International economics: theory & policy

Pearson International Edition

8th

E d itio n

International

Economics

Theory 8c Policy

Krugman • Obstfeld Số hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn1

rade Flows with the United States

Canada

United States

M exico

Other Latin

America

Japan

Australia and

New Zealand

Key

= Exports

= Imports

= Less than $20 billion per year

= $20-50 billion

= $50-100 billion

= $100-150 billion

= $150-200 billion

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International Economics

THEDRY (Sc P dlicy

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The Addison-W esley Series in Econom ics

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American Economy

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Economics

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Modern Industrial Organization

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World Trade and Payments:

An Introduction

Chapman

Environmental Economics:

Theory\ Application, and Policy

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An Economic Theory o f

Democracy

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Modern Labor Economics

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and the Economy

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Markets *

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Alternate Edition*

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Application with Calculus

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Schneider

Economics: A Tool fo r Critically

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and Policy

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'denotes titles. Log onto www.myeconlab.com to learn more

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International Economics

T heory & P olicy

EIGHTH EDITION

Paul R. Krugman

Princeton University

Maurice Obstfeld

University of California, Berkeley

Boston San Francisco New York

London Toronto Sydney Tokyo Singapore M adrid

Mexico City M unich Paris Cape Town Hong Kong M ontreal

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For Robin

— P . K .

For M y Family

— M . O .

Editor in Chief: Denise Clinton

Sponsoring Editor: Noel Kamm

Assistant Editor: Courtney E. Schinke

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Senior Production Supervisor: M eredith Gertz

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IS B N -13: 978-0-321-55398-0

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2 3 4 5 6 7 8 9 10— C R K — 12 11 10 09 08

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Brief Contents

Contents vii

Preface xx

1 Introduction 1

P a rti International Trade Theory 11

2 World Trade: An Overview 12

3 Labor Productivity and Comparative Advantage:

The Ricardian Model 27

4 Resources, Comparative Advantage, and Income Distribution 54

5 The Standard Trade Model 88

6 Economies of Scale, Imperfect Competition, and International

Trade 114

7 International Factor Movements 153

Part 2 International Trade Policy 181

8 The Instruments of Trade Policy 182

9 The Political Economy of Trade Policy 2 1 2

10 Trade Policy in Developing Countries 250

1 1 Controversies in Trade Policy 266

Part 3 Exchange Rates and Open-Economy Macroeconomics 287

12 National Income Accounting and the Balance of Payments 288

13 Exchange Rates and the Foreign Exchange Market:

An Asset Approach 31 7

14 Money. Interest Rates, and Exchange Rates 351

15 Price Levels and the Exchange Rate in the Long Run 382

16 Output and the Exchange Rate in the Short Run 420

17 Fixed Exchange Rates and Foreign Exchange Intervention 460

Part 4 International Macroeconomic Policy 501

18 The International Monetary System, 1870-1973 502

19 Macroeconomic Policy and Coordination Under Floating

Exchange Rates 532

20 Optimum Currency Areas and the European Experience 565

21 The Global Capital Market: Performance and Policy Problems 594

22 Developing Countries: Growth, Crisis, and Reform 621

V

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vi Brief Contents

Mathematical Postscripts 665

Postscript to Chapter 4: The Factor Proportions M o d el...................................................................... 666

Postscript to Chapter 5: The Trading World Economy ...................................................................... 670

Postscript to Chapter 6: The Monopolistic Competition Model .......................................................678

Postscript to Chapter 21 : Risk Aversion and International Portfolio Diversification ....................680

Credits 687

Index 689

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EM In tr o d u c tio n 1

W hat Is International Economics About? ............................................................................................. 3

The Gains from Trade ..................................................................................................................................4

The Pattern of Trade ....................................................................................................................................5

How Much Trade? ........................................................................................................................................ 5

Balance of Payments ....................................................................................................................................6

Exchange Rate Determination .....................................................................................................................6

International Policy Coordination ..............................................................................................................7

The International Capital Market ................................................................................................................ 7

International Economics: Trade and Money .........................................................................................8

Preface .................................................................................................................................................................... xx

Pa rt! International Trade Theory 11

Q W o rld T ra d e : A n O v e rv ie w 12

W ho T rades w ith W hom ? .........................................................................................................................13

Size Matters: The Gravity Model ............................................................................................................13

The Logic of the Gravity Model .............................................................................................................. 15

