INTERNATIONAL
ECONOMICS
SEVENTH EDITION
DENNIS R. APPLEYARD
DAVIDSON COLLEGE
ALFRED J. FIELD, JR.
UNIVERSITY OF NORTH CAROLINA
AT CHAPEL HILL
STEVEN L. COBB
UNIVERSITY OF NORTH TEXAS
I McGraw-Hill
I Irwln
BRIEF CONTENTS
CHAPTER 1
The World of International Economics, 1
PART 3
ADDITIONAL THEORIES
AND EXTENSIONS 173
PARTI
THE CLASSICAL THEORY OF TRADE 15
CHAPTER 2
Early Trade Theories: Mercantilism and the
Transition to the Classical World of David Ricardo, 17
CHAPTER 3
The Classical World of David Ricardo and
Comparative Advantage, 28
CHAPTER 11
Economic Growth and International Trade, 204
CHAPTER 12
International Factor Movements, 226
CHAPTER 4
Extensions and Tests of the Classical Model
of Trade, 42
PART 4
PART 2
NEOCLASSICAL TRADE THEORY
CHAPTER 10
Post-Heckscher-Ohlin Theories of Trade and IntraIndustry Trade, 175
TRADE POLICY 257
63
CHAPTER 5
Introduction to Neoclassical Trade Theory: Tools to
Be Employed, 65
CHAPTER 6
Gains from Trade in Neoclassical Theory, 87
CHAPTER 7
Offer Curves and the Terms of Trade, 103
CHAPTER 13
The Instruments of Trade Policy, 259
CHAPTER 14
The Impact of Trade Policies, 280
CHAPTER 15
Arguments for Interventionist Trade Policies, 319
CHAPTER 16
Political Economy and U.S. Trade Policy, 358
CHAPTER 8
The Basis for Trade: Factor Endowments and the
Heckscher-Ohlin Model, 125
CHAPTER 17
Economic Integration, 392
CHAPTER 9
Empirical Tests of the Factor Endowments
Approach, 153
CHAPTER 18
International Trade and the Developing
Countries, 418
xv
BRIEF CONTENTS
XVI
PART 5
FUNDAMENTALS OF INTERNATIONAL
MONETARY ECONOMICS 451
CHAPTER 19
The Balance-of-Payments Accounts, 453
CHAPTER26
Economic Policy in the Open Economy under
Flexible Exchange Rates, 662
CHAPTER 27
Prices and Output in the Open Economy: Aggregate
Supply and Demand, 683
PART 7
CHAPTER20
The Foreign Exchange Market, 476
CHAPTER21
International Financial Markets and Instruments:
An Introduction, 507
CHAPTER 22
The Monetary and Portfolio Balance Approaches to
External Balance, 541
ISSUES IN WORLD MONETARY
ARRANGEMENTS 711
CHAPTER28
Fixed or Flexible Exchange Rates? 713
CHAPTER 29
The International Monetary System: Past, Present,
CHAPTER 23
Price Adjustments and Balance-of-Payments
Disequilibrium, 573
and Future, 739
CHAPTER 24
National Income and the Current Account, 602
Photo Credits, 794
References for Further Reading, 775
Index, 795
PART 6
to)
MACROECONOMIC POLICY IN THE
OPEN ECONOMY 629
CHAPTER25
Economic Policy in the Open Economy under Fixed
Exchange Rates, 631
CONTENTS
CHAPTER 1
The World of International Economics, 1
j
INTRODUCTION, 1
THE NATURE OF MERCHANDISE TRADE, 3
v
The Geographical Composition of Trade, 3
The Commodity Composition of Trade, 6
U.S. International Trade, 7
WORLD TRADE IN SERVICES, 9
THE CHANGING DEGREE OF ECONOMIC
INTERDEPENDENCE, 11
SUMMARY, 12
Appendix: A General Reference List in International
Economics, 12
PARTI
THE CLASSICAL THEORY OF TRADE 15
CHAPTER 2
Early Trade Theories: Mercantilism and the Transition
to the Classical World of David Ricardo, 17
INTRODUCTION, 18
CHAPTER 3
The Classical World of David Ricardo and
Comparative Advantage, 28
INTRODUCTION, 29
Some Common Myths, 29
ASSUMPTIONS OF THE BASIC RICARDIAN
MODEL, 29
TITANS OF INTERNATIONAL ECONOMICS:
DAVID
RICARDO (1772-1823), 30
RICARDIAN COMPARATIVE ADVANTAGE, 30
IN THE REAL WORLD: EXPORT CONCENTRATION
OF SELECTED COUNTRIES, 33
COMPARATIVE ADVANTAGE AND THE TOTAL GAINS
FROM TRADE, 34
Resource Constraints, 34
Complete Specialization, 35
REPRESENTING THE RICARDIAN MODEL WITH
PRODUCTION-POSSIBILITIES FRONTIERS, 36
Production Possibilities—An Example, 36
Maximum Gains from Trade, 38
COMPARATIVE ADVANTAGE—SOME CONCLUDING
OBSERVATIONS, 39
SUMMARY, 40
The Oracle in the 21st Century, 18
MERCANTILISM, 18
The Mercantilist Economic System, 18
The Role of Government, 19
Mercantilism and Domestic Economic Policy, 20
IN THE REAL WORLD: MERCANTILISM IS STILL
ALIVE 21
THE CHALLENGE TO MERCANTILISM BY EARLY
CLASSICAL WRITERS, 22
David Hume—The Price-Specie-Flow
Mechanism, 22
CONCEPT BOX 1: CAPSULE SUMMARY OF THE
PRICE-SPECIE-FLOW MECHANISM, 22
CONCEPT
REVIEW—PRICE
ELASTICITY AND TOTAL EXPENDITURES, 23
CONCEPT BOX 2:
Adam Smith and the Invisible Hand, 24
TITANS OF INTERNATIONAL ECONOMICS:
ADAM SMITH (1723-1790), 25
SUMMARY, 26
CHAPTER4
Extensions and Tests of the Classical Model
of Trade, 42
INTRODUCTION, 43
Trade Complexities in the Real World, 43
THE CLASSICAL MODEL IN MONEY TERMS, 43
WAGE RATE LIMITS AND EXCHANGE RATE
LIMITS, 44
CONCEPT BOX 1: WAGE RATE LIMITS AND
EXCHANGE RATE LIMITS IN THE MONETIZED
RICARDIAN FRAMEWORK, 46
MULTIPLE COMMODITIES, 47
The Effect of Wage Rate Changes, 48
The Effect of Exchange Rate Changes, 49
TRANSPORTATION COSTS, 50
IN THE REAL WORLD: THE SIZE OF
TRANSPORTATION COSTS, 51
MULTIPLE COUNTRIES, 52
xvii
XV111
CONTENTS
EVALUATING THE CLASSICAL MODEL, 53
IN THE REAL WORLD: LABOR PRODUCTIVITY
IMPORT PENETRATION IN THE U.S. STEEL
INDUSTRY, 55
SUMMARY, 57
AND
Appendix: The Dornbusch, Fischer, and Samuelson
Model, 59
SOME IMPORTANT ASSUMPTIONS IN THE
ANALYSIS, 98
Costless Factor Mobility, 98
Full Employment of Factors of Production, 99
The Indifference Curve Map Can Show Welfare
Changes, 99
IN THE REAL WORLD: CHANGES IN INCOME
DISTRIBUTION WITH INCREASED TRADE, 100
SUMMARY, 101
PART 2
Appendix: "Actual" versus "Potential" Gains from
Trade, 102
NEOCLASSICAL TRADE THEORY 63
CHAPTER 7
Offer Curves and the Terms of Trade, 103
CHAPTER 5
Introduction to Neoclassical Trade Theory: Tools to
Be Employed, 65
INTRODUCTION, 104
Terms-of-Trade Shocks, 104
INTRODUCTION, 66
THE THEORY OF CONSUMER BEHAVIOR, 66
A COUNTRY'S OFFER CURVE, 104
CONCEPT BOX 1: THE TABULAR APPROACH TO
Consumer Indifference Curves, 66
TITANS OF INTERNATIONAL ECONOMICS:
DERIVING AN OFFER CURVE, 107
TRADING EQUILIBRIUM, 108
SHIFTS OF OFFER CURVES, 110
CONCEPT BOX 2: MEASUREMENT OF THE TERMS
OF TRADE, 113
ELASTICITY AND THE OFFER CURVE, 114
IN THE REAL WORLD: TERMS OF TRADE FOR
MAJOR GROUPS OF COUNTRIES, 1973-2007, 115
OTHER CONCEPTS OF THE TERMS OF TRADE, 119
FRANCIS YSIDRO EDGEWORTH (1845-1926), 67
The Budget Constraint, 71
Consumer Equilibrium, 72
PRODUCTION THEORY, 73
Isoquants, 73
IN THE REAL WORLD: CONSUMER
EXPENDITURE
PATTERNS IN THE UNITED STATES, 74
Isocost Lines, 76
Producer Equilibrium, 78
THE EDGEWORTH BOX DIAGRAM AND THE
PRODUCTION-POSSIBILITIES FRONTIER, 78
The Edgeworth Box Diagram, 78
The Production-Possibilities Frontier, 81
SUMMARY, 85
CHAPTER 6
Gains from Trade in Neoclassical Theory, 87
INTRODUCTION, 88
Income Terms of Trade, 119
Single Factoral Terms of Trade, 119
IN THE REAL WORLD: INCOME TERMS
OF
TRADE OF MAJOR GROUPS OF COUNTRIES,
1973-2007, 120
Double Factoral Terms of Trade, 120
SUMMARY, 121
Appendix A: Derivation of Import-Demand Elasticity
on an Offer Curve, 122
Appendix B: Elasticity and Instability of Offer Curve
Equilibria, 123
The Effects of Restrictions on U.S. Trade, 88
AUTARKY EQUILIBRIUM, 88
INTRODUCTION OF INTERNATIONAL TRADE, 90
The Consumption and Production Gains from
Trade, 92
Trade in the Partner Country, 94
MINIMUM CONDITIONS FOR TRADE, 95
Trade between Countries with Identical PPFs, 95
Trade between Countries with Identical Demand
Conditions, 97
Conclusions, 98
CHAPTER 8
The Basis for Trade: Factor Endowments and the
Heckscher-Ohlin Model, 125
INTRODUCTION, 126
Do Labor Standards Affect Comparative
Advantage? 126
SUPPLY, DEMAND, AND AUTARKY PRICES, 127
FACTOR ENDOWMENTS AND THE HECKSCHEROHLIN THEOREM, 127
Factor Abundance and Heckscher-Ohlin, 128
CONTENTS
XIX
Commodity Factor Intensity and HeckscherOhlin, 128
IN THE REAL WORLD: RELATIVE FACTOR
ENDOWMENTS IN SELECTED COUNTRIES, 129
IN THE REAL WORLD: RELATIVE FACTOR
INTENSITIES IN SELECTED INDUSTRIES, 2006, 131
The Heckscher-Ohlin Theorem, 131
TITANS OF INTERNATIONAL ECONOMICS: PAUL
ANTHONY SAM UELSON (BORN 1915), 134
The Factor Price Equalization Theorem, 135 {
The Stolper-Samuelson Theorem and Income
Distribution Effects of Trade in the
Heckscher-Ohlin Model, 138
Conclusions, 139
Demand Reversal, 140
Factor-Intensity Reversal, 141
Transportation Costs, 142
Imperfect Competition, 144
Immobile or Commodity-Specific Factors, 145
IN THE REAL WORLD: THE EFFECTS OF
146
MODEL
149
CHAPTER 9
Empirical Tests of the Factor Endowments
Approach, 153
INTRODUCTION, 154
Theories, Assumptions, and the Role of Empirical
Work, 154
THE LEONTIEF PARADOX, 154
