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International Economics Is Different The introduction to the subject of international economics has three major purposes: Show that international economics addresses important and interesting current events and issues. Show why international economics is special. Provide a broad overview of the book. We begin with four controversies that show the importance of current issues addressed by international economics.
The Basic Theory Using Demand and Supply This chapter indicates why we study theories of international trade and presents the basic theory using supply and demand curves. Trade is important to individual consumers, to workers and other factor owners, to firms, and therefore to the whole economy. The box “Trade Is Important” provides useful data about the types of products traded and the increasing role of trade in national economies.
Why Everybody Trades: Comparative Advantage This chapter extends the analysis of international trade to consider trade in a multiple-product economy. An economy composed of two products is useful to bring out insights about international trade. This general equilibrium approach explicitly shows the effects of resource reallocations between industries. The chapter culminates in showing the importance of comparative advantage for understanding why countries trade.
Trade: Factor Availability and Factor Proportions Are Key This chapter continues the analysis of international trade in a two-product economy. It picks up from the end of Chapter 3, where it was noted that the assumption of constant marginal cost and the implication that countries will completely specialize in producing only one (or a few) product(s) are unrealistic. In the modern theory of international trade, we use the assumption of increasing marginal costs—as one industry expands at the expense of others, increasing amounts of other goods must be given up to obtain each extra unit of the expanding output.
Who Gains and Who Loses from Trade? This chapter has two major purposes. First, it examines the implications for factor incomes of trade that follows the Heckscher-Ohlin (H-O) theory. Second, it examines the empirical evidence on the Heckscher-Ohlin theory and some of its implications. The implications of H-O trade for factor incomes follow from the pressures for changes in production levels as a country shifts from no trade to free trade.
Scale Economies, Imperfect Competition, and Trade Standard trade theory presented in Chapters 3-5 is based on perfect competition, with constant returns to scale at the level of the individual firm and constant or increasing cost of expanding production at the level of the industry. Comparative advantage predicts that countries will trade with other countries that are different (the source of the comparative cost differences) and that each country will export some products and import other, quite different products.
This chapter has two major purposes. First, it shows how the Heckscher-Ohlin model can be used to analyze economic growth and its impact on international trade. Second, it examines additional aspects of technological progress and its relationship to international trade. Growth in a country's production capabilities shifts the country's production-possibility curve out. Growth is balanced if the ppc shifts out proportionately.
This chapter starts the analysis of government policies that limit imports, by examining the tariff—a government tax on imports. Early in the chapter, the first in a series of boxes on Global Governance introduces the World Trade Organization (WTO), created in 1995, which subsumed the General Agreement on Tariffs and Trade (GATT), formed in 1947. The major principles of the WTO include trade liberalization, nondiscrimination, and no unfair encouragement of exports.
This chapter has four major purposes: Present analysis of an import quota and a voluntary export restraint (VER), for both a small importing country and a large one. Provide an overview of other nontariff barriers (NTBs) to imports. Explore the relative sizes of the economic costs of tariffs and nontariff barriers. Continue the discussion of the World Trade Organization (WTO), including its role in liberalizing NTBs and its role in the settlement of international trade disputes.
Arguments for and against Protection This chapter has three purposes: To present a framework and a rule for evaluating arguments offered in favor of limiting imports, to apply the framework and rule to several prominent arguments for protection, and to examine the political processes that result in government policies toward imports. The framework allows us to look at situations in which the free market may not result in economic efficiency, because of distortions that result from market failures or from efficiency-reducing government policies.
Chapters 8 through 10 focused on government policies toward imports, with little attention to government policies and business practices in the exporting countries. This chapter shifts to looking at various practices and policies that can increase exports, as well as the effects of these export-promoting activities on importing countries. The chapter has two major purposes: Examine dumping—what it is, why it occurs, how it affects importing countries, and what government policies are used in importing countries.
This chapter examines two types of trade barriers that are intended to discriminate between foreign countries. A trade bloc has lower or no barriers for trade between its members, while they maintain higher barriers for trade with outside countries. A trade embargo or trade block places extra barriers against trade with a specific foreign country, usually because of a broader policy disagreement. There are four major types of trade or economic blocs: free-trade area, customs union, common market, and economic union.