Using the Gravity Model: Looking for Anomalies ............................................................................... 16

Impediments to Trade: Distance, Barriers, and Borders .......................................................................17

The C hanging P attern of W orld T r a d e .................................................................................................. 19

Has the World Gotten Smaller? ................................................................................................................ 19

What Do We Trade? .................................................................................................................................... 20

Service Outsourcing .................................................................................................................................... 23

Do Old Rules Still Apply? ......................................................................................................................... 23

Sum m ary .......................................................................................................................................................... 24

□ L a b o r P ro d u c tiv ity a n d C o m p a ra tiv e A d v a n ta g e : T h e R ic a rd ia n M o d e l 27

The C oncept of C om parative A dvantage ..............................................................................................28

A O ne-F actor Econom y .............................................................................................................................. 29

Production Possibilities .............................................................................................................................. 30

Relative Prices and Supply ........................................................................................................................31

T rade in a O ne-Factor W orld ...................................................................................................................31

Determining the Relative Price After Trade ...........................................................................................32

b o x : C om parative A dvantage in P ractice: The Case of Babe R uth .......................................... 35

The Gains from Trade .................................................................................................................................36

A Numerical Example .................................................................................................................................37

Relative Wages ..............................................................................................................................................38

b o x : T he Losses from N ontrade ...............................................................................................................39

M isconceptions About C om parative A dvantage ................................................................................40

Productivity and Competitiveness .............................................................................................................40

The Pauper Labor Argument ......................................................................................................................41

Exploitation ...................................................................................................................................................41

b o x : Do W ages Reflect Productivity? ..................................................................................................... 42

C om parative A dvantage with M any Goods ..........................................................................................42

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Setting Up the Model .................................................................................................................................. 42

Relative Wages and Specialization .......................................................................................................... 44

Determining the Relative Wage in the Multigood Model .....................................................................45

A dding T ran sp o rt C osts and N ontraded G oods ................................................................................47

E m pirical Evidence on the R icardian M odel .......................................................................................4#

Sum m ary .........................................................................................................................................................51

f i R e s o u rc e s , C o m p a ra tiv e A d v a n ta g e ,

a n d In c o m e D is trib u tio n 34

A M odel of a Tw o-Factor Econom y ......................................................................................................55

Prices and Production ................................................................................................................................ 55

Choosing the Mix of Inputs ........................................................................................................................57

Factor Prices and Goods Prices .................................................................................................................58

Resources and Output ................................................................................................................................ 61

Effects of International T rade Between

Tw o-Factor Econom ies .................................................................................................................................64

Relative Prices and the Pattern of Trade ................................................................................................. 65

Trade and the Distribution of Income ......................................................................................................68

Factor-Price Equalization ............................................................................................................................68

Trade and Income Distribution in the Short Run .................................................................................... 70

c a s e s t u d y : N orth-South T rade and Incom e I n e q u a lity ..................................................................70

T he Political Econom y of T rade: A P relim inary View .................................................................... 72

The Gains from Trade, Revisited ...............................................................................................................72

Optimal Trade Policy ...................................................................................................................................73

Income Distribution and Trade Politics ....................................................................................................74

E m pirical Evidence on the H eckscher-O hlin M odel .........................................................................75

Testing the Heckscher-Ohlin Model ........................................................................................................ 75

box: Incom e D istribution and the Beginnings

of T rade T heory ........................................................................................................................................ 76

Implications of the Tests ...................................................................................................................................81

Sum m ary ...........................................................................................................................................................81

A ppendix: Factor Prices, Goods Prices, and Input Choices ...........................................................85

Choice of Technique ...................................................................................................................................85

Goods Prices and Factor Prices ................................................................................................................. 86

T he Standard Trade M o d el 88

A Standard Model of a Trading Economy ............................................................................................89

Production Possibilities and Relative Supply .........................................................................................89

Relative Prices and Demand ......................................................................................................................90

The Welfare Effect of Changes in the Terms of T ra d e ............................................................................93

Determining Relative Prices ......................................................................................................................93

Economic Growth: A Shift of the RS curve ..............................................................................................94

Growth and the Production Possibility Frontier .....................................................................................94

Relative Supply and the Terms of Trade ..................................................................................................95

International Effects of Growth ..................................................................................................................96

c a s e s t u d y : Has the G row th of Newly Industrializing

C ountries H u rt Advanced N a tio n s ? ................................................................................................... 97

