International Economics Thomson

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ISBN: 0-324-20591-0

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Number: 2004114047

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International Economics, Ifle

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Contents in Brief

Introduction

Chapter 1

Part 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Part 2

Chapter 10

Chapter 11

Chapter 12

Chapter 13

Chapter 14

Chapter 15

Chapter 16

Chapter 17

.......................................................... 1

The International Economy and Globalization 2

International Trade Relations 27

Foundations of Modern Trade Theory: Comparative Advantage 28

Sources of Comparative Advantage 63

Tariffs ....................................................101

Nontariff Trade Barriers 140

Trade Regulations and Industrial Policies 174

Trade Policies for the Developing Nations 218

Regional Trading Arrangements 253

International Factor Movements and Multinational Enterprises 289

International Monetary Relations 319

The Balance of Payments 320

Foreign Exchange 340

Exchange-Rate Determination 372

Balance-of-Payments Adjustments .400

Exchange-Rate Adjustments and the Balance of Payments .416

Exchange-Rate Systems and Currency Crises .442

Macroeconomic Policy in an Open Economy .474

International Banking: Reserves, Debt, and Risk .490

v

Contents

Introduction 1

chapter 1

The International Economy and Globalization 2

Globalization of Economic Activity 2

CLOTH IMPORTS FROM CHINA THREATEN ITALY'S

TEXTILE MAKERS .4

Waves of Globalization 5

First Wave of Globalization: 1870-1914 5

Second Wave of Globalization: 1945-1980 5

Latest Wave of Globalization 6

The United States as an Open Economy 9

Trade Patterns 9

Why Is Globalization Important? 12

ARE DETROIT'S BIG THREE HEADING FOR

A CRASH? 14

Common Fallacies of International Trade 15

Does Free Trade Apply to Cigarettes? 16

International Competitiveness 17

Firm (Industry) Competitiveness 17

A Nation's Competitiveness 18

Competition, Productivity, and

Economic Growth 18

Competition in the World Steel Industry 19

Is International Trade an Opportunity

or a Threat to Workers? 20

Backlash Against Globalization 22

Terrorism Jolts the Global Economy 23

The Plan of This Book 24

Summary 25

Key Concepts and Terms 25

Study Questions 26

Netlink 26

Part 1: International Trade Relations 27

chapter 2

Foundations of Modern Trade Theory: Comparative Advantage 28

Historical Development of Modern Trade

Theory 28

TheMercantilists 28

Why Nations Trade: Absolute Advantage 29

WhyNations Trade: Comparative Advantage 30

BABE RUTH AND THE PRINCIPLE OF COMPARATIVE

ADVANTAGE 31

Production Possibilities Schedules 33

Trading Under Constant-Cost Conditions 33

Basis for Trade and Direction of Trade 34

Production Gains from Specialization 35

Consumption Gains from Trade 35

Distributing the Gains from Trade 36

vii

viii Contents

MAYTAG SLASHES COSTS TO SURVIVE IN

GLOBAL ApPLIANCE MARKET 37

Equilibrium Terms of Trade 38

Terms-of- Trade Estimates 39

Dynamic Gains from Trade .40

Changing Comparative Advantage .41

Trading Under Increasing-Cost Conditions .42

Increasing-Cost Trading Case .43

Partial Specialization .45

Comparative Advantage Extended to Many

Products and Countries .45

More Than TWo Products .45

More Than TWo Countries .46

Exit Barriers .47

Empirical Evidence on Comparative

Advantage .47

Outsourcing and Free Trade .48

Advantage of Outsourcing .49

Do U.S. COMPANIES HAVE TO OurSOURCE

PRODUCTION TO LOW-WAGE COUNTRIES

TO REMAIN COMPETITIVE? 50

Burdens of Outsourcing 52

Summary 53

Key Concepts and Terms 54

Study Questions 54

Netlink 57

EXPLORING FURTHER 2.1:

Comparative Advantage in Money Terms ..58

chapter 3

Sources of Comparative Advantage 63

Factor Endowments as a Source of

Comparative Advantage 63

Factor-Price Equalization 64

Trade and the Distribution ofIncome 66

THE HECKSCHER-OHLIN THEORY:

U.S.-CHINA TRADE 67

Does Trade Make the Poor Even Poorer? 68

Explaining Wage Inequality 68

Evidence on Wage Inequality 69

Are Actual Trade Patterns Explained

by the Factor-Endowment Theory? .....71

Increasing Returns to Scale and

Specialization 73

Overlapping Demands as a Basis for Trade 76

Intraindustry Trade 76

NIKE AND REEBOK RESPOND TO SWEATSHOP CRillCS:

Bur WAGES REMAIN AT POVERTY LEVEL .....78

The product Cycle: A Technologically

Based Theory of Trade 80

Radios. Pocket Calculators. and the

International Product Cycle 81

Dynamic Comparative Advantage:

Industrial Policy 82

Industrial Policies Support Boeing

and Airbus 84

Government Regulatory Policies and

Comparative Advantage 85

Business Services and Comparative

Advantage 87

Transportation Costs and Comparative

Advantage 89

Trade Effects 89

Falling Transportation Costs Foster

Trade Boom 91

Terrorist Attacks Resultin AddedCosts

and Slowdowns for u.s. Freight System:

A New Kind of Trade Barrier? 92

Summary 94

Key Concepts and Terms 95

Contents

Study Questions 95

Netlink 97

EXPLORING FURTHER 3.1:

SpecificFactors-Trade and the

Distribution of Income in the Short Run ...98

ix

chapter 4

Tariffs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........................101