SUGGESTED EXPLANATIONS FOR THE LEONTIEF
PARADOX, 155
Demand Reversal, 155
Factor-Intensity Reversal, 156
IN THE REAL WORLD: CAPITAL/LABOR
THE CASE OF MOZAMBIQUE,
169
IN THE REAL WORLD: OUTSOURCING
AND WAGE
INEQUALITY IN THE UNITED STATES, 171
SUMMARY, 172
,
PART 3
CHAPTER 10
Post-Heckscher-Ohlin Theories of Trade and
Intra-Industry Trade, 175
INTRODUCTION, 176
A Trade Myth, 176
POST-HECKSCHER-OHLIN THEORIES OF TRADE, 176
Other Considerations, 149
CONCEPT BOX 1: THE SPECIFIC-FACTORS
AND THE REAL WAGE OF WORKERS,
SUMMARY, 151
TRADE AND OTHER MYSTERIES, 166
HECKSCHER-OHLIN AND INCOME INEQUALITY, 166
IN THE REAL WORLD: TRADE AND INCOME
INEQUALITY IN A LESS DEVELOPED COUNTRY:
ADDITIONAL THEORIES AND
EXTENSIONS 173
THEORETICAL QUALIFICATIONS
TO HECKSCHER-OHLIN, 139
INTERNATIONAL CARTELS,
Productivity Differences and "Home Bias," 163
IN THE REAL WORLD: CASE OF THE MISSING
RATIOS IN
LEADING EXPORT AND IMPORT
INDUSTRIES—LEONTIEF TEST, 157
U.S. Tariff Structure, 158
Different Skill Levels of Labor, 159
The Role of Natural Resources, 159
OTHER TESTS OF THE HECKSCHER-OHLIN
THEOREM, 160
Factor Content Approach with Many Factors, 161
Comparisons of Calculated and Actual
Abundances, 163
The Imitation Lag Hypothesis, 176
The Product Cycle Theory, 177
Vertical Specialization-Based Trade, 181
Firm-Focused Theories, 181
The Linder Theory, 182
IN THE REAL WORLD: NEW VENTURE
INTERNATIONALIZATION,
184
REEXAMINATION OF THE
185
IN THE REAL WORLD: A
LINDER HYPOTHESIS,
Economies of Scale, 186
The Krugman Model, 187
Other Post-Heckscher-Ohlin Theories, 190
Concluding Comments on Post-Heckscher-Ohlin
Trade Theories, 192
INTRA-INDUSTRY TRADE, 192
IN THE REAL WORLD: GEOGRAPHY AND TRADE,
193
Reasons for Intra-Industry Trade in a Product
Category, 194
The Level of a Country's Intra-Industry Trade, 196
SUMMARY, 198
Appendix A: Economies of Scale, 199
Appendix B: Monopolistic Competition and Price
Elasticity of Demand in the Krugman Model, 201
Appendix C: Differentiating among Alternative Trade
Theories Using the Gravity Equation, 202
Appendix D: Measurement of Intra-Industry Trade, 203
CONTENTS
XX
CHAPTER 11
Potential Benefits and Costs of Foreign Direct
Investment to a Host Country, 239
Economic Growth and International Trade, 204
INTRODUCTION, 205
LABOR MOVEMENTS BETWEEN COUNTRIES, 242
China—A Regional Growth Pole, 205
Seasonal Workers in Germany, 242
Permanent Migration: A Greek in Germany, 242
IN THE REAL WORLD: MIGRATION FLOWS INTO THE
CLASSIFYING THE TRADE EFFECTS OF ECONOMIC
GROWTH, 205
Trade Effects of Production Growth, 206
Trade Effects of Consumption Growth, 207
UNITED STATES, 1986 AND 2006, 244
SOURCES OF GROWTH AND THE PRODUCTIONPOSSIBILITIES FRONTIER, 209
The Effects of Technological Change, 209
IN THE REAL WORLD: LABOR AND CAPITAL
s
-
REQUIREMENTS PER UNIT OF OUTPUT, 210
"SPILLOVERS " AS A
CONTRIBUTOR TO ECONOMIC GROWTH, 213
IN THE REAL WORLD:
The Effects of Factor Growth, 213
AGAINST FOREIGN MEDICAL GRADUATES? 253
IMMIGRATION INTO THE
UNITED STATES AND THE BRAIN DRAIN FROM
DEVELOPING COUNTRIES, 254
SUMMARY, 255
IN THE REAL WORLD:
FACTOR GROWTH, TRADE, AND WELFARE IN THE
SMALL-COUNTRY CASE, 216
GROWTH, TRADE, AND WELFARE: THE LARGECOUNTRY CASE, 217
CONCEPT BOX 1: LABOR FORCE GROWTH AND PER
CAPITA INCOME, 218
CONCEPT BOX 2: ECONOMIC GROWTH AND THE
OFFER CURVE, 220
GROWTH AND THE TERMS OF TRADE: A
DEVELOPING-COUNTRY PERSPECTIVE, 222
IN THE REAL WORLD: TERMS OF TRADE OF
BRAZIL, JORDAN, MOROCCO, AND THAILAND,
1980-2007, 223
PART 4
TRADE POLICY 257
CHAPTER 13
The Instruments of Trade Policy, 259
INTRODUCTION, 260
In What Ways Can I Interfere with Trade? 260
SUMMARY, 224
IMPORT TARIFFS, 261
CHAPTER 12
International Factor Movements, 226
INTRODUCTION, 227
INTERNATIONAL CAPITAL MOVEMENTS THROUGH
FOREIGN DIRECT INVESTMENT AND
MULTINATIONAL CORPORATIONS, 227
Foreign Investors in China: "Good" or "Bad" from
the Chinese Perspective? 227
Definitions, 229
Some Data on Foreign Direct Investment and
Multinational Corporations, 229
Reasons for International Movement of Capital, 232
IN THE REAL WORLD: DETERMINANTS OF
FOREIGN DIRECT INVESTMENT,
234
Analytical Effects of International Capital
Movements, 235
IN THE REAL WORLD: HOST-COUNTRY
DETERMINANTS
