International economics

INTERNATIONAL

ECONOMICS THIRD EDITION

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THIRD EDITION

INTERNATIONAL

ECO

W. Charles Sawyer

Texas Christian University

Richard L. Sprinkle

University of Texas at El Paso

PEARSON

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About the Authors

W. Charles Sawyer is a Professor of Economics at Texas Christian University. He

earned both a B.A. and an M.A. from St. Mary’s University and a Ph.D. from the Uni￾versity of Arkansas. He has taught at the University of Arkansas, the University of

Southern Mississippi, Louisiana State University, and the Helsinki School of Economics

and Business. In addition to his academic teaching, he has taught in a num ber of exec￾utive development programs for both the public and private sectors. He has served as

a consultant for the U nited Nations Industrial Development O rganization and the

United Nations Conference on Trade and Development. Professor Sawyer is also the

Hal Wright Professor of Latin American Economics at TCU.

Professor Sawyer’s primary research interests have been in the areas of inter￾national trade and economic development. He has authored or coauthored a num ber

of research articles that have appeared in journals such as the Review of Economics and

Statistics, the Journal of Regional Science, Economic Development and Cultural Change, and

Weltwirtschafiliches Archiv. His current research focuses on the effects of international

trade on U.S. states and regions. He is a mem ber of the American Economic Associa￾tion and the International Economics and Finance Society.

Richard L. Sprinkle is a Professor of Economics at the University of Texas at El Paso.

Professor Sprinkle holds a Ph.D. in Economics from the University o f Arkansas

with specializations in international economics, international finance, and applied

econom etrics. He currently teaches m acroeconom ics, econom etrics, and inter￾national economics. Over the last thirty years he has been affiliated with the College of

the Ozarks, Louisiana State University, the Helsinki School of Economics and Busi￾ness, the University of Arkansas, and the University of Texas at El Paso.

Professor Sprinkle’s research has focused on U.S. international trade relations

and the effects of trade agreem ents on trade and employm ent. H e has published

num erous jo u rn al articles, book chapters, and technical docum ents. Professor

Sprinkle is a coauthor of two books, The Demand for Imports and Exports in the World

Economy and Regional Case Studies in International Business and Strategic Policy. Both his

teaching and research have been recognized by a num ber of professional awards.

Professor Sprinkle is the form er D irector of the C enter for the Study o f W estern

H em ispheric Trade at UTEP and currently holds the W estern H em ispheric Trade

Research Professorship.

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Brief Contents

About the Authors

Preface xix

C hapter 1

C hapter 2

C hapter 3

Appendix

Glossary

Index

Introduction: An Overview o f the World Economy 1

Why Countries Trade 21

Comparative Advantage and the Production Possibilities

Frontier 41

C hapter 4

C hapter 5

C hapter 6

C hapter 7

C hapter 8

C hapter 9

C hapter 10

C hapter 11

C hapter 12

C hapter 13

C hapter 14

C hapter 15

C hapter 16

C hapter 17

C hapter 18

C hapter 19

C hapter 20

C hapter 21

Factor Endowments and the Commodity Composition

o f Trade 68

Intraindustry Trade 93

International Factor Movements 117

Tariffs 142

N ontariff Distortions to Trade 166

International Trade Policy 193

Regional Economic A rrangem ents 221

International Trade and Economic Growth 245

N ational Incom e Accounting and the Balance o f Payments

International Transactions and Financial Markets 298

Exchange Rates and T heir D eterm ination: A Basic Model

Money, Interest Rates, and the Exchange Rate 338

Price Levels and the Exchange Rate in the Long Run 364

O utput and the Exchange Rate in the Short Run 389

M acroeconom ic Policy and Floating Exchange Rates 418

Fixed Exchange Rates and Currency Unions 447

International M onetary A rrangem ents 476

Capital Flows and the Developing C ountries 497

GDP, Population, and Exports for Countries, 2005

527

5 2 1

5 3 5

273

319

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Contents

About the Authors v

Preface xix

C h a p t e r i I n t r o d u c t i o n : A n o v e r v ie w o f

t h e W o r l d E c o n o m y i

Introduction 1

The Scope of International Economics 2

The O utput of the World Economy 3

Imports and Exports of Goods in the World Economy 5

International Trade in Services 7

Capital Flows in the World Economy 10

Trends in International Production and Trade 12

Globalization 15

Summary 18

Key Concepts and Terms 18

Problems and Questions for Review 19

Suggested Readings and Web Sites 19

C h a p t e r 2 W h y C o u n t r i e s T r a d e 2 1

Introduction 21

International Trade versus Interregional Trade 21

Trade in an Individual Product 23

Trade Based on Absolute Advantage 27

Absolute Advantage 28

The Gains from Specialization and Trade with Absolute Advantage 29

Trade Based on Comparative Advantage 30

Comparative Advantage 31

The Gains from Specialization and Trade with Comparative Advantage 32

Trade Based on O pportunity Costs 33

Opportunity Costs 34

The Gains from Specialization and Trade with Opportunity Costs 35

Dynamic Gains from Trade 36

Summary 38

Key Concepts and Terms 38

Problems and Questions for Review 38

Suggested Readings and Web Sites 39

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X Contents

C h a p t e r 3 C o m p a r a t i v e A d v a n t a g e a n d t h e P r o d u c t i o n

P o s s i b i l i t i e s F r o n t i e r 4 1

Introduction 41

The Production Possibilities Frontier and Constant Costs 42

The Production Possibilities Frontier 42

Production and Consumption without Specialization and Trade 43

Production and Consumption with Specialization and Trade 44

T he Terms of Trade 48

Changes in the Gains from Specialization and Trade 48

Demand Conditions and the Terms of Trade 50

Distribution of the Gains from Trade 51

Trade under Increasing Opportunity Costs 52

Increasing Costs and the Production Possibilities Frontier 53

Production and Consumption without Specialization and Trade 55

Production and Consumption with Specialization and Trade 57

International Trade under Increasing Costs:

An Advanced Analysis 57

Summary 65

Key Concepts and Terms 65

Problems and Questions for Review 65

Suggested Readings and Web Sites 67

C h a p t e r 4 F a c t o r E n d o w m e n t s a n d t h e C o m m o d i t y

C o m p o s i t i o n o f T r a d e 6 8

Introduction 68

The Factor-Proportions Theory 69

Assumptions of the Factor-Proportions Theory 70

The Factor-Proportions Theorem 72

Factor-Price Equalization and the Distribution of Income 75

Factor-Price Equalization 75

Trade and the Distribution of Income 77

The Specific-Factors Model 80

Empirical Evidence Concerning the Factor-Proportions Theory 82

The Leontief Paradox 83

Explanations of the Leontief Paradox 83

International Trade Not Explained by the Factor-Proportions Theory 86

Summary 86

Key Concepts and Terms 87

Problems and Questions for Review 87

Selected Readings and Web Sites 89

Appendix 4.1: Factor-Proportions Theory:

An Advanced Analysis 90

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C h a p t e r 5 I n t r a i n d u s t r y T r a d e 9 3

Introduction 93

Intraindustry versus Interindustry Trade 93

Defining Intraindustry Trade 94

The Increasing Importance of Intraindustry Trade 97

Intraindustry Trade in Hom ogeneous Products 97

Intraindustry Trade in Differentiated Products 99

Economies of Scale 101

The Product Cycle 105

Overlapping Demands 108

The Welfare Implications of Intraindustry Trade 111

Summary 114

Key Concepts and Terms 115

Problems and Questions for Review 115

Suggested Readings and Web Sites 116

C h a p t e r 6 I n t e r n a t i o n a l F a c t o r M o v e m e n t s

Introduction 117

International Trade versus International

Factor Movements 118

International Movements of Capital 119

Reasons for the International Movement of Capital 120

Welfare Effects of International Capital Movements 122

Capital Movements and Public Policy 124

International Movements of Labor 125

Reasons for the International Movement of Labor 126

Welfare Effects of the International Movement of Labor 128

Immigration and Public Policy 131

The M ultinational Corporation 133

The Importance of MNCs 134

Reasons for the Existence of MNCs 135

Public Policy toward Multinational Corporations 138

Summary 139

Key Concepts and Terms 140

Problems and Questions for Review 140

Suggested Readings and Web Sites 141

C h a p t e r 7 T a r i f f s 142

Introduction 142

Tariffs: Some Preliminary Details 142

Types of Tariffs 143

Methods of Valuing Imports 144

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x il Contents

Welfare Effects of Trade in an Individual Product 145

Consumer and Producer Surplus: A Review 145

The Effects of Free Trade 148

The Economic Effects of Tariffs 150

The Effects of a Tarifffor a Small Country 150

The Effects of a Tariff for a Large Country 153

The Effective Rate of Protection 156

Arguments for Tariffs 158

Infant Government 158

National Defense 159

Infant Industries 161

Senile Industry Protection 161

Tariffs, Trade, and Jobs 162

Summary 164

Key Concepts and Terms 164

Problems and Questions for Review 164

Suggested Readings and Web Sites 165

C h a p t e r 8 N o n t a r i f f D i s t o r t i o n s t o T r a d e

Introduction 166

Nontariff Barriers to Trade 167

Q uotas 167

The Economic Effects of a Q uota 171

O ther Nontariff Distortions 175

Industrial Policy 175

Technical Barriers to Trade 176

Subsidies 178

Government Procurement 179

Corruption and International Trade 180

Economic Sanctions 182

Labor and Environmental Standards 183

Transportation Costs and Trade 188

Summary 190

Key Concepts and Terms 190

Problems and Questions for Review 191

Suggested Readings and Web Sites 191

C h a p t e r g I n t e r n a t i o n a l T r a d e P o l i c y 1 9 3

Introduction 193

The Political Economy of Protectionism 194

Protectionism and Public Choice 194

The Structure of Protection 196

1 6 6

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Contents

The Evolution of U.S. Trade Policy 201

Antidumping, Countervailing Duties, and the Escape Clause 204

Antidumping 205

Countervailing Duties 207

The Escape Clause 208

The General Agreement on Tariffs and Trade (GATT) 209

GATT and Multilateral Trade Negotiations 210

T he World Trade Organization 213

T he Future of International Trade Negotiations 213

The Future of MTNs 215

Summary 216

Key Concepts and Terms 217

Problems and Questions for Review 217

Suggested Readings and Web Sites 218

Appendix 9.1: Price Discrimination 219

C h a p t e r i o R e g i o n a l E c o n o m i c A r r a n g e m e n t s 2 2 1

Introduction 221

Degrees of Economic Integration 223

Rules of Origin in International Trade 226

Trade Effects of Economic Integration 227

The Static Effects of a Customs Union 229

The European U nion 232

NAFTA and O ther U.S. Trade Agreements 235

NAFTA 236

Other U.S. Trade Agreements 237

Multilateralism versus Regional Trade Agreements 239

Summary 242

Key Concepts and Terms 243

Problems and Questions for Review 243

Suggested Readings and Web Sites 243

C h a p t e r i 1 I n t e r n a t i o n a l T r a d e a n d E c o n o m i c G r o w t h

Introduction 245

The Developing Countries 246

Economic Development 246

GDP of Developing Countries 24 7

Economic Growth 248

Preconditions for Growth 249

Economic Growth and the Factors of Production 249

Basic Growth Theory 251

Changes in Capital Stock and Technology 253

245

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