International Economics A Policy Approach

International Economics: A Policy Approach, 2E provides a simplified yet comprehensive analysis of international economic relations, with the objective of extracting maximum policy insight from a minimum number of theoretical constructs.

Written for students with only one or two previous courses in the principles of economics, it is designed primarily as a basic text for a one- or two-term undergraduate sequence in international economics. However, the material is also arranged so that the theoretical sections may be omitted and the main text used as supplementary reading in policy-oriented non-economics courses, such as international relations or business administration.   As domestic and global economies become ever more closely intertwined, world markets are an increasingly appropriate focus of study. International Economics: A Policy Approach gives students the conceptual tools they need to understand global economic relations.

DEFINITION 1

WHAT IS UNIQUE ABOUT INTERNATIONAL ECONOMICS? 1

INTERNATIONAL TRANSACTIONS—AN EMPIRICAL GLIMPSE 4

FOREIGN TRADE IN THE NATIONAL ECONOMY 6

Aggregate Measures 6

Disaggregation 7

Qualitative Considerations 9

Summary 9

FORUMS FOR TRADE AND MONETARY ISSUES 10

Summary 11

Important Concepts 11

Review Questions 11

ORGANIZATION OF THIS BOOK 12

INTRODUCTION 15

Review Question 16

THE PRINCIPLE OF COMPARATIVE ADVANTAGE 17

The Gains from Trade 17

Demand Considerations 21

COMPARATIVE OPPORTUNITY COST 24

Who ExportsWhat? 24

The Limits to Mutually Beneficial Exchange 26

Examples from U.S. Trade 29

ABSOLUTE ADVANTAGE AND WAGE RATES 30

SUMMARY OF POLICY IMPLICATIONS 32

DYNAMIC GAINS FROM INTERNATIONAL TRADE 33

Summary 36

Important Concepts 36

Review Questions 37

APPENDIX 2–1 39

More Advanced Analysis of the

Static Gains from Trade 39

THE FACTOR PROPORTIONS THEORY 49

Empirical Testing 54

ALTERNATIVE THEORIES 56

AN EMERGING CONSENSUS? 61

ECONOMIC ADJUSTMENT TO CHANGING

CIRCUMSTANCES 62

Summary 65

Important Concepts 65

Review Questions 66

APPENDIX 3–1 67

Formal Presentation of the Ricardian Model—

The Case of a One-Factor Economy 67

APPENDIX 3–2 71

The Factor Proportions Theory 71

APPENDIX 3–3 74

The Mobile Factor in a Sector-Specific Model 74

SOME INSTITUTIONAL CONSIDERATIONS 76

Export versus Import Duty 76

Protection versus Revenue 77

Types of Tariff 77

ECONOMIC EFFECTS OF THE TARIFF 79

Who Pays the Tariff? 79

Graphic Exposition 80

Domestic Effects 83

Effect on Real Income 87

Other Effects 89

Some Empirical Estimates 89

HOW PROTECTIVE IS THE TARIFF? 91

Ad Valorem and Specific Duty 91

Nominal versus Effective Tariff Rates 91

Aggregation Problems 97

ARGUMENTS FOR PROTECTION 98

APPROACHES TO FREE TRADE 102

The International Approach 103

The Regional Approach 103

Summary 108

Important Concepts 109

Review Questions 110

APPENDIX 4–1 112

Effect of the Tariff in the Large Country Case 112

APPENDIX 4–2 115

Economic Cost of the Tariff 115

APPENDIX 4–3 116

Static Effects of a Customs Union on

World’sWelfare 116

IMPORT QUOTAS 119

How Common Are Import Quotas 119

Economic Effects of Quotas 120

VOLUNTARY EXPORT RESTRAINTS 125

INTERNATIONAL COMMODITY AGREEMENTS 127

INTERNATIONAL CARTELS 130

LOCAL CONTENT REQUIREMENT 131

BORDER TAX ADJUSTMENTS 131

DUMPING 133

EXPORT SUBSIDIES 136

TIME COSTS AND SUPPLY CHANGE UNCERTAINTY 138

NTBS VERSUS TARIFFS 140

STRATEGIC TRADE POLICY? 140

Summary 143

Important Concepts 145

Review Questions 146

APPENDIX 5–1 147

A Domestic Monopolist Under a Tariff and a Quota 147