The Tariff Concept 102

Types of Tariffs 102

Specific Tariff 103

Ad Valorem Tariff 103

Compound Tariff 104

Smuggled Steel Evades U.S. Tariffs 104

Effective Rate of Protection 105

Tariff Escalation 107

Production Sharing and Offshore￾Assembly Provision 108

Postponing Import Duties 110

Bonded Warehouse 110

Foreign-Trade Zone 110

Tariff Welfare Effects: Consumer Surplus

and Producer Surplus 111

Tariff Welfare Effects: Small-Nation Model 112

CALCULATING THE WELFARE EFFECTS

OF A TARIFF 114

Tariff Welfare Effects: Large-Nation Model 115

How a Tariff Burdens Exporters 119

Steel- Using Industries Oppose Restrictions

on Steel Imports 120

Tariff Examples 121

Bush's Steel Tariffs Buy Time for

Troubled Industry 121

Lamb Tariffs Fleece U.S. Consumers 123

Harley-Davidson Revs Up Sales withTariffi 123

EFFECTS OF ELIMINATING IMPORT TARIFFS 124

Tariffs and the Poor 125

Arguments for Trade Restrictions 126

JobProtection 127

Protection AgainstCheap Foreign Labor 128

Fairness in Trade: A Level Playing Field 130

Maintenance of the Domestic Standard

of Living 131

Equalization ofProduction Costs 131

Infant-Industry Argument 131

Noneconomic Arguments 132

The Political Economy of Protectionism 133

PETITION OF THE CANDLE MAKERS 134

A Supply and Demand View of

Protectionism 134

Summary 136

Key Concepts and Terms 136

Study Questions 137

Netlink 139

x Contents

chapter 5

Nontariff Trade Barriers 140

Import Quota 140

Trade and Welfare Effects 141

Allocating Quota Licenses 143

SugarImport Quotas 144

Quotas Versus Tariffs 144

Tariff-Rate Quota: A Two-Tier Tariff 147

Orderly Marketing Agreements 148

Export Quota Effects 148

Japanese Auto Restraints Put Brakes

on U.S. Motorists 151

Domestic Content Requirements 152

How "FOREIGN" Is YOUR CAR? 154

Subsidies 154

Domestic Subsidy 155

Export Subsidy 156

Dumping 157

Forms of Dumping 157

International Price Discrimination 158

Antidumping Regulations 159

Smith Corona Finds Antidumping

Victories Are Hollow 160

SWIMMING UPSTREAM: THE CASE OF

VIETNAMESE CATFISH 161

Canadians Press Washington Apple

Producers for Level Playing Field 162

Is the Antidumping Law Unfair? 163

ShouldAverage Variable Cost Be the

Yardstick for Defining Dumping? 163

Should the Antidumping Law Reflect

Currency Fluctuations? 164

Other Nontariff Trade Barriers 164

Government Procurement Policies 164

Social Regulations 165

Sea Transport and Freight Restrictions 166

Summary 167

Key Concepts and Terms 168

Study Questions 168

Netlink 171

EXPLORING FURTHER 5.1:

Tariff-Rate Quota Welfare Effects 172

chapter 6

Trade Regulations and Industrial Policies 174

U.S. Tariff Policies Before 1930 174

Smoot-Hawley Act 175

Reciprocal Trade Agreements Act 176

General Agreement on Tariffs and Trade 178

The GATTSystem 178

Multilateral Trade Negotiations 179

World Trade Organization 181

Settling Trade Disputes 181

Does theWTO Reduce National Sovereignty? .. 182

Should Retaliatory Tariffs Be Used for

WTO Enforcement? 183

Does the WTO Harm the Environment? 184

WTO RULINGS OUTRAGE ENVIRONlV1ENTAUSTS 186

The Doha Round of Trade Negotiations 188

Trade Promotion Authority

(Fast-Track Authority) 190

The Escape Clause (Safeguards) 190

Countervailing Duties 191

Lumber Quotas HammerHome Buyers 192

Antidumping Duties 193

U.S. STEEL COMPANIES LOSE AN UNFAIR

TRADE CASE AND STILL WIN 194

Remedies AgainstDumped and

Subsidized Imports 195

Section 301: Unfair Trading Practices 197

Europe Slips in Banana Dispute 197

Protection of Intellectual Property Rights 198

Trade Adjustment Assistance 200

Will Wage Insurance Make Free Trade

More Acceptable to Workers? 201

Industrial Policies of the United States 202

chapter 7

Trade Policies for the Developing Nations

Developing-Nation Trade Characteristics ..218

Tensions Between Developing Countries

and Advanced Countries 220

Trade Problems of the Developing

Nations 221

Unstable Export Markets 221

Worsening Terms of Trade 222

DOES THE FAIR-TRADE MOVEMENT HELP

POOR COFFEE FARMERS? 224

LimitedMarketAccess 224

As U.S. Subsidies and Food Aid Support

American Farmers, Developing Growers

Cry Foul 228

Aiding the Developing Countries 229

World Bank 229

International Monetary Fund 230

Generalized System of Preferences 231

Stabilizing Primary-Product Prices 232

Production and Export Controls 232

Contents

Export Promotion and Financing 203

Industrial Policies of Japan 203

Has IndustrialPolicy Helped Japan? 205

Strategic Trade Policy 206

Economic Sanctions 208

FaaorsInfluencing the Success ofSanctions 209

Iraqi Sanctions 210

Summary 211

Key Concepts and Terms 212

Study Questions 213

Netlink 214

EXPLORING FURTHER 6.1:

Welfare Effectsof Strategic Trade Policy ...215

.....................................218

Buffer Stocks 234

Multilateral Contracts 235

The OPEC Oil Cartel 235

Maximizing Cartel Profits 236

ARE INTERNATIONAL LABOR STANDARDS

NEEDED TO PREVENT SOCIAL DUMPING? 238

OPEC as a Cartel 239

Economic Growth Strategies: Import

Substitution VersusExport-Led Growth 240

Import Substitution 240

Import-Substitution Laws Backfire

on Brazil 241

Export-Led Growth 242

Is Economic Growth Good for the Poor? 242

Can All Developing Countries Achieve

Export-Led Growth? 245

East Asian Economies 245

EastAsia's Growth Strategy 245

Flying-Geese Pattern of Growth 246

xi

xii Contents

China: Awakening Giant 246

China Enters theWorld Trade Organization 248

DOES FOREIGN DIRECT INVESTMENT HINDER

OR HELP ECONOMIC DEVELOPMENT? 249

Summary 251

Key Concepts and Terms 251

Study Questions 252

Netlink 252

chapter 8

Regional Trading Arrangements 253

Regional Integration Versus Multilateralism ..253

Types of Regional Trading Arrangements 254

Impetus for Regionalism 255

Effects of a Regional Trading

Arrangement 256

Static Effects 256

DID BRITAIN GAIN FROM ENTERING THE

EUROPEAN UNION? TRADE CREATION

VERSUS TRADE DIVERSION 258

Dynamic Effects 259

European Union 259

Pursuing Economic Integration 260

The EMU Presents Different Faces to

Portugal and Sweden 262

AgriculturalPolicy 263

Government Procurement Policies 265

Economic Costs and Benefits of a

Common Currency: The European

Monetary Union 266

Optimum Currency Area 268

Europe as a SuboptimalCurrency Area 269

Challenges for EMU 269

EMU and the United States 270

North American Free Trade Agreement

(NAFTA) 271

NAFTA's Benefits and Costs for Mexico

and Canada 271

NAFTA's Benefits and Costs for the

United States 273

Supreme Court Justices LetMexican

Trucks Roll In 276

IsNAFTA an Optimum Currency Area? 277

Free Trade Area of the Americas 277

THE U.S.-CHILE FREE-TRADE AGREEMENT 279

Asia-Pacific Economic Cooperation 280

Transition Economies 280

IndustrialCooperation 281

The Transition Toward a Market￾Oriented Economy 282

Russia and the World Trade Organization 284

Summary 285

Key Concepts and Terms 286

Study Questions 287

Netlink 288

chapter 9

International Factor Movements and Multinational Enterprises 289

The Multinational Enterprise 290

Motives for Foreign Direct Investment 292

DemandFactors 292

Cost Factors 292

Supplying Products to Foreign Buyers:

Whether to Produce Domestically or

Abroad 293

Direct Exporting Versus Foreign Direct

Investment/Licensing 294

Foreign Direct Investment Versus Licensing 295

International Trade Theory and

Multinational Enterprise 296

Japanese Transplants in the

U.S. Automobile Industry 297

International Joint Ventures 298

Welfare Effects 300

Do U.S. MULTINATIONALS EXPLOIT FOREIGN

WORKERS? 302

Multinational Enterprises as a Source of

Conflict 303

Employment 303

Contents xiii

Technology Transfer 304

National Sovereignty 306

Balance of Payments 307

Taxation 307

Transfer Pricing 308

U.S. Production Sharing with Mexico 308

International Labor Mobility: Migration 310

Effects of Migration 311

DOES U.S. IMMIGRATION POLICY HARM

DOMESTIC WORKERS? 313

Immigration as an Issue 314

Summary 316

Key Concepts and Terms 316

Study Questions 317

Netlink 318

Part 2: International Monetary Relations 319

chapter 10

The Balance of Payments 320

Double-Entry Accounting 320

Balance-of-Payments Structure 321

Current Account 321

INTERNATIONAL PAYMENTS PROCESS 322

Capital and Financial Account 324

Statistical Discrepancy: Errors andOmissions ..325

U.S. Balance of Payments 326

What Does a Current Account Deficit

(Surplus) Mean? 328

Net Foreign Investment and theCurrent

Account Balance 328

Impact of Financial Flows on the Current

Account 329

Is a Current Account Deficit a Problem? ....330

Do CURRENT ACCOUNT DEFICITS COST

AMERICANS JOBS? 331

Business Cycles, Economic Growth, and the

Current Account 331

Can the United States Continue toRun Current

Account Deficits Year AfterYear? 332

Balance of International Indebtedness 335

United States as a Debtor Nation 336

Summary 337

Key Concepts and Terms 337

Study Questions 338

Netlink 339

xiv Contents

chapter 11

Foreign Exchange 340

Foreign-Exchange Market 340

TYPes of Foreign-Exchange Transactions 342

Interbank Trading 343

Reading Foreign-Exchange Quotations 345

Forward and Futures Markets 347

Foreign-Currency Options 349

Exchange-Rate Determination 350

Demandfor Foreign Exchange 350

Supply of Foreign Exchange 350

Equilibrium Rate of Exchange 351

WEAK DOLLAR Is BONANZA FOR

EUROPEAN TOURISTS 352

Is a Strong Dollar Always Good and a Weak

Dollar Always Bad? 352

Indexes of the Foreign-Exchange Value

of the Dollar: Nominal and Real

Exchange Rates 354

Arbitrage 356

The Forward Market 357

TheForward Rate 357

Forward RateDiffers from the Spot Rate 358

Forward MarketFunctions 358

How MarkelRides Foreign-Exchange

Fluctuations 359

Does Foreign-Currency Hedging Pay Off? 360

EXCHANGE-RATE RISK: THE HAZARD OF

INVESTING ABROAD 361

Interest Arbitrage 362

Uncovered Interest Arbitrage 362

Covered Interest Arbitrage 363

Foreign-Exchange Market Speculation 364

How TO PLAY THE FALLING DOLLAR 365

Summary 366

Key Concepts and Terms 367

Study Questions 367

Netlink 369

EXPLORING FURTHER 11.1:

Techniques of Foreign-Exchange

Market Speculation 370

chapter 12

Exchange-Rate Determination 372

What Determines Exchange Rates? 372

Determining Long-Run Exchange Rates ..374

Relative Price Levels 374

Relative Productivity Levels 374

Preferences for Domestic or Foreign Goods .. 376

Trade Barriers 376

Inflation Rates, Purchasing Power Parity, and

Long-Run Exchange Rates 376

Law of One Price 376

The "Big Mac" Index and the Law of

OnePrice 378

Relative Purchasing Power Parity 379

Determining Short-Run Exchange Rates:

The Asset-Market Approach 381

Relative Levels of Interest Rates 382

INTEREST RATES AND THE DOLLAR'S

EXCHANGE VALUE 384

Expected Change in the Exchange Rate 385

Diversification, Safe Havens, and

Investment Flows 386

The Ups and Downs of the Dollar:

1980 to 2004 386

The 1980s 386

The 1990s 387

The2000s 387

DOES THE CURRENT ACCOUNT DEFICIT WEIGH

ON THE DOLLAR? 388

Exchange-Rate Overshooting 388

Forecasting Foreign-Exchange Rates 390

Contents xv

Judgmental Forecasts 391

FundamentalAnalysis 393

Forecast Performance ofAdvisory Services 394

Summary 394

Key Concepts and Terms 395

Study Questions 395

Netlink 397

EXPLORING FURTHER 12.1:

Fundamental Forecasting￾Regression Analysis 398

chapter 13

Balance-ot-Payments Adjustments .400

Price Adjustments .401

Gold Standard .401

QuantityTheory ofMoney .401

Balance-of-Payments Adjustment .402

Interest-Rate Adjustments .402

Financial Flows and Interest-Rate

Differentials .403

Income Adjustments .405

Disadvantages of Automatic Adjustment

Mechanisms .405

chapter 14

Monetary Adjustments .406

Payments Imbalances Under Fixed

Exchange Rates .406

Policy Implications .407

Summary .408

Key Concepts and Terms .409

Study Questions .409

Netlink .410

EXPLORING FURTHER 13.1:

Income Adjustment Mechanism ..... .411

Exchange-Rate Adjustments and the Balance of Payments 416

Effects of Exchange-Rate Changes on

Costs and Prices .416

Cost-Cutting Strategies of Manufacturers

in Response to Currency Appreciation .. .419

Appreciation of the Yen: Japanese

Manufacturers .419

CHEAP IMPORTS? NOT So FAST .421

Appreciation of the Dollar:

U.S. Manufacturers .422

Requirements for a SuccessfulDepreciation . .422

The Elasticity Approach to Exchange￾Rate Adjustment .422

Empirical Measurement: Import/Export

Demand Elasticities .425

xvi Contents

J-Curve Effect: Time Path of Depredation .. .425

Exchange Rate Pass-Through .428

WhatDetermines Currency Pass-Through? .. .428

Dollar Depreciation of the 1980s .429

JAPANESE FIRMS MOVE OUTPUT OVERSEAS

TO LIMIT EFFECTS OF STRONG YEN .431

Dollar Depreciation of 2003-2004 .432

The Dollar and U.S. Manufacturing .432

The Absorption Approach to Exchange￾Rate Adjustment .434

The Monetary Approach to Exchange￾Rate Adjustment .435

Summary .436

Key Concepts and Terms .437

Study Questions .437

Netlink .438

EXPLORING FURTHER 14.1:

Exchange Rate Pass-Through .439

chapter 15

Exchange-Rate Systems and Currency Crises .442

Exchange-Rate Practices .442

Fixed Exchange-Rate System .445

ParValue and Official Exchange Rate 445

Exchange-Rate Stabilization .446

Devaluation and Revaluation .447

Bretton Woods System of Fixed Exchange

Rates 448

Floating Exchange Rates .449

Achieving Market Equilibrium .449

Trade Restrictions, Jobs, and Floating

Exchange Rates .450

Arguments for and Against Floating Rates 451

Is IT CHINA'S FAULT? .452

Managed Floating Rates .452

Managed Floating Rates in the Short Run

and Long Run .4 53

Exchange-Rate Stabilization and Monetary

Policy .455

IsExchange-Rate Stabilization Effective? 456

The Crawling Peg .457

Currency Crises 458

Speculators Attack the Krona .461

Speculators Attack EastAsian Currencies .. .461

Capital Controls .462

ShouldForeign-Exchange Transactions

Be Taxed? 463

Increasing the Credibility of Fixed

Exchange Rates .464

Currency Board .464

For Argentina, No Panacea in a Currency

Board 465

Dollarization .466

Summary .468

Key Concepts and Terms .469

Study Questions .469

Netlink 470

EXPLORING FURTHER 15.1:

Legal and Economic Implications of

Devaluation and Revaluation .471

Contents xvii

chapter 16

Macroeconomic Policy in an Open Economy 474

Economic Policy in an Open Economy .. .474

Economic Objectives of Nations .474

Policy Instruments .475

Exchange-Rate Policies and Overall Balance . .477

Monetary Policy and Fiscal Policy:

Effects on Internal Balance .477

Fiscal Policy with Fixed Exchange Rates

and Floating Exchange Rates .478

Monetary Policy with Fixed Exchange

Rates and Floating Exchange Rates .... .479

Monetary and Fiscal Policies: Effects

on External Balance .480

Monetary Policy and Fiscal Policy:

Policy Agreement and Policy Conflict .. .482

Inflation with Unemployment .483

International Economic-Policy

Coordination 483

Policy Coordination in Theory 485

Does Policy Coordination Work? .486

Summary .487

Key Concepts and Terms .488

Study Questions .488

Netlink .489

chapter 17

International Banking: Reserves, Debt, and Risk .490

Nature of International Reserves .490

Demand for International Reserves .491

Exchange-Rate Flexibility 491

Other Determinants .493

Supply of International Reserves .494

Foreign Currencies .494

Gold 495

International Gold Standard .495

Gold Exchange Standard .496

Demonetization of Gold .497

Special Drawing Rights .497

Facilities for Borrowing Reserves .498

IMF Drawings .498

General Arrangements toBorrow 499

SwapArrangements .499

Glossary 509

Index 523

International Lending Risk .499

The Problem of International Debt 500

Dealing with Debt-Servicing Difficulties 501

Reducing Bank Exposure to Developing￾Nation Debt 502

How A DEBT/EQUITY SWAP WORKS 503

Debt Reduction and Debt Forgiveness 503

The Eurocurrency Market 504

Development of the Eurocurrency Market 504

Financial Implications 505

Summary 505

Key Concepts and Terms 506

Study Questions 506

Netlink 507