INFLOWS, 237
Economic Effects of Labor Movements, 245
Additional Considerations Pertaining to
International Migration, 248
IN THE REAL WORLD: IMMIGRANT REMITTANCES, 249
Immigration and the United States—Recent
Perspectives, 252
IN THE REAL WORLD: Is THERE A LICENSING BIAS
OF FOREIGN DIRECT
INVESTMENT
Specific Tariffs, 261
Ad Valorem Tariffs, 261
Other Features of Tariff Schedules, 261
IN THE REAL WORLD: U.S. TARIFF RATES, 263
IN THE REAL WORLD: THE U.S. GENERALIZED
SYSTEM OF PREFERENCES,
265
Measurement of Tariffs, 266
IN THE REAL WORLD: NOMINAL
AND EFFECTIVE
TARIFFS IN THE UNITED STATES AND JAPAN, 269
IN THE REAL WORLD: EFFECTIVE TARIFF RATES IN
BANGLADESH, 270
EXPORT TAXES AND SUBSIDIES, 271
NONTARIFF BARRIERS TO FREE TRADE, 272
Import Quotas, 272
"Voluntary" Export Restraints (VERs), 272
Government Procurement Provisions, 272
Domestic Content Provisions, 273
European Border Taxes, 273
Administrative Classification, 274
Restrictions on Services Trade, 274
xxi
CONTENTS
Trade-Related Investment Measures, 274
Additional Restrictions, 274
IN THE REAL WORLD: Is IT A CAR? IS IT
A
CHAPTER 15
Arguments for Interventionist Trade Policies, 319
INTRODUCTION, 320
TRADE POLICY AS A PART OF BROADER SOCIAL
POLICY OBJECTIVES FOR A NATION, 320
TRUCK?275
Additional Domestic Policies That Affect
Trade, 275
IN THE REAL WORLD: EXAMPLES OF CONTROL
Trade Taxes as a Source of Government
Revenue, 321
National Defense Argument for a Tariff, 321
IN THE REAL WORLD: THE RELATIVE IMPORTANCE
OVER TRADE, 276
IN THE REAL WORLD: THE EFFECT OF
PROTECTION INSTRUMENTS ON DOMESTIC
PRICES, 277
SUMMARY, 278
':
—
CHAPTER 14
The Impact of Trade Policies, 280
INTRODUCTION, 281
Gainers and Losers from Steel Tariffs, 281
TRADE RESTRICTIONS IN A PARTIAL EQUILIBRIUM
SETTING: THE SMALL-COUNTRY CASE, 282
The Impact of an Import Tariff, 282
The Impact of an Import Quota and a Subsidy to
Import-Competing Production, 285
The Impact of Export Policies, 288
IN THE REAL WORLD: REAL INCOME GAINS FROM
TRADE LIBERALIZATION IN AGRICULTURE, 289
TRADE RESTRICTIONS IN A PARTIAL
EQUILIBRIUM SETTING: T H E LARGE-COUNTRY
CASE, 291
Framework for Analysis, 291
The Impact of an Import Tariff, 294
The Impact of an Import Quota, 297
The Impact of an Export Tax, 299
IN THE REAL WORLD: WELFARE COSTS OF U.S.
IMPORT QUOTAS AND VERS,
301
OF TRADE TAXES AS A SOURCE OF GOVERNMENT
REVENUE, 322
Tariff to Improve the Balance of Trade, 323
The Terms-of-Trade Argument for Protection, 324
Tariff to Reduce Aggregate Unemployment, 326
Tariff to Increase Employment in a Particular
Industry, 327
IN THE REAL WORLD: INDUSTRY EMPLOYMENT
EFFECTS OF TRADE LIBERALIZATION,
327
IN THE REAL WORLD: COSTS OF PROTECTING
INDUSTRY EMPLOYMENT, 328
Tariff to Benefit a Scarce Factor of
Production, 328
Fostering "National Pride" in Key Industries, 329
Differential Protection as a Component of a
Foreign Policy/Aid Package, 329
PROTECTION TO OFFSET MARKET
IMPERFECTIONS, 330
The Presence of Externalities as an Argument for
Protection, 330
Tariff to Extract Foreign Monopoly Profit, 332
The Use of an Export Tax to Redistribute Profit
from a Domestic Monopolist, 333
PROTECTION AS A RESPONSE TO INTERNATIONAL
POLICY DISTORTIONS, 334
TRADE RESTRICTIONS IN A GENERAL EQUILIBRIUM
SETTING, 303
Tariff to Offset Foreign Dumping, 334
Tariff to Offset a Foreign Subsidy, 335
IN THE REAL WORLD: ANTIDUMPING ACTIONS IN
Protection in the Small-Country Case, 303
IN THE REAL WORLD: THE U. S. EXPORT
IN THE REAL WORLD: COUNTERVAILING DUTIES IN
The Impact of an Export Subsidy, 302
ENHANCEMENT PROGRAM FOR WHEAT, 304
Protection in the Large-Country Case, 306
OTHER EFFECTS OF PROTECTION, 309
IN THE REAL WORLD: DOMESTIC EFFECTS OF THE
SUGAR QUOTA SYSTEM, 310
SUMMARY, 311
Appendix A: The Impact of Protection in a Market
with Nonhomogeneous Goods, 312
Appendix B: The Impact of Trade Policy in the
Large-Country Setting Using Export Supply and
Import Demand Curves, 314
THE UNITED STATES, 336
THE UNITED STATES, 338
MISCELLANEOUS, INVALID ARGUMENTS, 340
STRATEGIC TRADE POLICY: FOSTERING
COMPARATIVE ADVANTAGE, 340
The Infant Industry Argument for Protection, 341
IN THE REAL WORLD: U.S. MOTORCYCLES—A
SUCCESSFUL INFANT INDUSTRY?
