International Economics, 13th Edition provides students with a comprehensive, up-to-date review of the field’s essential principles and theory. This comprehensive textbook explains the concepts necessary to understand, evaluate, and address the economic problems and issues the nations of the world are currently facing, and are likely to face in the future. Balancing depth and accessibility, the text helps students identify the real-world relevance of the material through extensive practical applications and examples.
The new, thoroughly-updated and expanded edition provides students with a solid knowledgebase in international trade theory and policy, balance of payments, foreign exchange markets and exchange rates, open-economy macroeconomics, and the international monetary system. The text uniquely employs the same graphical and numerical model in chapters that cover the same basic concept, allowing students to recognize the relationship among the different topics without having to start with a new example each time. Clear, straightforward discussions of each key concept and theory are complemented by concrete, accessible, and relatable examples that serve to strengthen student comprehension and retention. Topics include the ‘Great Recession,’ the increase in trade protectionism, excessive volatility and large misalignments of exchange rates, and the impacts of resource scarcity and climate change to continued growth and sustainable development.
Table of Contents
1 Introduction 1
1.1 The Globalization of the World Economy 1
1.2 International Trade and the Nation’s Standard of Living 4
1.3 The International Flow of Goods, Services, Labor, and Capital 8
1.4 International Economic Theories and Policies 12
1.5 Current International Economic Problems and Challenges 14
1.6 Organization and Methodology of the Text 16
Summary 18
Key Terms 19
Questions For Review 19
Problems 19
Appendix 20
A1.1 Basic International Trade Data 20
A1.2 Sources of Additional International Data and Information 24
OC Selected Bibliography
OC INTERNet
Part 1 International Trade Theory
2 The Law of Comparative Advantage 29
2.1 Introduction 29
2.2 The Mercantilists’ Views on Trade 30
2.3 Trade Based on Absolute Advantage: Adam Smith 32
2.4 Trade Based on Comparative Advantage: David Ricardo 33
2.5 Comparative Advantage and Opportunity Costs 38
2.6 The Basis for and the Gains from Trade under Constant Costs 42
2.7 Empirical Tests of the Ricardian Model 44
Summary 47
Key Terms 48
Questions for Review 48
Problems 49
Appendix 50
A2.1 Comparative Advantage with More Than Two Commodities 50
A2.2 Comparative Advantage with More Than Two Nations 52
OC Selected Bibliography
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3 The Standard Theory of International Trade 53
3.1 Introduction 53
3.2 The Production Frontier with Increasing Costs 53
3.3 Community Indifference Curves 56
3.4 Equilibrium in Isolation 57
3.5 The Basis for and the Gains from Trade with Increasing Costs 60
3.6 Trade Based on Differences in Tastes 67
Summary 68
Key Terms 69
Questions for Review 69
Problems 69
Appendix 70
A3.1 Production Functions, Isoquants, Isocosts, and Equilibrium 71
A3.2 Production Theory with Two Nations, Two Commodities, and Two Factors 72
A3.3 Derivation of the Edgeworth Box Diagram and Production Frontiers 73
A3.4 Some Important Conclusions 76
OC Selected Bibliography
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4 Demand and Supply, Offer Curves, and the Terms of Trade 77
4.1 Introduction 77
4.2 The Equilibrium-Relative Commodity Price with Trade - Partial Equilibrium Analysis 77
4.3 Offer Curves 80
4.4 The Equilibrium-Relative Commodity Price with Trade - General Equilibrium Analysis 83
4.5 Relationship Between General and Partial Equilibrium Analyses 84
4.6 The Terms of Trade 86
Summary 88
Key Terms 89
Questions for Review 89
Problems 89
Appendix 90
A4.1 Derivation of a Trade Indifference Curve for Nation 1 90
A4.2 Derivation of Nation 1’s Trade Indifference Map 92
