
Forward Exchange Rates and Covered Interest Parity
Summary
Chapter 15. Money, Interest Rates, and Exchange Rates
Money Defined: A Brief Review
Money as a Medium of Exchange
Money as a Unit of Account
Money as a Store of Value
What Is Money?
How the Money Supply Is Determined
The Demand for Money by Individuals
Expected Return
Risk
Liquidity
Aggregate Money Demand
The Equilibrium Interest Rate: The Interaction of Money Supply and Demand
Equilibrium in the Money Market
Interest Rates and the Money Supply
Output and the Interest Rate
The Money Supply and the Exchange Rate in the Short Run
Linking Money, the Interest Rate, and the Exchange Rate
U.S. Money Supply and the Dollar/Euro Exchange Rate
Europe’s Money Supply and the Dollar/Euro Exchange Rate
Money, the Price Level, and the Exchange Rate in the Long Run
Money and Money Prices
The Long-Run Effects of Money Supply Changes
Empirical Evidence on Money Supplies and Price Levels
Money and the Exchange Rate in the Long Run
Inflation and Exchange Rate Dynamics
Short-Run Price Rigidity versus Long-Run Price Flexibility
Box: Money Supply Growth and Hyperinflation in Zimbabwe
Permanent Money Supply Changes and the Exchange Rate
Exchange Rate Overshooting
Case Study: Inflation Targeting and Exchange Rate in Emerging Countries
Summary
Chapter 16. Price Levels and the Exchange Rate in the Long Run
The Law of One Price
Purchasing Power Parity
The Relationship between PPP and the Law of One Price
Absolute PPP and Relative PPP
A Long-Run Exchange Rate Model Based on PPP
The Fundamental Equation of the Monetary Approach
Ongoing Inflation, Interest Parity, and PPP
The Fisher Effect
Empirical Evidence on PPP and the Law of One Price
Explaining the Problems with PPP
Trade Barriers and Nontradables
Departures from Free Competition
Differences in Consumption Patterns and Price Level Measurement
Box: Measuring And Comparing Countries’ Wealth Worldwide: The International Comparison Program (ICP)
PPP in the Short Run and in the Long Run
Case Study: Why Price Levels Are Lower in Poorer Countries
Beyond Purchasing Power Parity: A General Model of Long-Run Exchange Rates
The Real Exchange Rate
Demand, Supply, and the Long-Run Real Exchange Rate
Box: Sticky Prices and the Law of One Price: Evidence from Scandinavian Duty-Free Shops
Nominal and Real Exchange Rates in Long-Run Equilibrium
International Interest Rate Differences and the Real Exchange Rate
Real Interest Parity
Summary
Appendix to Chapter 16: The Fisher Effect, the Interest Rate, and the Exchange Rate under the Flexible-Price Monetary Approach
Chapter 17. Output and the Exchange Rate in the Short Run
Determinants of Aggregate Demand in an Open Economy
Determinants of Consumption Demand
Determinants of the Current Account
How Real Exchange Rate Changes Affect the Current Account
How Disposable Income Changes Affect the Current Account
The Equation of Aggregate Demand
The Real Exchange Rate and Aggregate Demand
Real Income and Aggregate Demand
How Output Is Determined in the Short Run
Output Market Equilibrium in the Short Run: The DD Schedule
Output, the Exchange Rate, and Output Market Equilibrium
Deriving the DD Schedule
Factors That Shift the DD Schedule
Asset Market Equilibrium in the Short Run: The AA Schedule
Output, the Exchange Rate, and Asset Market Equilibrium
Deriving the AA Schedule
Factors That Shift the AA Schedule
Short-Run Equilibrium for an Open Economy: Putting the DD and AA Schedules Together
Temporary Changes in Monetary and Fiscal Policy
Monetary Policy
Fiscal Policy
Policies to Maintain Full Employment
Inflation Bias and Other Problems of Policy Formulation
Permanent Shifts in Monetary and Fiscal Policy
A Permanent Increase in the Money Supply
Adjustment to a Permanent Increase in the Money Supply
A Permanent Fiscal Expansion
Macroeconomic Policies and the Current Account
Gradual Trade Flow Adjustment and Current Account Dynamics
The J-Curve
Exchange Rate Pass-Through and Inflation
Global Value Chains and Exchange Rate Effects on Export and Import Prices
The Current Account, Wealth, and Exchange Rate Dynamics
Box: Understanding Pass-Through to Import and Export Prices
The Liquidity Trap
Case Study: How Big Is the Government Spending Multiplier?
