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DB- Module 02: Comparative Advantage: Sources

Description

Module 02: Comparative Advantage: Sources

In this module, we will continue our exploration of globalization by examining the principle of comparative advantage, a fundamental concept in classical trade theory, and a major justification for free trade and globalization. We will analyze how comparative advantage explains why trade occurs and the benefits it brings to nations. 

Discussion Requirement

Comparative Advantage Around the World

Select a country of your choice (other than Saudi Arabia) and discuss its comparative advantage. What are the sources and the challenges?

What is the role of the government? What policies should the government implement to enhance the comparative advantage?

Directions:

Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and cite any other sources if appropriate. 

Your initial post should address all components of the question with a 600 word limit.

Learning Outcomes

Understand how the law of comparative advantage forms the basis of trade theory and globalization.

Apply trade theory concepts in both verbal and graphical formats.

  • Readings
  • Required: 

Chapter 2 in International Economics

Krist, W. (n.d.). Chapter 3: Trade Agreements and Economic Theory. Wilson Center. Retrieved October 11, 2023, from

Module 02: Comparative Advantage: Sources
In this module, we will continue our exploration of globalization by examining the principle
of comparative advantage, a fundamental concept in classical trade theory, and a major
justification for free trade and globalization. We will analyze how comparative advantage
explains why trade occurs and the benefits it brings to nations.
Discussion Requirement
Comparative Advantage Around the World
Select a country of your choice (other than Saudi Arabia) and discuss its comparative advantage. What
are the sources and the challenges?
What is the role of the government? What policies should the government implement to enhance the
comparative advantage?
Directions:
• Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and cite
any other sources if appropriate.
• Your initial post should address all components of the question with a 600 word limit.
Learning Outcomes
• Understand how the law of comparative advantage forms the basis of trade theory and
globalization.