A4.3 Formal Derivation of Nation 1’s Offer Curve 92
A4.4 Outline of the Formal Derivation of Nation 2’s Offer Curve 94
A4.5 General Equilibrium of Production, Consumption, and Trade 96
A4.6 Multiple and Unstable Equilibria 96
OC Selected Bibliography
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5 Factor Endowments and the Heckscher-Ohlin Theory 99
5.1 Introduction 99
5.2 Assumptions of the Theory 100
5.3 Factor Intensity, Factor Abundance, and the Shape of the Production Frontier 101
5.4 Factor Endowments and the Heckscher-Ohlin Theory 107
5.5 Factor-Price Equalization and Income Distribution 112
5.6 Empirical Tests of the Heckscher-Ohlin Model 119
Summary 125
Key Terms 126
Questions for Review 127
Problems 127
Appendix 128
A5.1 The Edgeworth Box Diagram for Nation 1 and Nation 2 129
A5.2 Relative Factor-Price Equalization 130
A5.3 Absolute Factor-Price Equalization 132
A5.4 Effect of Trade on the Short-Run Distribution of Income: The Specific-Factors Model 132
A5.5 Illustration of Factor-Intensity Reversal 134
A5.6 The Elasticity of Substitution and Factor-Intensity Reversal 136
A5.7 Empirical Tests of Factor-Intensity Reversal 137
OC Selected Bibliography
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6 Economies of Scale, Imperfect Competition, and International Trade 138
6.1 Introduction 138
6.2 The Heckscher-Ohlin Model and New Trade Theories 138
6.3 Economies of Scale and International Trade 140
6.4 Imperfect Competition and International Trade 143
6.5 Trade Based on Dynamic Technological Differences 152
6.6 Costs of Transportation, Environmental Standards, and International Trade 156
Summary 160
Key Terms 161
Questions for Review 161
Problems 162
Appendix 162
A6.1 External Economies and the Pattern of Trade 162
A6.2 Dynamic External Economies and Specialization 164
OC Selected Bibliography
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7 Economic Growth and International Trade 166
7.1 Introduction 166
7.2 Growth of Factors of Production 167
7.3 Technical Progress 169
7.4 Growth and Trade: The Small-Country Case 172
7.5 Growth and Trade: The Large-Country Case 177
7.6 Growth, Change in Tastes, and Trade in Both Nations 182
Summary 184
Key Terms 185
Questions for Review 185
Problems 186
Appendix 187
A7.1 Formal Proof of the Rybczynski Theorem 187
A7.2 Growth with Factor Immobility 189
A7.3 Graphical Analysis of Hicksian Technical Progress 190
OC Selected Bibliography
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Part 2 International Trade Policy
8 Trade Restrictions: Tariffs 195
8.1 Introduction 195
8.2 Partial Equilibrium Analysis of a Tariff 197
8.3 The Theory of Tariff Structure 203
8.4 General Equilibrium Analysis of a Tariff in a Small Country 207
8.5 General Equilibrium Analysis of a Tariff in a Large Country 210
8.6 The Optimum Tariff 212
Summary 213
Key Terms 214
Questions for Review 214
Problems 215
Appendix 216
A8.1 Partial Equilibrium Effects of a Tariff in a Large Nation 216
A8.2 Derivation of the Formula for the Rate of Effective Protection 218
A8.3 The Stolper-Samuelson Theorem Graphically 219
A8.4 Exception to the Stolper-Samuelson Theorem - The Metzler Paradox 221
A8.5 Short-Run Effect of a Tariff on Factors’ Income 222
A8.6 Measurement of the Optimum Tariff 224
OC Selected Bibliography
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9 Nontariff Trade Barriers and the New Protectionism 226
9.1 Introduction 226
9.2 Import Quotas 226
9.3 Other Nontariff Barriers and the New Protectionism 229
9.4 The Political Economy of Protectionism 238
9.5 Strategic Trade and Industrial Policies 242
9.6 History of U.S. Commercial Policy 246
9.7 The Uruguay Round, the Failed Doha Round, and the Outstanding Trade Problems 250
Summary 255
Key Terms 256
Questions for Review 257
Problems 257
Appendix 258
A9.1 Centralized Cartels 258
A9.2 International Price Discrimination 259
A9.3 Tariffs, Subsidies, and Domestic Goals 260
OC Selected Bibliography
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10 Economic Integration: Customs Unions and Free Trade Areas 262