342
Economies of Scale in a Duopoly Framework, 343
Research and Development and Sales of a Home
Firm, 346
Export Subsidy in Duopoly, 348
CONTENTS
xxn
Strategic Government Interaction and World
Welfare, 351
IN THE REAL WORLD: AIRBUS INDUSTRIE, 352
Concluding Observations on Strategic Trade
Policy, 354
SUMMARY, 355
CHAPTER 16
Political Economy and U.S. Trade Policy, 358
INTRODUCTION, 359
Contrasting Vignettes on Trade Policy, 359
The Self-interest Approach to Trade Policy, 360
IN THE REAL WORLD: WORLD ATTITUDES TOWARD
FOREIGN TRADE, 361
IN THE REAL WORLD: CHANGING U.S. ATTITUDES
TOWARD INTERNATIONAL TRADE, 1992-2009, 362
IN THE REAL WORLD: POLITICS PUTS THE
364
The Social Objectives Approach, 364
An Overview of the Political Science Take on
Trade Policy, 366
Baldwin's Integrative Framework for Analyzing
Trade Policy, 366
A REVIEW OF U.S. TRADE POLICY, 367
Reciprocal Trade Agreements and Early GATT
Rounds, 367
The Kennedy Round of Trade Negotiations, 368
The Tokyo Round of Trade Negotiations, 368
IN THE REAL WORLD: THE DETERMINANTS OF
TRADE ADJUSTMENT ASSISTANCE,
THE STATIC AND DYNAMIC EFFECTS OF ECONOMIC
INTEGRATION, 394
Static Effects of Economic Integration, 394
IN THE REAL WORLD: ECONOMIC INTEGRATION
UNITS, 396
IN THE REAL WORLD: TRADE CREATION AND
THE POLITICAL ECONOMY OF TRADE POLICY, 359
SQUEEZE ON TOMATO IMPORTS,
Free-Trade Area, 393
Customs Union, 394
Common Market, 394
Economic Union, 394
370
The Uruguay Round of Trade Negotiations, 371
Trade Policy Issues after the Uruguay Round, 373
IN THE REAL WORLD: TARIFF REDUCTIONS
RESULTING FROM THE URUGUAY ROUND, 374
IN THE REAL WORLD: NATIONAL SOVEREIGNTY
AND THE WORLD TRADE ORGANIZATION, 377
The Doha Development Agenda, 377
Recent U.S. Actions, 380
IN THE REAL WORLD: HEALTH, SAFETY, OR
PROTECTIONISM?, 385
CONCLUDING OBSERVATIONS ON TRADE POLICY, 386
The Conduct of Trade Policy, 387
Empirical Work on Political Economy, 387
SUMMARY, 389
Appendix: A WTO Statement on Its Aims and
Functions, 390
CHAPTER 17
Economic Integration, 392
INTRODUCTION, 393
An Expanded European Union, 393
TYPES OF ECONOMIC INTEGRATION, 393
TRADE DIVERSION IN THE EARLY STAGES OF
EUROPEAN ECONOMIC INTEGRATION, 397
General Conclusions on Trade Creation/Trade
Diversion, 400
CONCEPT BOX 1: TRADE DIVERSION IN GENERAL
EQUILIBRIUM,
401
Dynamic Effects of Economic Integration, 402
Summary of Economic Integration, 402
THE EUROPEAN UNION, 403
History and Structure, 403
IN THE REAL WORLD: THE EAST AFRICAN
COMMUNITY,
404
Growth and Disappointments, 405
Completing the Internal Market, 406
Prospects, 406
IN THE REAL WORLD: CANADIAN REGIONAL TRADE
AGREEMENTS—Is THE EU NEXT?, 408
NORTH AMERICAN ECONOMIC INTEGRATION, 409
Greater Integration, 409
Worries over NAFTA, 410
NAFTA and Recent U.S. Free-Trade Agreements, 411
IN THE REAL WORLD: NAFTA—MYTHS VERSUS
FACTS, 412
OTHER MAJOR ECONOMIC INTEGRATION
EFFORTS, 413
MERCOSUR, 413
CAFTA-DR, 414
FTAA,414
Chilean Trade Agreements, 414
IN THE REAL WORLD: ASIAN ECONOMIC
INTERDEPENDENCE LEADS TO GREATER
INTEGRATION, 415
APEC, 416
SUMMARY, 416
CHAPTER 18
International Trade and the Developing Countries, 418
INTRODUCTION, 419
Strong Recovery in East Asia, 419
AN OVERVIEW OF THE DEVELOPING COUNTRIES, 419
A Closer Look at the Least Developed Countries, 420
CONTENTS
XXI11
THE ROLE OF TRADE IN FOSTERING ECONOMIC
DEVELOPMENT, 421
The Static Effects of Trade on Economic
Development, 421
The Dynamic Effects of Trade on Economic
Development, 423
Export Instability, 424
Potential Causes of Export Instability, 424
Long-Run Terms-of-Trade Deterioration, 426
TITANS OF INTERNATIONAL ECONOMICS: RAUL
PREBISCH (1901-1986) AND HANS WOLFGANG"
SINGER (1910-2006), 427
TRADE, ECONOMIC GROWTH, AND DEVELOPMENT:
THE EMPIRICAL EVIDENCE, 429
TRADE POLICY AND THE DEVELOPING
COUNTRIES, 430
Policies to Stabilize Export Prices or Earnings, 430
Problems with International Commodity
Agreements, 431
IN THE REAL WORLD: MANAGING PRICE
INSTABILITY, 432
SUMMARY STATEMENT, 460
IN THE REAL WORLD: CURRENT
ACCOUNT
DEFICITS, 464
BALANCE-OF-PAYMENTS SUMMARY STATEMENT
FOR THE UNITED STATES, 466
IN THE REAL WORLD: U.S. TRADE DEFICITS WITH
JAPAN, CHINA, OPEC, AND CANADA, 467
INTERNATIONAL INVESTMENT POSITION OF THE
UNITED STATES, 471
IN THE REAL WORLD: TRENDS IN THE U.S.