Apply trade theory concepts in both verbal and graphical formats.
Readings
Required:
Chapter 2 in International Economics
Krist, W. (n.d.). Chapter 3: Trade Agreements and Economic Theory. Wilson Center. Retrieved October
11, 2023, from
Recommended:
Chapter 2 PowerPoint slides – International Economics
Gnangnon, S. (2020). Effect of the internet on services export diversification. Journal of Economic
Integration, 35(3), 519-558. Retrieved from
Select a country of your choice (other than Saudi Arabia) so I choose Qater and discuss its
comparative advantage. What are the sources and the challenges?
Note from the instructor
• For this week’s discussion, select a country of your choice (other than Saudi Arabia)
and explore its comparative advantage. Discuss the sources and challenges it faces,
and propose policies the government could implement to enhance its comparative.
INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 2:
Foundations of
Modern Trade
Theory:
Comparative
Advantage
© 2019 Cengage. All rights reserved.
2
Chapter Outline (1 of 2)
• Historical Development of Modern Trade Theory
• Production Possibilities Frontiers
• Trading Under Constant-Cost Conditions
• Dynamic Gains from Trade: Economic Growth
• Changing Comparative Advantage
• Trading under Increasing-Cost Conditions
• The Impact of Trade on Jobs
© 2019 Cengage. All rights reserved.
3
Chapter Outline (2 of 2)
• Wooster, Ohio, Bears the Brunt of Globalization
• Comparative Advantage Extended to Many
Products & Countries
• Factor Mobility, Exit Barriers, and Trade
• Empirical Evidence on Comparative Advantage
• The Case for Free Trade
• Comparative Advantage & Global Supply Chains
© 2019 Cengage. All rights reserved.
4
Main Concepts
• Basis for trade: why do nations export
and import certain products?
• At what terms of trade are products
exchanged in world market?
• Gains from international trade:
production & consumption
© 2019 Cengage. All rights reserved.
5
Historical Development of
Modern Trade Theory (1 of 11)
• The Mercantilists, 1500–1800
• Promoted favorable trade balance by
encouraging exports and discouraging
imports
• Sought rise in domestic output & employment
• Advocated government regulation of trade (tariffs,
quotas, other commercial policies)
© 2019 Cengage. All rights reserved.
6
Historical Development of
Modern Trade Theory (2 of 11)
• Criticisms of Mercantilism
• David Hume’s price-specie-flow doctrine
• A favorable trade balance is possible only in short
run
• Adam Smith, The Wealth of Nations (1776)
• Static view; world’s wealth not fixed quantity
• International trade increases general level of
productivity within a country as well as increases
world output
© 2019 Cengage. All rights reserved.
7
Historical Development of
Modern Trade Theory (3 of 11)
• Why Nations Trade? Absolute Advantage
• Assumption:
• Production costs differ among nations due to
different productivities of factor inputs
• Absolute Cost Advantage
• Countries that use less labor to produce one unit of
output
• Labor theory of value – assumes that within a
nation, labor is only factor of production
© 2019 Cengage. All rights reserved.
8
Historical Development of
Modern Trade Theory (4 of 11)
• Principle of Absolute Advantage
• Two-nation, two-product world
• Each nation produces good absolutely more
efficiently than trading partner
• With trade and specialization
• Countries export goods – if have absolute cost
advantage
• Countries import goods – if have absolute cost
disadvantage
© 2019 Cengage. All rights reserved.
9
Historical Development of
Modern Trade Theory (5 of 11)
TABLE 2.1 A Case of Absolute Advantage When Each
Nation Is More Efficient in the Production of One Good
World output possibilities in the absence of specialization
OUTPUT PER LABOR HOUR
Nation
Wine
Cloth
United States
5 bottles
20 yards
United Kingdom
15 bottles
10 yards
© 2019 Cengage. All rights reserved.
10
Historical Development of
Modern Trade Theory (6 of 11)
• Why Nations Trade: Comparative
Advantage
• Emphasizes relative cost differences based
on opportunity costs; basis for trade
• Mutually advantageous trade possible even
when nation has absolute cost disadvantage
in production of both goods
© 2019 Cengage. All rights reserved.
11
Historical Development of
Modern Trade Theory (7 of 11)
TABLE 2.2 Examples of Comparative Advantages in
International Trade
Country
Product
Canada
Lumber
Israel
Citrus fruit
Italy
Wine
Jamaica
Aluminum ore
Mexico
Tomatoes
Saudi Arabia
Oil
China
Textiles
Japan
Automobiles
South Korea
Steel, ships
Switzerland
Watches
United Kingdom
Financial services
© 2019 Cengage. All rights reserved.
12
Historical Development of
Modern Trade Theory (8 of 11)
Assumptions of Ricardo’s Principle of
Comparative Advantage
1. World consists of 2 nations & 2 goods
2. Labor, fully employed & homogenous, is sole
input
3. Labor can move freely only within nation
4. Technology fixed for both nations; all firms
within nation utilize common production
methods
© 2019 Cengage. All rights reserved.
13
Historical Development of
Modern Trade Theory (9 of 11)
5. Costs do not vary with level of production &
proportional to labor use
6. Perfect competition prevails in all markets;
firms are price takers; products are identical
7. Free trade occurs between nations; no
barriers
8. Transportation costs zero; consumers don’t
care whether domestically produced or
imported
© 2019 Cengage. All rights reserved.
14
Historical Development of
Modern Trade Theory (10 of 11)
9. Firms make production decisions to maximize
profits; consumers maximize satisfaction
10. No money illusion; consumers and firms take
account of all prices in their decisions
11. Trade is balanced (exports pay for imports),
implying no money flows between nations
© 2019 Cengage. All rights reserved.
15
Historical Development of
Modern Trade Theory (11 of 11)
TABLE 2.3 A Case of Comparative Advantage When the
United States Has an Absolute Advantage in the
Production of Both Goods
World output possibilities in the absence of specialization
OUTPUT PER LABOR HOUR
Nation
Wine
Cloth
United States
40 bottles
40 yards
United Kingdom
20 bottles
10 yards
© 2019 Cengage. All rights reserved.
16
Production Possibilities
Frontiers (1 of 2)
• Production possibilities frontiers
• Various alternative combinations of two goods
a nation can produce when all factor inputs
are used in their most efficient manner
• Maximum output possibilities of a nation,
given land, labor, capital, entrepreneurship
© 2019 Cengage. All rights reserved.
17
Production Possibilities
Frontiers (2 of 2)
• Marginal rate of transformation (MRT)
• The amount of a product a nation must
sacrifice to obtain an additional unit of another
good
• Rate of sacrifice = opportunity cost of a product
• MRT equals the absolute value of slope of
production possibilities frontier
© 2019 Cengage. All rights reserved.
18
Trading Under Constant-Cost
Conditions (1 of 13)
• Constant opportunity costs
• Straight line production possibilities
• Assumes factors of production perfect
substitutes, and all units of a factor are of
same quality
• Autarky
• Absence of trade
© 2019 Cengage. All rights reserved.
19
Trading Under Constant-Cost
Conditions (2 of 13)
TABLE 2.4 Gains from Specialization and Trade: Constant
Opportunity Costs
(a) Production Gains from Specialization
BEFORE
SPECIALIZATION
AFTER
SPECIALIZATION
NET GAIN (LOSS)
Autos
Wheat
Autos
Wheat
Autos
Wheat
United States
40
40
120
0
80
−40
Canada
40
80
0
160
−40
80
World
80
120
120
160
40
40
(b) Consumption Gains from Trade
BEFORE TRADE
AFTER TRADE
NET GAIN (LOSS)
Autos
Wheat
Autos
Wheat
Autos
Wheat
United States
40
40
60
60
20
20
Canada
40
80
60
100
20
20
World
80
120
120
160
40
40
© 2019 Cengage. All rights reserved.
20
Trading Under Constant-Cost
Conditions (3 of 13)
• Consumption Gains from Trade
• Consumption gains for both countries
• Consumption points:
• Beyond domestic production possibilities frontiers,
so countries consume more of both goods
• Terms of Trade
• Rate at which country’s export product is
traded for other country’s export product
• Defines relative prices of the two products
© 2019 Cengage. All rights reserved.
21
Trading Under Constant-Cost
Conditions (4 of 13)
• Domestic terms of trade: set of post-trade
consumption points that a nation can achieve is
determined by the rate at which its export product is
traded for the other country’s export product
• Slope of production possibilities frontier
• Relative prices at which the two commodities can be
exchanged at home
• Terms of Trade for exports
• For country to consume beyond production
possibilities frontier, international terms of trade must
be more favorable than domestic terms of trade
© 2019 Cengage. All rights reserved.
22
Trading Under Constant-Cost
Conditions (5 of 13)
• Trading possibilities line
• International terms of trade for both countries
• Trade triangle for a country
• Exports – along horizontal axis
• Imports – along vertical axis
• Terms of trade equal to slope
• Complete specialization
• Produces only one product
© 2019 Cengage. All rights reserved.
23
Trading Under Constant-Cost
Conditions (6 of 13)
• Domestic cost ratio
• Negatively sloped production possibilities
frontier
• Transforms into a positively sloped cost-ratio line
• Sets outer limits for equilibrium terms of
trade
• Constitutes the no-trade boundary
• Region of mutually beneficial trade
bounded by cost ratios of the two countries
© 2019 Cengage. All rights reserved.
24
FIGURE 2.2 Equilibrium Terms of
Trade Limits
© 2019 Cengage. All rights reserved.
25
Trading Under Constant-Cost
Conditions (8 of 13)
• Theory of Reciprocal Demand
• Within outer limits of the terms of trade, actual
terms of trade determined by relative strength
of each country’s demand for other country’s
product
• Production costs determine outer limits of terms of
trade
• Reciprocal demand determines terms of trade
within those limits
© 2019 Cengage. All rights reserved.
26
Trading Under Constant-Cost
Conditions (9 of 13)
• Theory of Reciprocal Demand
• Best applies when both nations are of equal
economic size
• If two nations are of unequal economic size
• Relative demand strength of smaller nation can be
dwarfed by larger nation
• Domestic exchange ratio of larger nation will prevail
• Small nation can export as much of the commodity as it
desires
© 2019 Cengage. All rights reserved.
27
Trading Under Constant-Cost
Conditions (10 of 13)
• Importance of Being Unimportant
• For two nations of approximately same size
engaged in international trade, gains from
trade will be shared equally between them
• If one nation is significantly larger
• Larger nation – fewer gains from trade
• Smaller nation – most of the gains from trade
• Larger nation may continue to produce