Intern atio nal T ransfers of Incom e: Shifting the RI) C urve ...........................................................99

The Transfer Problem ................................................................................................................................. 99

Effects of a Transfer on the Terms of Trade ......................................................................................... 100

Presumptions About the Terms of Trade Effects of Transfers ............................................................ 101

c a s e s t u d y : The T ran sfer Problem and the A sian C risis ..............................................................102

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Contents ix

Tariffs and E xport Subsidies: Sim ultaneous Shifts in R S and RD ............................................ 103

Relative Demand and Supply Effects of a Tariff ................................................................................. 103

Effects of an Export Subsidy ..................................................................................................................104

Implications of Terms of Trade Effects: Who Gains and Who Loses? ............................................105

S um m ary .......................................................................................................................................................107

A ppendix: R epresenting International Equilibrium

w ith O ffer C urves ...................................................................................................................................... I l l

Deriving a Country’s Offer Curve ......................................................................................................... Ill

International Equilibrium ........................................................................................................................ 113

F I E c o n o m ie s o f S c a le , Im p e rf e c t C o m p e titio n ,

a n d In te rn a tio n a l T rade 114

Econom ies of Scale and International T rade: An Overview ......................................................115

Econom ies of Scale and M arket S tructure ........................................................................................ 116

T he T heory of Im perfect C om petition ............................................................................................... 117

Monopoly: A Brief Review .................................................................................................................... 118

Monopolistic Competition ...................................................................................................................... 120

Limitations of the Monopolistic Competition Model ........................................................................ 124

M onopolistic C om petition and Trade ................................................................................................. 125

The Effects of Increased Market Size ...................................................................................................125

Gains from an Integrated Market: A Numerical Example ..................................................................127

Economies of Scale and Comparative Advantage ...............................................................................129

The Significance of Intraindustry Trade .............................................................................................. 132

Why Intraindustry Trade Matters ............................................................................................................133

c a s e s t u d y : Intraind ustry Trade in Action:

The N orth A m erican Auto Pact of 1964 ......................................................................................134

D um ping .......................................................................................................................................................135

The Economics of Dumping .................................................................................................................. 135

c a s e s t u d y : A ntidum ping as Protectionism ...................................................................................... 138

Reciprocal Dumping ............................................................................................................................... 139

T he Theory of E xternal Economies ....................................................................................................140

Specialized Suppliers ............................................................................................................................... 140

Labor Market Pooling ............................................................................................................................. 141

Knowledge Spillovers ..............................................................................................................................142

External Economies and Increasing Returns ........................................................................................ 142

External Economies and International Trade ..................................................................................143

External Economies and the Pattern of Trade ......................................................................................143

Trade and Welfare with External Econom ies........................................................................................ 144

Dynamic Increasing Returns ...................................................................................................................145

Interregional T rade and Econom ic G eography ................................................................................146

box: Tinseltow n Econom ics .....................................................................................................................147

Sum m ary ........................................................................................................................................................149

A ppendix: D eterm ining M arginal Revenue .......................................................................................152

Q In te rn a tio n a l F a c to r M o v e m e n ts 153

In tern ation al L abo r M obility ................................................................................................................ 154

A One-Good Model Without Factor Mobility ...................................................................................... 154

International Labor Movement ...............................................................................................................156

Extending the Analysis ............................................................................................................................ 157

c a s e s t u d y : W age C onvergence in the Age of M ass .Migration ................................................. 158

c a s e s t u d y : Im m igration and the U.S. E c o n o m y ..............................................................................159 Số hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn12

Contents

International Borrowing and Lending ................................................................................................ 160

Intertemporal Production Possibilities and Trade ................................................................................161

The Real Interest Rate .......................................................................................................................

Intertemporal Comparative Advantage .............................................................................................