INTERNATIONAL INVESTMENT POSITION, 473
SUMMARY, 475
CHAPTER20
The Foreign Exchange Market, 476
Suggested Policies to Combat a Long-Run
Deterioration in the Terms of Trade, 433
IN THE REAL WORLD: THE LENGTH OF
COMMODITY PRICE SHOCKS, 433
IN THE REAL WORLD: COMECON FOREIGN
PRICING STRATEGIES, 435
RECENT GROWTH OF TRADE AND CAPITAL
MOVEMENTS, 455
CREDITS AND DEBITS IN BALANCE-OF-PAYMENTS
ACCOUNTING, 457
SAMPLE ENTRIES IN THE BALANCE-OF-PAYMENTS
ACCOUNTS, 458
ASSEMBLING A BALANCE-OF-PAYMENTS
INTRODUCTION, 477
The Case of the Wayward U.S. Dollar, 477
TRADE
Inward-Looking versus Outward-Looking Trade
Strategies, 436
IN THE REAL WORLD: TERRORISM AND ITS EFFECT
THE FOREIGN EXCHANGE RATE AND THE MARKET
FOR FOREIGN EXCHANGE, 477
Demand Side, 478
Supply Side, 478
The Market, 479
ON DEVELOPING COUNTRIES, 439
IN THE REAL WORLD: EMERGING CONNECTIONS
BETWEEN ASIA AND AFRICA, 441
THE EXTERNAL DEBT PROBLEM OF THE
DEVELOPING COUNTRIES, 441
THE SPOT MARKET, 481
Causes of the Developing Countries' Debt
Problem, 442
Possible Solutions to the Debt Problem, 444
IN THE REAL WORLD: THE MULTILATERAL DEBT
EXCHANGE RATES OF THE U.S. DOLLAR, 486
THE FORWARD MARKET, 489
IN THE REAL WORLD: SPOT AND PPP EXCHANGE
RELIEF INITIATIVE,
SUMMARY, 450
CONCEPT BOX 1:
446
Principal Actors, 481
The Role of Arbitrage, 481
Different Measures of the Spot Rate, 482
IN THE REAL WORLD: NOMINAL AND REAL
RATES,
490
CURRENCY FUTURES
495
CONCEPT BOX 2: CURRENCY FUTURES OPTION
QUOTATIONS, 496
THE LINK BETWEEN THE FOREIGN EXCHANGE
MARKETS AND THE FINANCIAL MARKETS, 497
QUOTATIONS,
PARTS
FUNDAMENTALS OF INTERNATIONAL
MONETARY ECONOMICS 451
CHAPTER 19
The Balance-of-Payments Accounts, 453
INTRODUCTION, 454
China's Trade Surpluses and Deficits, 454
The Basis for International Financial
Flows, 497
Covered Interest Parity and Financial Market
Equilibrium, 499
Simultaneous Adjustment of the Foreign Exchange
Markets and the Financial Markets, 503
SUMMARY, 505
CONTENTS
XXIV
CHAPTER 21
International Financial Markets and Instruments:
An Introduction, 507
INTRODUCTION, 508
Financial Globalization: A Recent Phenomenon? 508
INTERNATIONAL BANK LENDING, 508
THE INTERNATIONAL BOND MARKET (DEBT
SECURITIES), 514
IN THE REAL WORLD: INTEREST RATES ACROSS
COUNTRIES, 517
}
INTERNATIONAL STOCK MARKETS, 519
FINANCIAL LINKAGES AND EUROCURRENCY
DERIVATIVES, 521
Basic International Financial Linkages:
A Review, 521
International Financial Linkages and the
Eurodollar Market, 523
IN THE REAL WORLD: U.S. DOMESTIC AND
EURODOLLAR DEPOSIT AND LENDING RATES,
1989-2008, 525
Hedging Eurodollar Interest Rate Risk, 528
CONCEPT BOX 1: EURODOLLAR INTEREST RATE
FUTURES MARKET QUOTATIONS, 532
INTEREST OPTION
QUOTATIONS, 534
THE CURRENT GLOBAL DERIVATIVES MARKET, 536
SUMMARY, 539
CONCEPT BOX 2: EURODOLLAR
CHAPTER 22
The Monetary and Portfolio Balance Approaches to
External Balance, 541
INTRODUCTION, 542
The New Globalized Capital, 542
THE MONETARY APPROACH TO THE BALANCE OF
PAYMENTS, 542
The Supply of Money, 543
The Demand for Money, 544
IN THE REAL WORLD: RELATIONSHIPS
BETWEEN
MONETARY CONCEPTS IN THE UNITED STATES, 545
Monetary Equilibrium and the Balance of
Payments, 548
THE MONETARY APPROACH TO THE EXCHANGE
RATE, 551
IN THE REAL WORLD: MONEY GROWTH AND
EXCHANGE RATES IN THE RUSSIAN TRANSITION, 552
Portfolio Balance, 556
Portfolio Adjustments, 557
EXCHANGE RATE OVERSHOOTING, 560
TITANS OF INTERNATIONAL ECONOMICS:
RUDIGER DORNBUSCH (1942-2002), 561
SUMMARY, 567
Appendix: A Brief Look at Empirical Work on the
Monetary and Portfolio Balance Approaches, 568
CHAPTER 23
Price Adjustments and Balance-of-Payments
Disequilibrium, 573
INTRODUCTION, 574
Price Adjustment: The Exchange Rate Question, 574
THE PRICE ADJUSTMENT PROCESS AND THE
CURRENT ACCOUNT UNDER A FLEXIBLE-RATE
SYSTEM, 574
The Demand for Foreign Goods and Services and
the Foreign Exchange Market, 575
Market Stability and the Price Adjustment
Mechanism, 578
CONCEPT BOX 1: ELASTICITY OF IMPORT DEMAND
AND THE SUPPLY CURVE OF FOREIGN
WHEN DEMAND IS LINEAR, 582
EXCHANGE
The Price Adjustment Process: Short Run versus
Long Run, 585
IN THE REAL WORLD: ESTIMATES OF IMPORT AND
EXPORT DEMAND ELASTICITIES, 586
EXCHANGE RATE PASSTHROUGH OF FOREIGN EXPORTS TO THE UNITED
STATES, 588
IN THE REAL WORLD: JAPANESE EXPORT PRICING
AND PASS-THROUGH IN THE 1990S, 589
IN THE REAL WORLD: U.S. AGRICULTURAL
EXPORTS AND EXCHANGE RATE CHANGES, 593
THE PRICE ADJUSTMENT MECHANISM IN A FIXED
EXCHANGE RATE SYSTEM, 593
IN THE REAL WORLD:
Gold Standard, 593
The Price Adjustment Mechanism and the Pegged
Rate System, 596
IN THE REAL WORLD: EXCHANGE RATE REGIMES
IN TRANSITION ECONOMIES, 596
SUMMARY, 598
Appendix: Derivation of the Marshall-Lerner
Condition, 599
A Two-Country Framework, 553
THE PORTFOLIO BALANCE APPROACH TO THE
BALANCE OF PAYMENTS AND THE EXCHANGE
RATE, 554
Asset Demands, 555
CHAPTER 24
National Income and the Current Account, 602
INTRODUCTION, 603
Does GDP Growth Cause Trade Deficits? 603
CONTENTS
XXV
THE CURRENT ACCOUNT AND NATIONAL
INCOME, 603
The Keynesian Income Model, 603
TITANS OF INTERNATIONAL ECONOMICS: JOHN
MAYNARD KEYNES (1883-1946), 604
Determining the Equilibrium Level of National
Income, 609
IN THE REAL WORLD: AVERAGE PROPENSITIES TO
IMPORT, SELECTED COUNTRIES, 610
The Autonomous Spending Multiplier, 615 !