comparative-disadvantage good because smaller
nation cannot meet all demand
© 2019 Cengage. All rights reserved.
28
Trading Under Constant-Cost
Conditions (11 of 13)
• Terms-of-Trade estimates
• Commodity terms of trade (a.k.a. barter
terms of trade)
• Measure of the international exchange ratio
• Measures the relation between the prices a nation
gets for its exports and the prices it pays for its
imports
Export Price Index
Terms of Trade =
 100
Import Price Index
© 2019 Cengage. All rights reserved.
29
Trading Under Constant-Cost
Conditions (12 of 13)
• Improvement in a nation’s terms of trade
• Rise in export prices relative to import prices
• A smaller quantity of export goods sold
abroad to obtain a given quantity of imports
• Deterioration in a nation’s terms of trade
• Rise in import relative to export prices
• Given quantity of imports requires sacrifice of
greater quantity of exports
© 2019 Cengage. All rights reserved.
30
Trading Under Constant-Cost
Conditions (13 of 13)
TABLE 2.5 Commodity Terms of Trade, 2015 (2000 = 100)
Country
Export Price
Index
Import Price Index
Terms of Trade
Germany
242
212
114
Brazil
347
305
114
United States
193
183
105
Australia
295
291
101
Argentina
216
238
91
United Kingdom
162
180
90
Canada
148
178
83
Japan
130
171
76
Sources: From International Monetary Fund, IMF Financial Statistics, Washington, DC, January 2017. See
also World Bank, Export Value Index (2000 = 100) at and Import Value
Index (2000 = 100) at .
© 2019 Cengage. All rights reserved.
31
Dynamic Gains from Trade
• Dynamic gains from international trade
• Effect of trade on country’s growth rate and
volume of additional resources made
available to/utilized by trading country
• Can arise from increased investment in
equipment, economies of large-scale
production, increased competition, internet
use, etc.
• Dwarf static gains from trade
© 2019 Cengage. All rights reserved.
32
Changing Comparative
Advantage (1 of 2)
• Patterns of comparative advantage
change over time
• Productivity increases
• Production possibilities frontier changes
• More output can be produced with same amount of
resources
• Producers must hone skills to compete in
more profitable areas
© 2019 Cengage. All rights reserved.
33
FIGURE 2.3 Changing
Comparative Advantage
© 2019 Cengage. All rights reserved.
34
Trading Under Increasing-Cost
Conditions (1 of 7)
• Increasing opportunity costs
• Gives rise to a production possibilities
frontier that appears bowed outward from
diagram’s origin
• Larger in terms of what is sacrificed
© 2019 Cengage. All rights reserved.
35
FIGURE 2.4 Production Possibilities Frontier
under Increasing-Cost Conditions
© 2019 Cengage. All rights reserved.
36
Trading Under Increasing-Cost
Conditions (3 of 7)
• Increasing-Cost Trading Case
• One country specializes, producing one good;
other country specializes in producing the other
good
• Process of specialization continues in both
nations until
• Relative cost of one good is identical in both nations
• One country’s exports of one good equal other
country’s imports of the good
• Domestic rates of transformation are same
© 2019 Cengage. All rights reserved.
37
FIGURE 2.5 Trading under
Increasing Opportunity Costs
© 2019 Cengage. All rights reserved.
38
Trading Under Increasing-Cost
Conditions (5 of 7)
• Production Gains
• More of each good is being produced
• Consumption gains
• Both countries consume more of at least one
good
• Trade Triangle
• Denotes country’s exports, imports, and terms
of trade
• Same for both countries
© 2019 Cengage. All rights reserved.
39
Trading Under Increasing-Cost
Conditions (6 of 7)
TABLE 2.6 Gains from Specialization and Trade: Increasing
Opportunity Costs
(a) Production Gains from Specialization
BEFORE
SPECIALIZATION
AFTER
SPECIALIZATION
NET GAIN (LOSS)
Autos
Wheat
Autos
Wheat
Autos
Wheat
United States
5
18
12
14
7
−4
Canada
17
6
13
13
−4
7
World
22
24
25
27
3
3
(b) Consumption Gains from Trade
BEFORE TRADE
AFTER TRADE
NET GAIN (LOSS)
Autos
Wheat
Autos
Wheat
Autos
Wheat
United States
5
18
5
21
0
3
Canada
17
6
20
6
3
0
World
22
24
25
27
3
3
© 2019 Cengage. All rights reserved.
40
Trading Under Increasing-Cost
Conditions (7 of 7)
• Partial Specialization
• Trade generally leads each country to
specialize only partially in production of good
in which it has comparative advantage.
• Increasing costs constitute mechanism that
forces costs in two trading nations to
converge.
• When cost differentials are eliminated, the
basis for further specialization ceases to exist.
© 2019 Cengage. All rights reserved.
41
The Impact of Trade on Jobs
(1 of 2)
• The extent to which an economy is open
• Influences mix of jobs within an economy
• Can cause dislocation in certain areas or
industries
• Has little effect on the overall level of
employment
© 2019 Cengage. All rights reserved.
42
FIGURE 2.6 The Impact of Trade
on Jobs
© 2019 Cengage. All rights reserved.
43
Wooster, Ohio, Bears the Brunt
of Globalization
• When resin prices skyrocketed, Rubbermaid
tried to raise prices to compensate.
• Walmart ceased carrying its products, broke
relations, & turned to foreign producers with
lower labor costs.
• Profits plunged 30%; closed 9 manufacturing
plants; laid off 10% of workforce.
• Newell Corp purchased Rubbermaid; 1,000
more jobs lost in Wooster.
© 2019 Cengage. All rights reserved.
44
Comparative Advantage Extended to
Many Products & Countries (1 of 3)
• More than two products:
• Comparative advantage ranks goods by
degree of comparative cost.
• Each country exports products in which it has
greatest comparative advantage.
• Each country imports products in which it has
greatest comparative disadvantage.
• Cutoff point between exports & imports
depends on relative strength of international
demand.
© 2019 Cengage. All rights reserved.
45
Comparative Advantage Extended to
Many Products & Countries (2 of 3)
• More than two countries:
• Multilateral trading relations
• Bilateral balance should not pertain to any two
trading partners
• Trade surplus with trading partners that buy
many products it supplies at low cost
• Trade deficit with trading partners that are
low-cost suppliers of goods it imports
intensively
© 2019 Cengage. All rights reserved.
46
FIGURE 2.8 Multilateral Trade among
the United States, Japan, and OPEC
© 2019 Cengage. All rights reserved.
47
Factor Mobility, Exit Barriers,
and Trade (1 of 2)
• Trading assumes factors of production are
mobile between different uses.
• Factor mobility: ability to move factors of
production out of one production process into
another.
• How realistic is it that factors of production can
move freely within an industry in a country, can
move across industries in a country, and are
immobile across national borders?
© 2019 Cengage. All rights reserved.
48
Factor Mobility, Exit Barriers,
and Trade (2 of 2)
• Exit barriers hinder market adjustments
that would occur through comparative
advantage.
• Exit barriers in U.S. steel industry caused
by:
• Relatively fixed cost of union-negotiated
wages & benefits.
• Antiquated plants with no other use; contract
termination fines; environmental problems.
© 2019 Cengage. All rights reserved.
49
Empirical Evidence on
Comparative Advantage (1 of 2)
• Ricardian model
• Implies nations export goods in which their
labor productivity is relatively high.
• Testing Ricardian model
• MacDougall, 1951
• Export patterns of 25 industries in the United
States and United Kingdom (1937) examined
• 20 industries fit predicted pattern
© 2019 Cengage. All rights reserved.
50
Empirical Evidence on
Comparative Advantage (2 of 2)
• Testing Ricardian model (cont.)
• Stephen Golub
• Found that relative unit labor costs help explain
trade patterns of U.S. vis-à-vis United Kingdom,
Japan, Germany, Canada, and Australia.
• Limits of Ricardian model
• Labor not the only factor input; production and
distribution costs also impact trade
• Differences in product quality impact trade as
well
© 2019 Cengage. All rights reserved.
51
Can American Workers Compete
with Low-Wage Workers Abroad?
• Argument highly political
• Bernie Sanders believes U.S. cannot
compete.
• Opponents believe that Sanders’s
understanding of free trade is inaccurate.
• Lawrence found a strong relationship
between average productivity (GDP per
capita) and average wages.
© 2019 Cengage. All rights reserved.
52
The Case for Free Trade (1 of 2)
• Main arguments
• For world as whole, free trade results in
higher level of output and income than would
occur in absence of free trade.
• It allows each individual nation to achieve
higher level of production and consumption
than would be achieved in isolation.
© 2019 Cengage. All rights reserved.
53
The Case for Free Trade (2 of 2)
• Additional benefits of free trade:
• Increased monopoly
• More innovation
• Wider range of product choices
• Reduces international political animosities
• However, trade sometimes harms particular
domestic industries and workers, prompting
calls for protections from imports.
© 2019 Cengage. All rights reserved.
54
Comparative Advantage & Global
Supply Chains (1 of 3)
• Ricardian theory assumes production
cannot move to other nations.
• Today, labor, technology, capital, and ideas
all shift around globe.
• Today, many goods are supplied by global
supply chains, international production
networks that allow firms to move goods
and services efficiently across national
borders.
© 2019 Cengage. All rights reserved.
55
Comparative Advantage & Global
Supply Chains (2 of 3)
• Global supply chains use outsourcing
• Subcontracting work to another firm, or
purchasing components rather than
manufacturing them
• Advantages of outsourcing
• Reduced costs & increased competitiveness
• Creation of new industries and products
© 2019 Cengage. All rights reserved.
56
Comparative Advantage & Global
Supply Chains (3 of 3)
• Reshoring Production to U.S.
• Wage gap narrowing
• Cost of shipping goods by ocean freight
increasing sharply; goods in transit for weeks
• Distance made it difficult to customize goods
to local markets; natural disasters, geopolitical
shocks disrupt supply chains
• Many firms now returning some production to
U.S.
© 2019 Cengage. All rights reserved.
57
150
120
90
A RCTIC
OCEAN
60
30
30
0
A RCTIC
OCEAN
Greenland
(DENMARK)
NORWAY
ICELAND
U.S.
SWEDEN FIN
60
CANADA
BELGIUM
UNITED
KINGDOM DENMARK
NETH.
IRELAND
SLOVAKIA
HUNGARY
NORTH
PACIFIC
OCEAN
NORTH
ATLANTIC
OCEAN
UNITED STATES
EST
LITH.
POLAND
GERMANY CZECH RE
SWITZ. AUSTRIA
FRANCE
RO
ITALY
B
PORTUGAL SPAIN
GREEC
TUNISIA
MOROCCO
30
ALGERIA
MEXICO
CUBA
MAURITANIA
BELIZE
GUATEMALA
HONDURAS
EL SALVADOR
NICARAGUA
COSTA RICA
PANAMA
MALI
NIGER
CHAD
BURKINA
FASO
GUINEA-BISSAU
NIGERIA
GUINEA
BENIN
CÔTE
CENTR
SIERRA LEONE D’IVOIRE TOGO
AFRICAN RE
LIBERIA
GHANA
CAMEROON