We begin the chapter with two provocative questions. First, is free trade anti-environment? We argue that it is not. There is no reason to think that trade generally promotes production or consumption of products that cause large harm to the environment. Surprisingly, the incentive to relocate production into “pollution havens” is usually small. Trade tends to raise world production and incomes. While some environmental problems become worse as production and income rise, others become less severe, in part because protecting the environment is a normal good.
Trade Policies for Developing Countries This chapter examines trade issues affecting developing countries. It begins by noting differences between high-income developed or industrialized countries and low- and medium-income developing countries, as well as differences among the developing countries. Some developing countries are growing quickly, while others are stagnating or declining. The comparative advantages of developing countries (relative to industrialized countries) derive from abundance of unskilled labor and, for many, abundance of natural resources, as well as a tropical climate for agriculture.
Multinationals and Migration: International Factor Movements This chapter provides a survey of the economics of foreign direct investment (FDI) and the economics of labor migration. Foreign direct investment is a flow of funding provided by an investor (usually a firm) to establish or acquire a foreign company or to finance an existing foreign company that the investor owns. Ownership is important because the investor has or acquires the power to have a substantial influence on the management of the foreign company.
This chapter begins the discussion of international finance and macroeconomics—the subject of the rest of the book. Its major purpose is to show how the balance of payments accounts for international transactions and how the different balances (or sub-balances) can be interpreted. It also presents the international investment position. A country's balance of payments records all economic transactions between the residents of the country and residents of the rest of the world.
The purpose of this chapter is to present the foreign exchange market and exchange rates, with an emphasis on spot exchange rates. Foreign exchange is the act of trading different countries' moneys. An exchange rate is the price of one money in terms of another. The spot exchange rate is the price for "immediate" exchange. The forward exchange rate is the price agreed to today for exchanges that will take place in the future.
Forward Exchange and International Financial Investment This chapter presents the uses of forward foreign exchange rates and the returns and risks of international financial investments, both covered and uncovered. It begins by noting that in many situations people or organizations are exposed to exchange rate risk, because the value of the individual's income, wealth, or net worth changes when exchange rates change unexpectedly in the future.
What Determines Exchange Rates? Since the general shift to floating exchange rates in the early 1970s, exchange rates between the U.S. dollar and other major currencies have been variable or volatile. The charts at the beginning of the chapter suggest three types of variability. First, there are long-term trends in which some currencies tend to appreciate against the dollar, and others tend to depreciate. Second, there are medium-term trends which are sometimes counter to the longer trends.
Government Policies toward the Foreign Exchange Market The first half of this chapter examines types of government policies toward the foreign exchange market and provides analysis of government intervention and exchange controls. The second half examines the actual policies that governments have adopted during the past 150 years. Government policies toward the foreign exchange market exist for a variety of reasons, including to reduce variability in exchange rates, to keep the exchange value of its currency either high or low, or to raise national pride in a steady or strong currency.
International Lending and Financial Crises International capital movements can bring major gains both to the lending or investing countries and to the borrowing countries, through intertemporal trade and through portfolio diversification for the lenders/investors. But international lending and borrowing sometimes is not well-behaved—financial crises are recurrent. This chapter examines both the gains from well-behaved lending and borrowing and what we know about international financial crises.
How Does the Open Macroeconomy Work? This chapter provides a framework and model for analyzing international macroeconomics. We judge the performance of a national economy against two objectives. Internal balance involves both full employment and price stability or an acceptable rate of inflation. External balance involves a reasonable and sustainable makeup of the country's international payments, taken to be approximately an official settlements balance that is zero.
Internal and External Balance with Fixed Exchange Rates This chapter presents the analysis of the macroeconomy of a country that has a fixed exchange rate. As noted in the introduction, this analysis is important because some countries currently have fixed exchange rates or floating rates that are so heavily managed that they resemble fixed rates, and because there are ongoing discussions of proposals to return to a system of fixed rates among the world's major currencies.
Floating Exchange Rates and Internal Balance This chapter presents the analysis of the macroeconomy of a country that has a floating exchange rate. If government officials allow the exchange rate to float cleanly, then the exchange rate changes to achieve external balance. With floating exchange rates monetary policy exerts strong influence on domestic product and income. A change in monetary policy results in a change in the country's interest rates.
National and Global Choices: Floating Rates and the Alternatives This chapter provides a capstone to the discussion of international finance and international macroeconomics by examining the choice between fixed and floating exchange rates. Much of the discussion examines this choice from the point of view of a single country, but the discussion also examines some issues related to the functioning of the entire system.