IN THE REAL WORLD: MULTIPLIER ESTIMATES FOR
INDIA, 617
The Current Account and the Multiplier, 618
Foreign Repercussions and the Multiplier
Process, 619
IN THE REAL WORLD: CORRELATIONS OF
MACROECONOMIC VARIABLES ACROSS
COUNTRIES, 620
IN THE REAL WORLD: SYNCHRONIZATION OF GDP
MOVEMENTS ACROSS COUNTRIES, 621
AN OVERVIEW OF PRICE AND INCOME
ADJUSTMENTS AND SIMULTANEOUS EXTERNAL
AND INTERNAL BALANCE, 622
SUMMARY, 623
Appendix A: The Multiplier When Taxes Depend on
Income, 625
Appendix B: Derivation of the Multiplier with
Foreign Repercussions, 626
General Equilibrium in the Real Sector: The IS
Curve, 640
Simultaneous Equilibrium in the Monetary and
Real Sectors, 642
Equilibrium in the Balance of Payments: The BP
Curve, 642
IN THE REAL WORLD: THE PRESENCE OF
EXCHANGE CONTROLS IN THE CURRENT
FINANCIAL SYSTEM, 647
Equilibrium in the Open Economy: The
Simultaneous Use of the LM, IS, and BP
Curves, 649
THE EFFECTS OF FISCAL POLICY UNDER FIXED
EXCHANGE RATES, 651
THE EFFECTS OF MONETARY POLICY UNDER FIXED
EXCHANGE RATES, 654
THE EFFECTS OF OFFICIAL CHANGES IN THE
EXCHANGE RATE, 655
IN THE REAL WORLD: THE RISE AND FALL OF A
CURRENCY BOARD—THE CASE
OF ARGENTINA, 657
SUMMARY, 659
Appendix: The Relationship between the Exchange
Rate and Income in Equilibrium, 660
CHAPTER 26
Economic Policy in the Open Economy under
Flexible Exchange Rates, 662
INTRODUCTION, 663
PART 6
MACROECONOMIC POLICY IN THE OPEN
ECONOMY 629
CHAPTER 25
Economic Policy in the Open Economy under Fixed
Exchange Rates, 631
INTRODUCTION, 632
The Case of the Chinese Renminbi Yuan, 632
TARGETS, INSTRUMENTS, AND ECONOMIC POLICY IN
A TWO-INSTRUMENT, TWO-TARGET MODEL, 632
7JV THE REAL WORLD: EXCHANGE RATE
ARRANGEMENTS, 633
TITANS OF INTERNATIONAL ECONOMICS:
ROBERTA. MUNDELL (BORN 1932), 634
GENERAL EQUILIBRIUM IN THE OPEN ECONOMY
MODEL: THE IS/LM/BP MODEL, 637
General Equilibrium in the Money Market: The
LM Curve, 637
Is There a Case for Flexible Rates? 663
THE EFFECTS OF FISCAL AND MONETARY POLICY
UNDER FLEXIBLE EXCHANGE RATES WITH
DIFFERENT CAPITAL MOBILITY
ASSUMPTIONS, 663
CONCEPT BOX 1: REAL AND FINANCIAL
FACTORS THAT INFLUENCE THE BP
CURVE, 665
The Effects of Fiscal Policy under Different
Capital Mobility Assumptions, 665
The Effects of Monetary Policy under Different
Capital Mobility Assumptions, 668
Policy Coordination under Flexible Exchange
Rates, 670
THE EFFECTS OF EXOGENOUS SHOCKS IN THE
IS/LM/BP MODEL WITH IMPERFECT MOBILITY
OF CAPITAL, 672
IN THE REAL WORLD: COMMODITY PRICES AND
U.S. REAL GDP, 1972-2008, 673
IN THE REAL WORLD: POLICY FRICTIONS IN AN
INTERDEPENDENT
WORLD, 677
CONTENTS
XXVI
IN THE REAL WORLD:
POLICY COORDINATION,
AND THE G-7, 678
SUMMARY, 680
MACROECONOMIC
THE IMF,
IN THE REAL WORLD: INFLATION AND
UNEMPLOYMENT IN THE UNITED STATES,
1970-2007, 706
SUMMARY, 709
Appendix: Policy Effects, Open-Economy
Equilibrium, and the Exchange Rate under
Flexible Rates, 680
CHAPTER 27
Prices and Output in the Open Economy: Aggregate
v
Supply and Demand, 683
INTRODUCTION, 684
Crisis in Argentina, 684
AGGREGATE DEMAND AND SUPPLY IN THE CLOSED
ECONOMY, 685
Aggregate Demand in the Closed
Economy, 685
Aggregate Supply in the Closed Economy, 686
Equilibrium in the Closed Economy, 690
IN THE REAL WORLD: U.S. ACTUAL AND NATURAL
INCOME AND UNEMPLOYMENT, 691
AGGREGATE DEMAND AND SUPPLY IN THE OPEN
ECONOMY, 692
Aggregate Demand in the Open Economy under
Fixed Rates, 692
Aggregate Demand in the Open Economy under
Flexible Rates, 694
THE NATURE OF ECONOMIC ADJUSTMENT AND
MACROECONOMIC POLICY IN THE
OPEN-ECONOMY AGGREGATE SUPPLY AND
DEMAND FRAMEWORK, 694