EQUATORIAL
GUINEA
GABON
DEMOC
SENEGAL
VENEZUELA
COLOMBIA GUYANA
0
LIBYA
WESTERN
SAHARA
SURINAME
French Guiana
(FRANCE)
ECUADOR

REP. OF THE CONGO
PERU
BRAZIL
SOUTH
ATLANTIC
OCEAN
BOLIVIA
REPU
OF THE
ANGOLA
Z
NAMIBIA
BOTS
PARAGUAY
CHILE
SOUT
AFRIC
30
URUGUAY
SOUTH
PACIFIC
OCEAN
ARGENTINA
60
ANTARCTICA
150
120
90
60
30
0
Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
58938_end02_hr_000-000.indd 2
8/3/18 9:56 AM
30
0
30
60
90
120
150
A RCTIC
OCEAN
A RCTIC
OCEAN
180
NORWAY
SWEDEN FINLAND
TED
DOM DENMARK
NETH.
RUSSIA
60
EST.
LAT.
LITH.
POLAND BELARUS
GERMANY CZECH REP. UKRAINE
SWITZ. AUSTRIA
ROMANIA
RANCE
ITALY
PAIN
TUNISIA
MALI
LIBYA
MONGOLIA
UZBEKISTAN
KYRGYZSTAN
TURKEY
TURKMENISTAN
TAJIKISTAN
ARMENIA
SYRIA
AFGHANISTAN
LEB.
IRAQ
IRAN
ISRAELJORDAN
KUWAIT
NEPAL
PAKISTAN
GREECE
ALGERIA
KAZAKHSTAN
AZERBAIJAN
BULGARIA GEORGIA
EGYPT
SAUDI
ARABIA
UNITED ARAB
EMIRATES
OMAN
NORTH KOREA
CHINA
ANGOLA
30
BANGLADESH
INDIA
BURMA LAOS
MOZAMBIQUE
ZIMBABWE
NAMIBIA
BOTSWANA
THAILAND
VIETNAM
CAMBODIA
SRI
LANKA
MALDIVES
PHILIPPINES
FEDERATED STATES
OF MICRONESIA
MARSHALL
ISLANDS
BRUNEI
MALAYSIA
SINGAPORE
0
INDONESIA
PAPUA
NEW GUINEA
SOLOMON
ISLANDS
INDIAN
OCEAN
MALAWI
ZAMBIA
NORTH
PACIFIC
OCEAN
JAPAN
BHUTAN
NIGER
CHAD
ERITREA YEMEN QATAR
URKINA
SUDAN
FASO
NIGERIA
DJIBOUTI
BENIN
E
CENTRAL
ETHIOPIA
RE TOGO
AFRICAN REPUBLIC
SOMALIA
GHANA
CAMEROON