10.1 Introduction 262
10.2 Trade-Creating Customs Union 263
10.3 Trade-Diverting Customs Unions 264
10.4 The Theory of the Second Best and Other Static Welfare Effects of Customs Unions 266
10.5 Dynamic Benefits from Customs Unions 268
10.6 History of Attempts at Economic Integration 269
Summary 280
Key Terms 281
Questions for Review 281
Problems 281
Appendix 282
A10.1 General Equilibrium Analysis of the Static Effects of a Trade-Diverting Customs Union 282
A10.2 Regional Trade Agreements and Other Groups Around the World in June 2018 284
OC Selected Bibliography
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11 International Trade and Economic Development 289
11.1 Introduction 289
11.2 The Importance of Trade to Development 290
11.3 The Terms of Trade and Economic Development 295
11.4 Export Instability and Economic Development 300
11.5 Import Substitution versus Export Orientation 303
11.6 Current Problems Facing Developing Countries 307
Summary 313
Key Terms 313
Questions for Review 314
Problems 314
Appendix 315
A11.1 Income Inequalities by Traditional and Purchasing-Power Parity (PPP) Measures 315
A11.2 The World by Income 316
OC Selected Bibliography
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12 International Resource Movements and Multinational Corporations 319
12.1 Introduction 319
12.2 Some Data on International Capital Flows 320
12.3 Motives for International Capital Flows 323
12.4 Welfare Effects of International Capital Flows 326
12.5 Multinational Corporations 329
12.6 Motives for and Welfare Effects of International Labor Migration 334
Summary 338
Key Terms 339
Questions for Review 339
Problems 339
Appendix 340
A12.1 The Transfer Problem 340
A12.2 International Trade, Financial and Aid Flows, and Migration 341
OC Selected Bibliography
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Part 3 The Balance of Payments, Foreign Exchange Markets, and Exchange Rates
13 Balance of Payments 347
13.1 Introduction 347
13.2 Balance of Payments Accounting 348
13.3 The International Transactions of the United States 350
13.4 Accounting Balances and the U.S. Balance of Payments 353
13.5 The Postwar Balance of Payments of the United States 353
13.6 The Importance of the Current Account 356
13.7 The International Investment Position of the United States 357
Summary 360
Key Terms 361
Questions for Review 361
Problems 362
Appendix 362
A13.1 The IMF Method of Reporting International Transactions 362
OC Selected Bibliography
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14 Foreign Exchange Markets and Exchange Rates 366
14.1 Introduction 366
14.2 Functions of the Foreign Exchange Markets 366
14.3 Foreign Exchange Rates 370
14.4 Spot and Forward Rates, Currency Swaps, Futures, and Options 376
14.5 Foreign Exchange Risks, Hedging, and Speculation 379
14.6 Interest Arbitrage and the Efficiency of Foreign Exchange Markets 385
14.7 Eurocurrency or Offshore Financial Markets 392
Summary 396
Key Terms 397
Questions for Review 398
Problems 398
Appendix 399
A14.1 Derivation of the Formula for the Covered Interest Arbitrage Margin 399
OC Selected Bibliography
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15 Exchange Rate Determination 401
15.1 Introduction 401
15.2 Purchasing-Power Parity Theory 402
15.3 Monetary Approach to the Balance of Payments and Exchange Rates 407
15.4 Portfolio Balance Model and Exchange Rates 416
15.5 Exchange Rate Dynamics 421
15.6 Empirical Tests of the Monetary and Portfolio Balance Models and Exchange Rate Forecasting 425
Summary 428
Key Terms 429
Questions for Review 429
Problems 429
Appendix 431
A15.1 Formal Monetary Approach Model 431
A15.2 Formal Portfolio Balance Model and Exchange Rates 433
OC Selected Bibliography
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Part 4 Open-Economy Macroeconomics and the International Monetary System
16 The Price Adjustment Mechanism with Flexible and Fixed Exchange Rates 437
16.1 Introduction 437
16.2 Adjustment with Flexible Exchange Rates 438