Summary
Appendix 1 to Chapter 17: Intertemporal Trade and Consumption Demand
Appendix 2 to Chapter 17: The Marshall-Lerner Condition and Empirical Estimates of Trade Elasticities
Appendix 3 to Chapter 17: The IS-LM Model and the DD-AA Model
Chapter 18. Fixed Exchange Rates and Foreign Exchange Intervention
Why Study Fixed Exchange Rates?
Central Bank Intervention and the Money Supply
The Central Bank Balance Sheet and the Money Supply
Foreign Exchange Intervention and the Money Supply
Sterilization
The Balance of Payments and the Money Supply
How the Central Bank Fixes the Exchange Rate
Foreign Exchange Market Equilibrium under a Fixed Exchange Rate
Money Market Equilibrium under a Fixed Exchange Rate
A Diagrammatic Analysis
Stabilization Policies with a Fixed Exchange Rate
Monetary Policy
Fiscal Policy
Changes in the Exchange Rate
Adjustment to Fiscal Policy and Exchange Rate Changes
Balance of Payments Crises and Capital Flight
Managed Floating and Sterilized Intervention
Perfect Asset Substitutability and the Ineffectiveness of Sterilized Intervention
Case Study: Can Markets Attack a Strong Currency? The Case of Switzerland, 2011–2015
Foreign Exchange Market Equilibrium under Imperfect Asset Substitutability
The Effects of Sterilized Intervention with Imperfect Asset Substitutability
Evidence on the Effects of Sterilized Intervention
Reserve Currencies in the World Monetary System
The Mechanics of a Reserve Currency Standard
The Asymmetric Position of the Reserve Center
The Gold Standard
The Mechanics of a Gold Standard
Symmetric Monetary Adjustment under a Gold Standard
Benefits and Drawbacks of the Gold Standard
The Bimetallic Standard
The Gold Exchange Standard
Case Study: The Demand for International Reserves
Summary
Appendix 1 to Chapter 18: Equilibrium in the Foreign Exchange Market with Imperfect Asset Substitutability
Demand
Supply
Equilibrium
Appendix 2 to Chapter 18: The Timing of Balance of Payments Crises
Appendix 3 to Chapter 18: The Monetary Approach to the Balance of Payments
Part 4: International Macroeconomic Policy
Chapter 19. International Monetary Systems: A Historical Overview
Macroeconomic Policy Goals in an Open Economy
Internal Balance: Full Employment and Price Level Stability
External Balance: The Optimal Level of the Current Account
Box: Can a Country Borrow Forever? The Case of New Zealand
Classifying Monetary Systems: The Open-Economy Monetary Trilemma
International Macroeconomic Policy under the Gold Standard, 1870–1914
Origins of the Gold Standard
External Balance under the Gold Standard
The Price-Specie-Flow Mechanism
The Gold Standard “Rules of the Game”: Myth and Reality
Internal Balance under the Gold Standard
Case Study: The Political Economy of Exchange Rate Regimes: Conflict over America’s Monetary Standard during the 1890s
The Interwar Years, 1918–1939
The Fleeting Return to Gold
International Economic Disintegration
Case Study: The International Gold Standard and the Great Depression
The Bretton Woods System and the International Monetary Fund
Goals and Structure of the IMF
Convertibility and the Expansion of Private Financial Flows
Speculative Capital Flows and Crises
Analyzing Policy Options for Reaching Internal and External Balance
Maintaining Internal Balance
Maintaining External Balance
Expenditure-Changing and Expenditure-Switching Policies
The External Balance Problem of the United States under Bretton Woods
Case Study: The End of Bretton Woods, Worldwide Inflation, and the Transition to Floating Rates
The Mechanics of Imported Inflation
Assessment
The Case for Floating Exchange Rates
Monetary Policy Autonomy
Symmetry
Exchange Rates as Automatic Stabilizers
Exchange Rates and External Balance
case study: The First Years of Floating Rates, 1973–1990
Macroeconomic Interdependence under a Floating Rate
Case Study: Transformation and Crisis in the World Economy
Box: The Thorny Problem of Currency Manipulation
Case Study: The Dangers of Deflation
What Has Been Learned Since 1973?
Monetary Policy Autonomy
Symmetry
The Exchange Rate as an Automatic Stabilizer
External Balance
The Problem of Policy Coordination
Are Fixed Exchange Rates Even an Option for Most Countries?