UGANDA
AL
KENYA
GABON
RWANDA
DEMOCRATIC
EP. OF THE CONGO
BURUNDI
REPUBLIC
OF THE CONGO TANZANIA
SOUTH
KOREA
FIJI
MADAGASCAR
AUSTRALIA
SWAZILAND
SOUTH
AFRICA
30
LESOTHO
NEW
ZEALAND
SOUTH
PACIFIC
OCEAN
60
ANTARCTICA
0
30
60
90
120
150
180
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International Economics
SEVENTEENTH EDITION
R O B E R T J. CA R BAU G H
Professor of Economics, Central Washington University
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
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International Economics,
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Brief Contents
preface ���������������������������������������������������������������������������������������������������������������� xii
about the author ���������������������������������������������������������������������������������������������� xxi
chapter 1
The International Economy and Globalization ����������������������������� 1
PART 1
International Trade Relations    25
chapter 2 Foundations of Modern Trade Theory: Comparative
Advantage��������������������������������������������������������������������������������������� 27
chapter 3
Sources of Comparative Advantage �������������������������������������������� 71
chapter 4
Tariffs ������������������������������������������������������������������������������������������� 113
chapter 5
Nontariff Trade Barriers �������������������������������������������������������������� 157
chapter 6
Trade Regulations and Industrial Policies ��������������������������������� 189
chapter 7
Trade Policies for the Developing Nations �������������������������������� 239
chapter 8
Regional Trading Arrangements ������������������������������������������������ 277
chapter 9 International Factor Movements and Multinational
Enterprises ����������������������������������������������������������������������������������� 311
PART 2
International Monetary Relations    343
chapter 10
The Balance-of-Payments ����������������������������������������������������������� 345
chapter 11
Foreign Exchange ����������������������������������������������������������������������� 375
chapter 12
Exchange Rate Determination ���������������������������������������������������� 413
chapter 13 Exchange Rate Adjustments and the
Balance-of-Payments ������������������������������������������������������������������ 439
chapter 14
Exchange Rate Systems and Currency Crises �������������������������� 459
chapter 15
Macroeconomic Policy in an Open Economy ��������������������������� 495
glossary ����������������������������������������������������������������������������������������������������������� 511
index ����������������������������������������������������������������������������������������������������������������� 529
iii
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Contents
Preface �����������������������������������������������������������������������������������������������������������������xii
About the Author ����������������������������������������������������������������������������������������������� xxi
CHAPTER 1
The International Economy and Globalization ���������������������������������������1
Economic Interdependence: Federal Reserve Policy
Incites Global Backlash ����������������������������������������������������������2
Globalization of Economic Activity ������������������������������������������3
Globalization Forces Kodak to Reinvent Itself ����������������� 15
Bicycle Imports Force Schwinn to Downshift ������������������� 16
Element Electronics Survives by Moving TV
­Production to America�������������������������������������������������� 17
U.S. Apple Growers Not Overly
Worried about Chinese Imports����������������4
Common Fallacies of International Trade �����������������������������17
Waves of Globalization ���������������������������������������������������������������5
First Wave of Globalization: 1870–1914����������������������������� 5
Second Wave of Globalization: 1945–1980������������������������� 6
Latest Wave of Globalization ���������������������������������������������� 7
Is International Trade an Opportunity or a
Threat to Workers?����������������������������������������������������������������19
Is the United States Losing Its
Innovation Edge?��������������������������������������18
Diesel Engines and Gas Turbines as
Movers of Globalization ���������������������������9
Has Globalization Gone Too Far? �������������������������������������������21
The United States as an Open Economy������������������������������������9
Trade Patterns����������������������������������������������������������������������� 9
Labor and Capital �������������������������������������������������������������� 12
Summary��������������������������������������������������������������������������������������24
Why Is Globalization Important?���������������������������������������������13
The Plan of This Text �����������������������������������������������������������������23
Key Concepts and Terms ����������������������������������������������������������24
Study Questions ��������������������������������������������������������������������������24
Globalization and Competition������������������������������������������������15
PART 1 International Trade Relations
25
CHAPTER 2
Foundations of Modern Trade Theory: Comparative Advantage��������27
Historical Development of Modern Trade Theory ����������������27
The Mercantilists ���������������������������������������������������������������� 27
Why Nations Trade: Absolute Advantage ������������������������ 28
Adam Smith and David Ricardo��������������30
Why Nations Trade: Comparative Advantage ���������������� 31
Production Possibilities Frontiers���������������������������������������������33
Trading under Constant-Cost Conditions������������������������������35
Basis for Trade and Direction of Trade����������������������������� 35
Production Gains from Specialization ������������������������������ 35
Babe Ruth and the Principle of
Comparative Advantage��������������������������37
Consumption Gains from Trade ��������������������������������������� 38
Distributing the Gains from Trade ����������������������������������� 39
Equilibrium Terms of Trade ���������������������������������������������� 40
Terms of Trade Estimates��������������������������������������������������� 41
Dynamic Gains from Trade: Economic Growth��������������������42
Changing Comparative Advantage������������������������������������������43
Natural Gas Boom Fuels Debate ������������45
Trading under Increasing-Cost Conditions ���������������������������46
Increasing-Cost Trading Case ������������������������������������������� 47
Partial Specialization ��������������������������������������������������������� 49
The Impact of Trade on Jobs ����������������������������������������������������49
Wooster, Ohio Bears the Brunt of Globalization �������������������50
Comparative Advantage Extended to Many
Products and Countries �������������������������������������������������������51
More Than Two Products �������������������������������������������������� 52
More Than Two Countries ������������������������������������������������ 52
Factor Mobility, Exit Barriers, and Trade �������������������������������53
Empirical Evidence on Comparative Advantage �������������������55
iv
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Contents
v
Can American Workers Compete with Low-Wage
Workers Abroad?����������������������������������������������������������� 56
Outsourcing Backfires for Boeing 787 Dreamliner ����������� 63
Reshoring Production to the United States������������������������ 64
The Case for Free Trade�������������������������������������������������������������58
Deindustrialization Redeploys
Workers to Growing Service Sector�������64
Comparative Advantage and Global Supply Chains��������������58
Advantages and Disadvantages of Outsourcing ��������������� 60
Outsourcing and the U.S. Automobile Industry���������������� 61
The iPhone Economy and Global Supply Chains ������������� 61
Summary��������������������������������������������������������������������������������������66
Key Concepts and Terms ����������������������������������������������������������66
Study Questions ��������������������������������������������������������������������������67
CHAPTER 3
Sources of Comparative Advantage ������������������������������������������������������71
Factor Endowments as a Source of Comparative