THE RECIPROCAL TRADE AGREEMENTS LEGISLATION 149

The 1958 Extension and the Safeguard Provisions 150

Trade-Adjustment Assistance 151

THE TRADE EXPANSION ACT OF 1962 151

THE TRADE REFORM ACT OF 1974 152

THE TRADE AND COMPETITIVENESS ACT OF 1988 153

REGIONAL AND BILATERAL RELATIONS 153

Trade Promotion Authority 154

THE POLITICAL ECONOMY OF PROTECTIONISM 154

INDUSTRIAL POLICY? 155

Summary 156

Important Concepts 157

Review Questions 157

Regionalism 159

THE EUROPEAN UNION 159

Forerunners 160

Internal Restrictions 160

Agricultural Policy 161

Political Institutions 162

Special Trading Arrangements between the EU and

Developing Countries 163

THE U.S.–CANADA FREE TRADE AGREEMENT 164

NAFTA 165

KORUS FTA 165

TRANSATLANTIC TRADE AND INVESTMENT PARTNERSHIP 166

THE WORLD TRADE ORGANIZATION (WTO) 167

Fundamental Principles 168

The Uruguay Round 169

THE WTO AND THE ENVIRONMENT 171

ECONOMIC REFORMS IN EASTERN EUROPE (TRANSITION

ECONOMIES) 173

Summary 175

Important Concepts 175

Review Questions 176

ALTERNATIVE TRADE APPROACHES TO DEVELOPMENT 177

China and India 179

THE U.N. CONFERENCE ON TRADE

AND DEVELOPMENT 180

Demands Concerning Primary Products 180

Manufactured Products 182

THE GENERALIZED SYSTEM OF PREFERENCES 183

The U.S. Scheme 184

The EU Scheme 185

The Japanese Scheme 185

Effect of the Tokyo and Uruguay Rounds on the GSP 186

REGIONAL INTEGRATION AMONG

DEVELOPING NATIONS 186

Summary 187

Important Concepts 188

Review Questions 188

MOTIVES FOR DIRECT INVESTMENTS ABROAD 191

Cost Considerations 192

Marketing Considerations 194

FOREIGN INVESTMENT AND ECONOMIC WELFARE

(REAL INCOME) 194

WorldWelfare 194

Host Country 194

Source (Investing) Country 196

INTERNATIONAL TRADE THEORY AND THE MULTINATIONAL

CORPORATION 198

The Phenomenon of Transfer Pricing 198

The Commodity Composition of Trade 199

INTERNATIONAL MIGRATION OF LABOR 200

GLOBALIZATION AND THE

OUTSOURCING CONTROVERSY 201

Summary 205

Important Concepts 206

Review Questions 206

THE NATURE OF FINANCIAL RELATIONS 209

Review Questions 210

MAIN ITEMS IN THE STATEMENT OF INTERNATIONAL

TRANSACTIONS 211

The Current Account 211

The Financial Account 215

Autonomous and Accommodating Items 216

Changes in Official Reserves 217

The Balance of Payments in the National Economy 218

USES AND MISUSES OF INTERNATIONAL TRANSACTIONS

STATISTICS 219

Long-Run Shifts in the Balance onMerchandise Trade 220

Placing Balance-of-Payments Considerations

in Proper Perspective 220

Limitations of Balance-of-Payments Information 221

Value-Added Effect 222

A Nation versus a State 223

Summary 224

Important Concepts 226

Review Questions 226

DEMAND AND SUPPLY OF FOREIGN CURRENCIES 229

SHIFTS IN THE DEMAND AND SUPPLY CURVES 232

Relative Interest Rates 233

Relative Price Change 234

Expectations 239

Other Factors 239

Summary 239

THE FOREIGN EXCHANGE MARKET 241

Market Organization 241

The Forward Exchange Market 243

Speculation 246

Summary 247

Important Concepts 248

Review Questions 49

APPENDIX 11–1 251

Exchange Rates for March 14, 2013 251

APPENDIX 11–2 252

The Relationship Between Demand for a Foreign

Currency (Dollar) and Supply for Domestic

Currency (Euro) 252

APPENDIX 11–3 253

Exchange Rate Determination 253

FIXED EXCHANGE RATES 254

History of Fixed Exchange Rates 258

THE CONTEMPORARY INTERNATIONAL

CURRENCY SYSTEM 259

Fluctuating Currencies 259

The Euro—A Currency of 17 Countries 261

Fixed Exchange Rates 262

Summary of Exchange Regimes 263

The Role of the U.S. Dollar 263

THE INCOMPATIBLE TRINITY 265

INDICES OF TRADE-WEIGHTED (EFFECTIVE)