Direct Foreign Investment and Multinational Firms .................................................................... 163

b o x : Does Capital Movement to Developing Countries Hurt

Workers in High-Wage Countries? ................................................................................................164

The Theory of Multinational Enterprise ............................................................................................... 164

Multinational Firms in Practice ...............................................................................................................166

c a s e s t u d y : Foreign Direct Investment in the United States ......................................................167

b o x : Taken for a R id e .................................................................................................................................169

Summary ........................................................................................................................................................170

Appendix 1: Finding Total Output from the Marginal Product C u r v e ................................... 174

Appendix 2: More on Intertemporal Trade .......................................................................................176

2 International Trade Policy 181

□ T h e In s tr u m e n ts o f T rad e P o licy 182

Basic T ariff A n a ly s is ................................................................................................................................... 182

Supply, Demand, and Trade in a Single Industry ................................................................................183

Effects of a Tariff ....................................................................................................................................... 185

Measuring the Amount of Protection ......................................................................................................187

C osts and Benefits of a T a r i f f ...................................................................................................................188

Consumer and Producer Surplus .............................................................................................................188

Measuring the Costs and Benefits .......................................................................................................... 190

O th e r Instrum ents of T rade Policy ....................................................................................................... 192

Export Subsidies: Theory .......................................................................................................................... 192

case study: E urope’s C om m on A gricultural Policy .......................................................................193

Import Quotas: Theory .............................................................................................................................. 195

case study: An Im p o rt Q uota in Practice: U.S. S ugar ..................................................................195

Voluntary Export Restraints ......................................................................................................................197

case study: A V oluntary E xport R estrain t in P ractice: Japanese Autos ...............................197

Local Content Requirements ................................................................................................................... 198

b o x : A m erican Buses, M ade in H ungary ............................................................................................199

Other Trade Policy Instruments ............................................................................................................... 199

The Effects of T rade Policy: A S um m ary ............................................................................................200

Sum m ary .........................................................................................................................................................200

A ppendix 1: T ariff A nalysis in G eneral E quilibrium .................................................................... 204

A Tariff in a Small Country ......................................................................................................................204

A Tariff in a Large Country ......................................................................................................................206

A ppendix 2: Tariffs and Im po rt Q uotas in the Presence of M onopoly ................................... 208

The Model with Free Trade ...................................................................................................................... 208

The Model with a Tariff .............................................................................................................................209

The Model with an Import Quota ...........................................................................................................210

Comparing a Tariff and a Quota ............................................................................................................. 210

T h e P o litica l E c o n o m y o f T ra d e P o licy 212

The C ase for F ree T rade ...........................................................................................................................213

Free Trade and Efficiency .........................................................................................................................213

Additional Gains from Free Trade ........................................................................................................... 214

R ent-Seeking................................................................................................................................................. 215

Political Argument for Free Trade ........................................................................................................... 215

case study: T he G ains from 1992 .......................................................................................................... 216 Số hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn13

Contents xi

N ational W elfare A rgum ents Against f ree T rade .......................................................................... 217

The Terms of Trade Argument for a Tariff ..........................................................................................218

The Domestic Market Failure Argument Against Free Trade ........................................................... 219

How Convincing Is the Market Failure Argument? .............................................................................220

Incom e D istribution and Trade Policy ............................................................................................... 222

Electoral Competition .............................................................................................................................222

b o x : Politicians for Sale: Evidence from the 1990s ........................................................................224

Collective Action ..................................................................................................................................... 224

Modeling the Political Process................................................................................................................225

Who Gets Protected? ...............................................................................................................................226

International N egotiations and Trade Policy ................................................................................... 227

The Advantages of Negotiation ............................................................................................................. 228

International Trade Agreements: A Brief History ...............................................................................230

The Uruguay Round ................................................................................................................................. 231

Trade Liberalization ................................................................................................................................. 232

From the GATT to the WTO ..................................................................................................................233

b o x : Settling a Dispute— and C reating One ................................................................................... 234

Benefits and Costs ................................................................................................................................... 235

C ASE s t u d y : Testing the W T O ’s M e tt le ...............................................................................................236

The Doha D isappointm ent ...................................................................................................................... 236

b o x : Do A gricultural Subsidies H urt the T hird W o rld ? ...............................................................238

Preferential Trading Agreements ........................................................................................................... 239

b o x : Free Trade Area versus C ustom s Union ................................................................................. 240

b o x : Do T rade Preferences Have Appeal? ........................................................................................ 241

CASE s t u d y : T rade Diversion in South A m erica .............................................................................242

S um m ary .......................................................................................................................................................243

A ppendix: Proving T hat the O ptim um T ariff Is Positive .............................................................247

Demand and Supply ................................................................................................................................. 247

The Tariff and Prices ............................................................................................................................... 247

The Tariff and Domestic Welfare ............................................................................................................248