Summary
Appendix to Chapter 19: International Policy Coordination Failures
Chapter 20. Financial Globalization: Opportunity and Crisis
The International Capital Market and the Gains from Trade
Three Types of Gain from Trade
Risk Aversion
Portfolio Diversification as a Motive for International Asset Trade
The Menu of International Assets: Debt versus Equity
International Banking and the International Capital Market
The Structure of the International Capital Market
Offshore Banking and Offshore Currency Trading
The Shadow Banking System
Banking and Financial Fragility
The Problem of Bank Failure
Government Safeguards against Financial Instability
Moral Hazard and the Problem of “Too Big to Fail”
Box: Does the IMF Create Moral Hazard?
The Challenge of Regulating International Banking
The Financial Trilemma
International Regulatory Cooperation through 2007
Case Study: The Global Financial Crisis of 2007–2009
Box: Foreign Exchange Instability and Central Bank Swap Lines
International Regulatory Initiatives after the Global Financial Crisis
Metrics for International Capital Market Performance
The Extent of International Portfolio Equity Diversification
The Extent of Intertemporal Trade
The Efficiency of International Asset-Price Arbitrage
The Efficiency of the Foreign Exchange Market
Summary
Chapter 21. Optimum Currency Areas and the Euro
How the European Single Currency Evolved
What Has Driven European Monetary Cooperation?
Box: Brexit
The European Monetary System, 1979–1998
German Monetary Dominance and the Credibility Theory of the EMS
Market Integration Initiatives
European Economic and Monetary Union
The Euro and Economic Policy in the Euro Zone
The Maastricht Convergence Criteria and the Stability and Growth Pact
The European Central Bank and the Eurosystem
The Revised Exchange Rate Mechanism
The Theory of Optimum Currency Areas
Economic Integration and the Benefits of a Fixed Exchange Rate Area: The GG Schedule
Economic Integration and the Costs of a Fixed Exchange Rate Area: The LL Schedule
The Decision to Join a Currency Area: Putting the GG and LL Schedules Together
What Is an Optimum Currency Area?
Other Important Considerations
Case Study: Is Europe an Optimum Currency Area?
The Euro Crisis and the Future of EMU
Origins of the Crisis
Self-Fulfilling Government Default and the “Doom Loop”
A Broader Crisis and Policy Responses
ECB Outright Monetary Transactions
Response to the COVID-19 Pandemic
The Future of EMU
Summary
Chapter 22. Developing Countries: Growth, Crisis, and Reform
Income, Wealth, and Growth in the World Economy
The Gap between Rich and Poor
Has the World Income Gap Narrowed Over Time?
The Importance of Developing Countries for Global Growth
Structural Features of Developing Countries
Box: The Commodity Super Cycle
Developing-Country Borrowing and Debt
The Economics of Financial Inflows to Developing Countries
The Problem of Default
Alternative Forms of Financial Inflow
The Problem of “Original Sin”
The Debt Crisis of the 1980s
Reforms, Capital Inflows, and the Return of Crisis
East Asia: Success and Crisis
The East Asian Economic Miracle
Box: Why Have Developing Countries Accumulated High Levels of International Reserves?
Asian Weaknesses
Box: What Did East Asia Do Right?
The Asian Financial Crisis
Lessons of Developing-Country Crises
Reforming the World’s Financial “Architecture”
Capital Mobility and the Trilemma of the Exchange Rate Regime
“Prophylactic” Measures
Coping with Crisis
Box: Emerging Markets and Global Financial Cycles
Understanding Global Capital Flows and the Global Distribution of Income: Is Geography Destiny?
Box: Capital Paradoxes
Summary
Mathematical Postscripts
Postscript to Chapter 5: The Factor-Proportions Model
Factor Prices and Costs
Goods Prices and Factor Prices
Factor Supplies and Outputs
Postscript to Chapter 6: The Trading World Economy
Supply, Demand, and Equilibrium
Supply, Demand, and the Stability of Equilibrium
Effects of Changes in Supply and Demand
Economic Growth
A Transfer of Income
A Tariff
Postscript to Chapter 8: The Monopolistic Competition Model
Postscript to Chapter 20: Risk Aversion and International Portfolio Diversification
An Analytical Derivation of the Optimal Portfolio
A Diagrammatic Derivation of the Optimal Portfolio
The Effects of Changing Rates of Return
Merchandise Trade Flows with the United States (in 2018 U.S. dollars)
Gross National Product per Capita (in 2019 U.S. dollars)
Index
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