Advantage�������������������������������������������������������������������������������71
The Factor-Endowment Theory ����������������������������������������� 72
Visualizing the Factor-Endowment Theory ���������������������� 74
Applying the Factor-Endowment Theory to U.S.–China
Trade ����������������������������������������������������������������������������� 75
Chinese Manufacturers Beset by Rising Wages
and a Rising Yuan��������������������������������������������������������� 76
Does Trade with China Take Away
Blue-Collar American Jobs?������������������������������������������ 77
Factor-Price Equalization �������������������������������������������������� 78
Globalization Drives Changes
for U.S. Automakers��������������������������������79
Who Gains and Loses from Trade?
The Stolper–Samuelson Theorem �������������������������������� 82
Is International Trade a Substitute for Migration?���������� 83
Specific-Factors Theory: Trade and the Distribution
of Income ����������������������������������������������������������������������� 84
Does Trade Make the Poor Even Poorer? ������������������������� 86
Is International Trade Responsible for the Loss
of ­American Manufacturing Jobs? How about
Robots Instead?����������������������������������������������������������������������88
Is the Factor-Endowment Theory a Good Predictor
of Trade Patterns? The Leontief Paradox ��������������������������89
Economies of Scale and Comparative Advantage �����������������90
Internal Economies of Scale ����������������������������������������������� 90
External Economies of Scale����������������������������������������������� 91
Does a “Flat World” Make Ricardo
Wrong?������������������������������������������������������93
Overlapping Demands as a Basis for Trade ����������������������������93
Intra-industry Trade ������������������������������������������������������������������94
Technology as a Source of Comparative Advantage:
The Product Cycle Theory ���������������������������������������������������97
Radios, Pocket Calculators, and the International
Product Cycle����������������������������������������������������������������� 98
Japan Fades in the Electronics Industry���������������������������� 99
Dynamic Comparative Advantage: Industrial Policy��������� 100
World Trade Organization Rules That Illegal
Government Subsidies Support Boeing and Airbus ����� 102
Government Regulatory Policies and Comparative
Advantage���������������������������������������������������������������������������� 103
Do Labor Unions Stifle
Competitiveness? ����������������������������������103
Transportation Costs and Comparative Advantage������������ 105
Trade Effects���������������������������������������������������������������������� 105
Falling Transportation Costs Foster Trade �������������������� 107
How Containers Revolutionized the
World of Shipping�������������������������������������������������������� 108
The Port of Prince Rupert: Shifting Competitiveness
in Shipping Routes������������������������������������������������������� 109
Summary����������������������������������������������������������������������������������� 110
Key Concepts and Terms ������������������������������������������������������� 111
Study Questions ����������������������������������������������������������������������� 111
CHAPTER 4
Tariffs�������������������������������������������������������������������������������������������������������113
The Tariff Concept������������������������������������������������������������������� 114
Types of Tariffs ������������������������������������������������������������������������ 115
Specific Tariff��������������������������������������������������������������������� 115
Ad Valorem Tariff������������������������������������������������������������� 116
Compound Tariff ������������������������������������������������������������� 116
Trade Protectionism Intensifies
as Global Economy Falls into the
Great Recession��������������������������������������117
Effective Rate of Protection����������������������������������������������������� 118
Tariff Escalation ����������������������������������������������������������������������� 120
Outsourcing and Offshore Assembly Provision������������������ 121
Dodging Import Tariffs: Tariff Avoidance and Tariff
Evasion �������������������������������������������������������������������������������� 122
Ford Strips Its Wagons to Avoid a High Tariff��������������� 122
Smuggled Steel Evades U.S. Tariffs ��������������������������������� 123
Postponing Import Tariffs������������������������������������������������������ 123
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vi
Contents
Gains from Eliminating Import
Tariffs�������������������������������������������������������124
Bonded Warehouse����������������������������������������������������������� 124
Foreign-Trade Zone���������������������������������������������������������� 125
FTZs Benefit Motor Vehicle Importers���������������������������� 126
Tariff Effects: An Overview����������������������������������������������������� 126
Tariff Welfare Effects: Consumer Surplus and ­
Producer Surplus……………………………………………………….. 127
Tariff Welfare Effects: Small-Nation Model…………………….. 129
Tariff Welfare Effects: Large-Nation Model…………………….. 131
Donald Trump’s Border Tax: How to Pay
for the Wall…………………………………………………………. 134
The Optimal Tariff and Retaliation……………………………. 135
Examples of U.S. Tariffs………………………………………………….. 135
Obama’s Tariffs on Chinese Tires………………………………. 135
Should Footwear Tariffs Be Given the Boot?……………….. 137
Could a Higher Tariff Put a Dent
in the Federal Debt?…………………………..138
How a Tariff Burdens Exporters……………………………………… 138
Tariffs and the Poor: Regressive Tariffs…………………………… 140
Arguments for Trade Restrictions…………………………………… 142
Job Protection…………………………………………………………… 143
Protection against Cheap Foreign Labor…………………….. 143
Fairness in Trade: A Level Playing Field…………………….. 145
Maintenance of the Domestic Standard of Living………… 146
Equalization of Production Costs……………………………….. 146
Infant-Industry Argument…………………………………………. 147
Noneconomic Arguments………………………………………….. 147
Would a Tariff Wall Really Protect U.S. Jobs?…………………. 148
Petition of the Candle Makers…………….149
The Political Economy of Protectionism…………………………. 150
A Supply and Demand View of Protectionism…………….. 151
Summary………………………………………………………………………… 152
Key Concepts and Terms………………………………………………… 153
Study Questions………………………………………………………………. 154
CHAPTER 5
Nontariff Trade Barriers�������������������������������������������������������������������������157
Absolute Import Quota ………………………………………………….. 157
Trade and Welfare Effects…………………………………………. 158
Allocating Quota Licenses…………………………………………. 160
Quotas versus Tariffs………………………………………………… 161
Whirlpool Agitates for Antidumping Tariffs on Clothes
Washers………………………………………………………………. 175
Vaughan-Bassett Furniture Company: Furniture
Dumping from China…………………………………………… 177
Tariff-Rate Quota: A Two-Tier Tariff……………………………… 162
Tariff-Rate Quota Bittersweet for Sugar Consumers……. 164
Is Antidumping Law Unfair?…………………………………………… 178
Should Average Variable Cost Be the Yardstick
for Defining Dumping?…………………………………………. 178
Should Antidumping Law Reflect Currency
Fluctuations?……………………………………………………….. 179
Are Antidumping Duties Overused?…………………………… 179
Export Quotas…………………………………………………………………. 164
Japanese Auto Restraints Put Brakes on
U.S. Motorists……………………………………………………… 165
Domestic Content Requirements……………………………………. 166
How American Is Your Car?……………….168
Other Nontariff Trade Barriers……………………………………….. 180
Government Procurement Policies: “Buy American”…… 180
Subsidies…………………………………………………………………………. 168
Domestic Production Subsidy…………………………………….. 169
Export Subsidy………………………………………………………….. 170
U.S. Fiscal Stimulus and Buy
American Legislation…………………………182
Dumping………………………………………………………………………… 171
Forms of Dumping……………………………………………………. 171
International Price Discrimination……………………………. 172
Social Regulations…………………………………………………….. 182
CAFE Standards……………………………………………………….. 182
Europe Has a Cow over Hormone-Treated U.S. Beef…… 183
Sea Transport and Freight Regulations………………………. 184
Avoiding Antidumping Duties:
U.S.–Mexico Sugar Agreement…………..174
Key Concepts and Terms………………………………………………… 185
Antidumping Regulations……………………………………………….. 174
Study Questions………………………………………………………………. 186
Summary………………………………………………………………………… 185
CHAPTER 6
Trade Regulations and Industrial Policies��������������������������������������������189
U.S. Tariff Policies Before 1930……………………………………….. 189