EE T rad e P o licy in D e v e lo p in g C o u n trie s 250

Im port-S ubstituting Industrialization ............................................................................................... 251

The Infant Industry Argument ................................................................................................................ 252

Promoting Manufacturing Through Protection ....................................................................................253

CASE s t u d y : M exico A bandons Im port-Substituting Industrialization ................................... 255

R esults of Favoring M anufacturing: Problem s

of Im port-S ubstituting Industrialization ...........................................................................................256

T rade L iberalization Since 1985 ........................................................................................................... 257

E xport-O riented Industrialization: The East Asian M iracle ......................................................259

The Facts of Asian Growth .....................................................................................................................259

Trade Policy in the H P A E s....................................................................................................................... 260

B O X : In d ia 's Boom .....................................................................................................................................261

Industrial Policy in the HPAEs .............................................................................................................. 262

Other Factors in Growth ..........................................................................................................................262

S um m ary ........................................................................................................................................................263

ED C o n tr o v e r sie s in Trade P olicy 266

Sophisticated Arguments for Activist Trade P o liọ .........................................................................267

Technology and Externalities ................................................................................................................... 267

Imperfect Competition and Strategic Trade Policy ..............................................................................268

C A SE s t u d y : W hen the C hips W ere lỉp ................................................................................................ 272

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xii Contents

Globalization and Low-Wage L a b o r .................................................................................................. -273

The Anti-Globalization Movement ........................................................................................................ 274

Trade and Wages Revisited ......................................................................................................................274

Labor Standards and Trade Negotiations ............................................................................................... 276

Environmental and Cultural Issues ........................................................................................................ 277

The WTO and National Independence ..................................................................................................278

c a s e s t u d y : Bare Feet. Hot M etal, and G lo b alization.................................................................... 279

Globalization and the E nvironm ent....................................................................................................... 280

Globalization. Growth, and Pollution......................................................................................................280

The Problem of "Pollution H avens"........................................................................................................ 282

Environmental Issues and Trade Negotiations .......................................................................................283

Summary ........................................................................................................................................................2H4

Part 3 Exchange Rates and Open-Economy

Macroeconomics 287

2 N a tio n a l In c o m e A c c o u n tin g a n d th e B alan c e o f P a y m e n ts 288

The N ational Incom e Accounts .............................................................................................................. 290

National Product and National Income ..................................................................................................291

Capital Depreciation and International Transfers.................................................................................. 292

Gross Domestic Product ..........................................................................................................................292

N ational Incom e Accounting for an O pen E c o n o m y .......................................................................293

Consumption ..............................................................................................................................................293

Investment .................................................................................................................................................. 293

Government Purchases ...............................................................................................................................294

The National Income Identity for an Open Economy ......................................................................... 294

An Imaginary Open Economy ................................................................................................................. 295

The Current Account and Foreign Indebtedness .................................................................................. 295

Saving and the Current Account .............................................................................................................297

Private and Government Saving ............................................................................................................... 298

c a s e s t u d y : G overnm ent Deficit R eduction M ay Not Increase the

C u rren t A ccount Surplus ................................................................................................................... 299

The Balance of Paym ents A ccounts ...................................................................................................301

Examples of Paired Transactions .............................................................................................................302

The Fundamental Balance of Payments Identity .................................................................................. 304

The Current Account. Once Again .........................................................................................................304

The Capital Account ................................................................................................................................. 306

The Financial Account ...............................................................................................................................306

The Statistical Discrepancy ......................................................................................................................307

Official Reserve Transactions ..................................................................................................................307

c a s e s t u d n : T he Assets and Liabilities of the W orld's Biggest D ebtor ................................. .309

Sum m ary ........................................................................................................................................................312

E x c h a n g e R ates a n d th e F o re ig n E x c h a n g e M a rk e t: An A sse t A p p ro a c h 317

Exchange R ates and Intern atio nal T ransactions .............................................................................318

Domestic and Foreign Prices ....................................................................................................................318

Exchange Rates and Relative Prices .......................................................................................................320

The Foreign Exchange M arket ..............................................................................................................321

The Actors ................................................................................................................................................... 321

box: A Tale of Two D ollars ....................................................................................................................-322

Characteristics of the Market ....................................................................................................................324

Spot Rates and Forward Rates ..................................................................................................................325 Số hóa bởi Trung tâm Học liệu – ĐH TN http://www.lrc-tnu.edu.vn15