The Effect of Exogenous Shocks on the Aggregate
Demand Curve under Fixed and Flexible
Rates, 694
The Effect of Monetary and Fiscal Policy on the
Aggregate Demand Curve under Fixed and
Flexible Rates, 696
Summary, 697
MONETARY AND FISCAL POLICY IN THE OPEN
ECONOMY WITH FLEXIBLE PRICES, 697
Monetary Policy, 697
Currency Adjustments under Fixed Rates, 701
Fiscal Policy, 701
Economic Policy and Supply
Considerations, 702
IN THE REAL WORLD: ECONOMIC PROGRESS IN
SUB-SAHARAN AFRICA, 704
EXTERNAL SHOCKS AND THE OPEN
ECONOMY, 704
PART 7
ISSUES IN WORLD MONETARY
ARRANGEMENTS 711
CHAPTER 28
Fixed or Flexible Exchange Rates? 713
INTRODUCTION, 714
Slovenia's Changeover to the Euro—A Clear
Success, 714
CENTRAL ISSUES IN THE FIXED-FLEXIBLE
EXCHANGE RATE DEBATE, 714
Do Fixed or Flexible Exchange Rates Provide for
Greater "Discipline" on the Part of
Policymakers? 714
Would Fixed or Flexible Exchange Rates Provide
for Greater Growth in International Trade and
Investment? 716
IN THE REAL WORLD: EXCHANGE RISK AND
INTERNATIONAL TRADE, 717
Would Fixed or Flexible Exchange Rates Provide for
Greater Efficiency in Resource Allocation? 718
Is Macroeconomic Policy More Effective in
Influencing National Income under Fixed or
Flexible Exchange Rates? 720
Will Destabilizing Speculation in Exchange
Markets Be Greater under Fixed or Flexible
Exchange Rates? 721
IN THE REAL WORLD: RESERVE HOLDINGS
UNDER FIXED AND FLEXIBLE
RATES, 721
EXCHANGE
TITANS OF INTERNATIONAL ECONOMICS:
MILTON FRIEDMAN (1912-2006), 725
Will Countries Be Better Protected from External
Shocks under a Fixed or a Flexible Exchange
Rate System? 726
IN THE REAL WORLD: "INSULATION" WITH
FLEXIBLE RATES—THE CASE OF JAPAN, 727
CURRENCY BOARDS, 728
Advantages of a Currency Board, 728
IN THE REAL WORLD: CURRENCY BOARDS IN
ESTONIA AND LITHUANIA,
729
Disadvantages of a Currency Board, 730
CONTENTS
XXV11
OPTIMUM CURRENCY AREAS, 731
HYBRID SYSTEMS COMBINING FIXED AND
FLEXIBLE EXCHANGE RATES, 733
Exchange Rate Variations, 754
Short-Run Fluctuations in the 1990s and 2000s, 754
IN THE REAL WORLD: ADOPTING THE EURO IN
Wider Bands, 733
Crawling Pegs, 734
Managed Floating, 735
IN THE REAL WORLD: A
THE NEW MEMBER STATES, 755
CURRENT EXCHANGE RATE ARRANGEMENTS, 756
EXPERIENCE UNDER THE CURRENT
INTERNATIONAL MONETARY SYSTEM, 759
CRAWLING PEG IN
COLOMBIA, 736
SUMMARY, 737
v
CHAPTER 29
- The International Monetary System: Past, Present,
and Future, 739
INTRODUCTION, 740
Global Crisis Requires a Global Solution, 740
IN THE REAL WORLD: FLEXIBLE EXCHANGE RATES
IN POST-WORLD WAR I EUROPE: THE UNITED
KINGDOM, FRANCE, AND NORWAY, 741
THE BRETTON WOODS SYSTEM, 743
The Goals of the IMF, 743
The Bretton Woods System in Retrospect, 746
GRADUAL EVOLUTION OF A N E W INTERNATIONAL
MONETARY SYSTEM, 747
Early Disruptions, 747
Special Drawing Rights, 748
The Breaking of the Gold-Dollar Link and the
Smithsonian Agreement, 749
The Jamaica Accords, 750
The European Monetary System, 750
The Global Financial Crisis and Recession of
2007-, 763
SUGGESTIONS FOR REFORM OF THE
INTERNATIONAL MONETARY SYSTEM, 764
A Return to the Gold Standard, 764
A World Central Bank, 765
CONCEPT BOX 1: A WORLD CENTRAL
A THREE-CURRENCY
MONETARY
BANK WITHIN
UNION, 766
The Target Zone Proposal, 767
Controls on Capital Flows, 768
Greater Stability and Coordination of
Macroeconomic Policies across Countries, 770
IN THE REAL WORLD: POLICY COORDINATION AND
THE G-20, 771
THE INTERNATIONAL MONETARY SYSTEM
AND THE DEVELOPING COUNTRIES, 772
SUMMARY, 773
References for Further Reading, 775
Photo Credits, 794
Index, 795