Reciprocal Trade Agreements Act…………………………………… 192
Smoot–Hawley Act…………………………………………………………. 191
General Agreement on Tariffs and Trade………………………… 193
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Contents
Trade without Discrimination…………………………………… 193
Promoting Freer Trade……………………………………………… 194
Predictability: Through Binding and Transparency…….. 194
Multilateral Trade Negotiations………………………………… 195
Avoiding Trade Barriers during the
Great Recession…………………………………197
World Trade Organization……………………………………………… 198
Settling Trade Disputes……………………………………………… 198
Does the WTO Reduce National Sovereignty?…………….. 201
Does the WTO Harm the Environment?…………………….. 201
Harming the Environment………………………………………… 202
Improving the Environment………………………………………. 203
WTO Rules against China’s Hoarding of Rare
Earth Metals……………………………………………………….. 203
Future of the World Trade Organization……………………. 205
Trade Promotion Authority (Fast Track Authority)……….. 206
Safeguards (The Escape Clause): Emergency ­Protection
from Imports……………………………………………………………… 206
U.S. Safeguards Limit Surging Imports of Textiles
from China………………………………………………………….. 208
Countervailing Duties: Protection against Foreign
Export Subsidies………………………………………………………… 209
Countervailing Duties: Trade Disputes between
Canada and the United States………………………………. 209
Would a Carbon Tariff Help Solve
the Climate Problem?………………………..211
Antidumping Duties: Protection against Foreign
Dumping……………………………………………………………………. 212
Remedies against Dumped and Subsidized Imports…….. 213
vii
U.S. Steel Companies Lose an Unfair Trade Case
and Still Win……………………………………………………….. 215
Section 301: Protection against Unfair Trading
Practices…………………………………………………………………….. 216
Protection of Intellectual Property Rights……………………….. 217
China’s Piracy of Software…………………………………………. 218
Trade Adjustment Assistance………………………………………….. 219
Trade Adjustment Assistance for Workers, Firms,
Farmers, and Fishermen………………………………………. 220
Is Trade Adjustment Assistance Necessary?………………… 221
United States Lifts Its Restrictions
on Oil Exports……………………………………222
Industrial Policies of the United States……………………………. 223
The Export-Import Bank……………………………………………. 224
U.S. Airlines and Boeing Spar over Export-Import
Bank Credit…………………………………………………………. 226
U.S. Solar Industry Dims as China’s Industrial Policy
Lights Up…………………………………………………………….. 227
Carrier Inc. Agrees to Keep Jobs in Indiana………………… 228
Strategic Trade Policy……………………………………………………… 228
Economic Sanctions………………………………………………………… 230
Factors Influencing the Success of Sanctions……………….. 231
Sanctions and Nuclear Weapons: Iran and
North Korea………………………………………………………… 233
Russia Hit by Sanctions over Ukraine………………………… 235
Summary………………………………………………………………………… 236
Key Concepts and Terms………………………………………………… 237
Study Questions………………………………………………………………. 237
CHAPTER 7
Trade Policies for the Developing Nations�������������������������������������������239
Developing Nation Trade Characteristics……………………….. 240
Tensions between Developing Nations
and Advanced Nations………………………………………………. 241
Multilateral Contracts………………………………………………. 251
Does the Fair Trade Movement Help Poor
Coffee Farmers?…………………………………………………… 251
Trade Problems of the Developing Nations…………………….. 241
Unstable Export Markets…………………………………………… 242
Falling Commodity Prices Threaten Growth of
Exporting Nations……………………………………………….. 243
Worsening Terms of Trade………………………………………… 244
The OPEC Oil Cartel………………………………………………………. 252
Maximizing Cartel Profits…………………………………………. 253
Does Foreign Direct Investment
Hinder or Help Economic
Development?……………………………………245
Aiding the Developing Nations……………………………………….. 256
The World Bank……………………………………………………….. 257
International Monetary Fund……………………………………. 258
Generalized System of Preferences……………………………… 259
Does Aid Promote Growth of Developing Nations?……… 260
Limited Market Access………………………………………………. 246
Agricultural Export Subsidies of Advanced Nations…….. 247
Bangladesh’s Sweatshop Reputation…………………………… 248
Stabilizing Primary-Product Prices…………………………………. 249
Production and Export Controls………………………………… 249
Buffer Stocks…………………………………………………………….. 250
Declining Oil Prices Test OPEC’s
Unity…………………………………………………255
OPEC as a Cartel……………………………………………………… 255
Economic Growth Strategies: Import Substitution
versus Export-Led Growth…………………………………………. 260
Import Substitution…………………………………………………… 261
Import Substitution Laws Backfire on Brazil………………. 262
Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Contents
Export-Led Growth…………………………………………………… 262
Is Economic Growth Good for the Poor?……………………… 263
Can All Developing Nations Achieve
Export-Led Growth?…………………………………………….. 264
East Asian Economies……………………………………………………… 264
Flying Geese Pattern of Growth………………………………….. 265
Is State Capitalism Winning?……………..266
China’s Great Leap Forward……………………………………………. 267
Challenges and Concerns for China’s Economy…………… 268
China’s Export Boom Comes at a Cost: How to
Make Factories Play Fair……………………………………… 272
India: Breaking Out of the Third World………………………….. 273
Summary………………………………………………………………………… 275
Key Concepts and Terms………………………………………………… 275
Study Questions………………………………………………………………. 276
CHAPTER 8
Regional Trading Arrangements�����������������������������������������������������������277
Regional Integration versus Multilateralism……………………. 277
Types of Regional Trading Arrangements………………………. 279
Impetus for Regionalism…………………………………………………. 280
Effects of a Regional Trading Arrangement…………………….. 281
Static Effects……………………………………………………………… 281
Dynamic Effects………………………………………………………… 283
The European Union………………………………………………………. 284
Pursuing Economic Integration………………………………….. 284
Agricultural Policy……………………………………………………. 286
Is the European Union Really a Common Market?……… 288
Britain Announces Withdrawal from the European
Union (Brexit)…………………………………………………….. 289
Economic Costs and Benefits of a Common Currency:
The European Monetary Union…………………………………. 292
Optimal Currency Area…………………………………………….. 293
European Monetary “Disunion”…………294
Eurozone’s Problems and Challenges………………………….. 294
Greece and the Eurozone…………………………………………… 296
Deflation and the Eurozone………………………………………. 297
North American Free Trade Agreement………………………….. 298
NAFTA’s Benefits and Costs for Mexico and Canada….. 299
NAFTA’s Benefits and Costs for the United States………. 299
Modernizing NAFTA………………………………………………… 301
Free Trade Agreements Bolster
Mexico’s Competitiveness…………………302
U.S.–Mexico Trucking Dispute………………………………….. 303
U.S.–Mexico Tomato Dispute……………………………………. 304
Is NAFTA an Optimal Currency Area?………………………. 305
A Trans-Pacific Partnership?………………306
A U.S.–China Free Trade Agreement?…307
Summary………………………………………………………………………… 308
Key Concepts and Terms………………………………………………… 308
Study Questions………………………………………………………………. 309
CHAPTER 9
International Factor Movements and Multinational Enterprises�������311
The Multinational Enterprise………………………………………….. 311
Motives for Foreign Direct Investment……………………………. 313
Demand Factors……………………………………………………….. 314
Cost Factors……………………………………………………………… 314
Supplying Products to Foreign Buyers:
Whether to Produce Domestically or Abroad……………. 315
Direct Exporting versus Foreign Direct Investment/
Licensing…………………………………………………………….. 316
Foreign Direct Investment versus Licensing………………… 317
Country Risk Analysis…………………………………………………….. 318
International Joint Ventures……………………………………………. 323
Welfare Effects………………………………………………………….. 324
Multinational Enterprises as a Source of Conflict……………. 326
Employment…………………………………………………………….. 326
Caterpillar Bulldozes Canadian Locomotive Workers…. 327
Technology Transfer…………………………………………………. 328
National Sovereignty…………………………………………………. 330
Balance-of-Payments………………………………………………… 331
Transfer Pricing………………………………………………………… 331
Do U.S. Multinationals Exploit
­Foreign Workers?………………………………319
The Tax Cuts and Jobs Act of 2017:
Apple Plans to Build a New U.S.
Campus…………………………………………….332
International Trade Theory and Multinational
Enterprise………………………………………………………………….. 321
Foreign Auto Assembly Plants in the United States………… 321
International Labor Mobility: Migration…………………………. 333
The Effects of Migration…………………………………………….. 334
Immigration as an Issue……………………………………………. 336
Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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Contents
ix
Does Canada’s Immigration Policy Provide a Model
for the United States?…………………………………………… 338
Summary………………………………………………………………………… 340
Does U.S. Immigration Policy Harm