EXCHANGE RATES 266

THE INTERNATIONAL MONETARY FUND (IMF) 268

Regular International Monetary Fund Procedures 268

Special Drawing Rights 269

Special Facilities 269

International Reserves 270

Summary 271

Important Concepts 272

Review Questions 273

“AUTOMATIC” PROCESSES 275

The Monetary Mechanism 275

Direct Effect on Private Expenditures 279

SUMMARY OF THE “AUTOMATIC” BALANCE-OF-PAYMENTS

ADJUSTMENT 285

GOVERNMENT POLICY 286

Domestic Policy Measures and the Current Account 286

Effect on Direct Investment Capital 288

Effect on Other Capital Movements 289

FOREIGN REPERCUSSIONS 290

THE BALANCE OF PAYMENTS IN THE CONTEXT OF GENERAL

POLICY OBJECTIVES 292

SOME UNANSWERED QUESTIONS 294

The Degree of Impact 294

Time Lags 295

Summary 296

Important Concepts 297

Review Questions 298

APPENDIX 13–1 300

The Foreign Trade Multiplier in a Small Country 300

APPENDIX 13–2 307

Foreign-Trade Multiplier with Foreign Repercussions 307

RELATIVE PRICE EFFECT 311

Effect on Dollar Outpayments 315

Effect on Dollar Inpayments 318

Outpayments and Inpayments Combined 322

Domestic Income Effect 323

Domestic Price Effect 324

Redistribution of Domestic Resources 325

Cost of Depreciation 326

ANOTHER VIEW OF DEPRECIATION: THE ABSORPTION

APPROACH 327

SUMMARY OF POLICY ANALYSIS 329

The Need for Policy Mixes 329

Effectiveness of Policy 330

Foreign Retaliation 331

What Governs Exchange Variations? 332

The Role of Fluctuating Exchange Rates 333

SOME UNANSWERED QUESTIONS 336

The Degree of Impact 337

Time Path 340

Summary 342

Important Concepts 344

Review Questions 344

APPENDIX 14–1 346

Stability of the Foreign-Exchange Market 346

APPENDIX 14–2 349

Equilibrium Exchange Rate and Output 349

APPENDIX 14–3 352

Policies to Attain Internal and External Balance 352

APPENDIX 14–4 355

On the Relative Effectiveness (for Domestic Purposes)

of Fiscal and Monetary Policy under Alternative

Exchange-Rate Regimes 355

THE UNDERLYING CAUSE OF EXTERNAL IMBALANCES

(UNDER FIXED EXCHANGE RATES) 359

Demand and Supply of Money 359

External Surplus 360

External Deficit 361

Role of Money 362

Monetary Policy 362

POLICY IMPLICATIONS 363

Devaluation 363

Tariffs, Quotas, and Exchange Control 364

Economic Growth 364

Change in the Rate of Interest 364

FLUCTUATING EXCHANGE RATES 365

EVALUATION 366

Summary 367

Important Concepts 368

Review Questions 368

FIXED VERSUS FLOATING EXCHANGE RATES 370

The Record of 1973–2008 374

Wider Bands and Crawling Pegs 375

Target Zones 376

Optimum Currency Areas 376

THE EURO—A CURRENCY OF 17 COUNTRIES 378

EXCHANGE CONTROL 380

BILATERAL CLEARING AGREEMENTS 385

Summary 386

Important Concepts 388

Review Questions 388

THE GOLD STANDARD (1870–1914) 389

FLUCTUATING EXCHANGE RATES AND

CURRENCY STABILIZATION 389

THE DEVALUATION CYCLE (1930–1939) 390

BRETTON WOODS (JULY 1944) 390

EUROPEAN RECONSTRUCTION (1945–1958) 391

THE DOLLAR GLUT (1959–1970) 391

THE SMITHSONIAN AGREEMENT 392

MARCH 1973—THE COLLAPSE OF BRETTON WOODS 393

THE 1974–1975 WORLD RECESSION AND

ITS AFTERMATH 393

THE RISE OF THE DOLLAR EXCHANGE RATE,

1981–1985 394

THE DOLLAR’S DECLINE, 1985–1989 396

THE 1990S 397

THE LDC DEBT PROBLEM OF THE 1980S 397

THE MEXICAN CURRENCY CRISIS OF DECEMBER 1994 399

THE ASIAN FINANCIAL CRISIS OF 1997–1999 400

THE NEW CENTURY 402

THE GLOBAL RECESSION OF 2008–2009 404

THE EURO AREA SOVEREIGN DEBT CRISIS 408

Summary 411

Important Concepts 412

Review Questions 412

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