16.3 Effect of Exchange Rate Changes on Domestic Prices and the Terms of Trade 441
16.4 Stability of Foreign Exchange Markets 443
16.5 Elasticities in the Real World 445
16.6 Adjustment under the Gold Standard 454
Summary 456
Key Terms 457
Questions for Review 457
Problems 458
Appendix 458
A16.1 The Effect of Exchange Rate Changes on Domestic Prices 458
A16.2 Derivation of the Marshall-Lerner Condition 460
A16.3 Derivation of the Gold Points and Gold Flows Under the Gold Standard 462
OC Selected Bibliography
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17 The Income Adjustment Mechanism and Synthesis of Automatic Adjustments 464
17.1 Introduction 464
17.2 Income Determination in a Closed Economy 465
17.3 Income Determination in a Small Open Economy 468
17.4 Foreign Repercussions 476
17.5 Absorption Approach 479
17.6 Monetary Adjustments and Synthesis of the Automatic Adjustments 481
Summary 484
Key Terms 485
Questions for Review 485
Problems 486
Appendix 487
A17.1 Derivation of Foreign Trade Multipliers with Foreign Repercussions 487
A17.2 The Transfer Problem Once Again 489
OC Selected Bibliography
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18 Open-Economy Macroeconomics: Adjustment Policies 491
18.1 Introduction 491
18.2 Internal and External Balance with Expenditure-Changing and Expenditure-Switching Policies 494
18.3 Equilibrium in the Goods Market, in the Money Market, and in the Balance of Payments 496
18.4 Fiscal and Monetary Policies for Internal and External Balance with Fixed Exchange Rates 498
18.5 The IS-LM-BP Model with Flexible Exchange Rates 506
18.6 Policy Mix and Price Changes 510
18.7 Direct Controls 516
Summary 519
Key Terms 520
Questions for Review 520
Problems 521
Appendix 522
A18.1 Derivation of the IS Curve 522
A18.2 Derivation of the LM Curve 524
A18.3 Derivation of the BP Curve 525
A18.4 Mathematical Summary 527
OC Selected Bibliography
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19 Prices and Output in an Open Economy: Aggregate Demand and Aggregate Supply 528
19.1 Introduction 528
19.2 Aggregate Demand, Aggregate Supply, and Equilibrium in a Closed Economy 528
19.3 Aggregate Demand in an Open Economy Under Fixed and Flexible Exchange Rates 534
19.4 Effect of Economic Shocks and Macroeconomic Policies on Aggregate Demand in Open Economies with Flexible Prices 536
19.5 Effect of Fiscal and Monetary Policies in Open Economies with Flexible Prices 539
19.6 Macroeconomic Policies to Stimulate Growth and Adjust to Supply Shocks 544
Summary 549
Key Terms 550
Questions for Review 550
Problems 551
OC Selected Bibliography
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20 Flexible Versus Fixed Exchange Rates, the European Monetary System, and Macroeconomic Policy Coordination 552
20.1 Introduction 552
20.2 The Case for Flexible Exchange Rates 553
20.3 The Case for Fixed Exchange Rates 555
20.4 Optimum Currency Areas, the European Monetary System, and the European Monetary Union 562
20.5 Currency Boards Arrangements and Dollarization 571
20.6 Exchange Rate Bands, Adjustable Pegs, Crawling Pegs, and Managed Floating 573
20.7 International Macroeconomic Policy Coordination 578
Summary 580
Key Terms 581
Questions for Review 581
Problems 581
Appendix 582
A20.1 Exchange Rate Arrangements 582
OC Selected Bibliography
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21 The International Monetary System: Past, Present, and Future 586
21.1 Introduction 586
21.2 The Gold Standard and the Interwar Experience 587
21.3 The Bretton Woods System 590
21.4 Operation and Evolution of the Bretton Woods System 592
21.5 U.S. Balance-of-Payments Deficits and Collapse of the Bretton Woods System 596
21.6 The International Monetary System: Present and Future 599
Summary 615
Key Terms 616
Questions for Review 617
Problems 617
Appendix 618
A21.1 International Reserves: 1950-2018 618
OC Selected Bibliography
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Glossary of Key Terms G-1
Name Index I-1
Subject Index I-5