Domestic Workers?……………………………340
Study Questions………………………………………………………………. 341
Key Concepts and Terms………………………………………………… 341
PART 2 International Monetary Relations
343
CHAPTER 10
The Balance-of-Payments����������������������������������������������������������������������345
Double Entry Accounting……………………………………………….. 345
Balance-of-Payments Structure……………………………………….. 347
Current Account……………………………………………………….. 347
International Payments Process……….. 348
Capital and Financial Account………………………………….. 349
Special Drawing Rights……………………………………………… 351
Statistical Discrepancy: Errors and Omissions…………….. 352
U.S. Balance-of-Payments……………………………………………….. 352
What Does a Current Account Deficit (Surplus) Mean?….. 354
Net Foreign Investment and the Current Account
Balance……………………………………………………………….. 355
Impact of Capital Flows on the Current Account………… 356
Is Trump’s Trade Doctrine Misguided?………………………. 357
The iPhone’s Complex Supply Chain
Depicts Limitations of Trade
Statistics…………………………………………..358
Is a Current Account Deficit a Problem?…………………….. 359
Business Cycles, Economic Growth, and the Current
Account………………………………………………………………. 360
How the United States Has Borrowed at
Very Low Cost……………………………………………………… 361
Do Current Account Deficits Cost
Americans Jobs?…………………………………………………… 362
Can the United States Continue to Run Current
Account Deficits Indefinitely?……………………………….. 363
Balance of International Indebtedness…………………………….. 365
United States as a Debtor Nation………………………………. 366
Global Imbalances……………………………..366
The Dollar as the World’s Reserve Currency…………………… 367
Benefits to the United States………………………………………. 368
Will the Special Drawing Right or the Yuan Become
a Reserve Currency?……………………………………………… 368
Will Cryptocurrencies Lower the Dollar’s Status
as a World Reserve Currency?………………………………. 370
Summary………………………………………………………………………… 371
Key Concepts and Terms………………………………………………… 372
Study Questions………………………………………………………………. 372
CHAPTER 11
Foreign Exchange�����������������������������������������������������������������������������������375
Foreign Exchange Market……………………………………………….. 375
Foreign Currency Trading Becomes Automated…………….. 377
Types of Foreign Exchange Transactions………………………… 379
Interbank Trading…………………………………………………………… 380
Reading Foreign Exchange Quotations……………………………. 382
Yen Depreciation Drives Toyota
Profits Upward………………………………….385
Forward and Futures Markets…………………………………………. 385
Foreign Currency Options………………………………………………. 387
Exchange Rate Determination…………………………………………. 388
Demand for Foreign Exchange…………………………………… 388
Supply of Foreign Exchange……………………………………….. 388
Equilibrium Rate of Exchange……………………………………. 389
Indexes of the Foreign Exchange Value
of the Dollar: Nominal and Real Exchange Rates……….. 390
Arbitrage………………………………………………………………….. 392
The Forward Market……………………………………………………….. 393
The Forward Rate……………………………………………………… 394
Relation between the Forward Rate and the Spot Rate… 395
Managing Your Foreign Exchange Risk: Forward
Foreign Exchange Contract…………………………………… 396
Case 1………………………………………………………………………. 397
Case 2………………………………………………………………………. 397
How Markel, Volkswagen, and Nintendo Manage
Foreign Exchange Risk…………………………………………. 398
Does Foreign Currency Hedging Pay Off?…………………… 399
Currency Risk and the Hazards of
Investing Abroad……………………………….400
Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Contents
Interest Arbitrage, Currency Risk, and Hedging……………… 401
Uncovered Interest Arbitrage…………………………………….. 401
Covered Interest Arbitrage (Reducing Currency Risk)…. 402
Foreign Exchange Market Speculation……………………………. 403
Long and Short Positions…………………………………………… 404
Andy Krieger Shorts the New Zealand Dollar……………… 404
George Soros Shorts the Pound and Yen……………………… 405
People’s Bank of China Widens Trading Band to
Punish Currency Speculators………………………………… 405
How to Play the Falling (Rising) Dollar……………………… 406
Stabilizing and Destabilizing Speculation…………………… 407
Foreign Exchange Trading as a Career……………………………. 407
Foreign Exchange Traders Hired by Commercial
Banks, Companies, and Central Banks………………….. 408
Do You Really Want to Trade Currencies?…………………. 408
Money Managers Scramble to Pull
Off Currency Carry Trades………………….409
Summary………………………………………………………………………… 410
Key Concepts and Terms………………………………………………… 411
Study Questions………………………………………………………………. 411
CHAPTER 12
Exchange Rate Determination…………………………….. 413
What Determines Exchange Rates?…………………………………. 413
Determining Long-Run Exchange Rates…………………………. 415
Relative Price Levels………………………………………………….. 415
Relative Productivity Levels……………………………………….. 416
Preferences for Domestic or Foreign Goods…………………. 416
Trade Barriers………………………………………………………….. 416
Inflation Rates, Purchasing Power Parity
and Long-Run Exchange Rates…………………………………… 417
Law of One Price………………………………………………………. 418
Burgeromics: The “Big Mac” Index and the Law of One
Price……………………………………………………………………. 418
Banks Found Guilty of Foreign
Exchange Market Rigging………………….420
Purchasing-Power-Parity………………………………………….. 420
Determining Short-Run Exchange Rates: The Asset Market
Approach…………………………………………………………………… 423
Relative Levels of Interest Rates…………………………………. 424
Expected Change in the Exchange Rate………………………. 426
Diversification, Safe Havens, and Investment Flows……. 428
International Comparisons of GDP:
­Purchasing Power Parity……………………428
Exchange Rate Overshooting………………………………………….. 430
Forecasting Foreign Exchange Rates……………………………….. 431
Judgmental Forecasts………………………………………………… 432
Technical Forecasts…………………………………………………… 432
Comercial Mexicana Gets Burned
by Speculation…………………………………..434
Fundamental Analysis………………………………………………. 435
Exchange Rate Misalignment…………………………………….. 435
Summary………………………………………………………………………… 436
Key Concepts and Terms………………………………………………… 437
Study Questions………………………………………………………………. 437
CHAPTER 13
Exchange Rate Adjustments and the Balance-of-Payments��������������439
Case 1: Improved Trade Balance……………………………….. 445
Case 2: Worsened Trade Balance……………………………….. 446
Effects of Exchange Rate Changes on Costs and Prices……. 439
Case 1: No Foreign Sourcing—All Costs Are
­Denominated in Dollars……………………………………….. 439
Case 2: Foreign Sourcing—Some Costs Denominated in
Dollars and Some Costs Denominated in Francs……. 440
J-Curve Effect: Time Path of Depreciation………………………. 447
Cost-Cutting Strategies of Manufacturers in Response
to Currency Appreciation………………………………………….. 442
Appreciation of the Yen: Japanese Manufacturers………. 442
Appreciation of the Dollar: U.S. Manufacturers………….. 443
Does Currency Depreciation
­Stimulate Exports?…………………………….452
Japanese Firms Send Work Abroad
as Rising Yen Makes Their Products
Less Competitive……………………………… 444
Will Currency Depreciation Reduce a Trade Deficit?
The Elasticity Approach…………………………………………….. 444
Exchange Rate Pass-Through………………………………………….. 450
Partial Exchange Rate Pass-Through………………………….. 450
The Absorption Approach to Currency Depreciation……… 453
The Monetary Approach to Currency Depreciation………… 454
Summary………………………………………………………………………… 455
Key Concepts and Terms………………………………………………… 456
Study Questions………………………………………………………………. 456
Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Contents
xi
CHAPTER 14
Exchange Rate Systems and ­Currency Crises�������������������������������������459
Exchange Rate Practices………………………………………………….. 459
The Crawling Peg……………………………………………………………. 476
Choosing an Exchange Rate System: Constraints
Imposed by Free Capital Flows………………………………….. 461
Currency Manipulation and Currency Wars…………………… 477
Is China a Currency Manipulator?…………………………….. 478
Currency Crises………………………………………………………… 481
Fixed Exchange Rate System…………………………………………… 462
Use of Fixed Exchange Rates……………………………………… 462
Par Value and Official Exchange Rate……………………….. 464
Russia’s Central Bank Fails to Offset
the Ruble’s Collapse…………………………..464
Exchange Rate Stabilization………………………………………. 465
Devaluation and Revaluation……………………………………. 466
Bretton Woods System of Fixed Exchange Rates………….. 467
Floating Exchange Rates…………………………………………………. 468
Achieving Market Equilibrium………………………………….. 469
Trade Restrictions, Jobs, and Floating Exchange Rates… 470
Arguments for and against Floating Rates………………….. 471
Managed Floating Rates………………………………………………….. 471
Managed Floating Rates in the Short Run and
Long Run…………………………………………………………….. 472
Exchange Rate Stabilization and Monetary Policy………. 474
Is Exchange Rate Stabilization Effective?……………………. 476
The Global Financial Crisis
of 2007–2009……………………………………..482
Sources of Currency Crises…………………………………………. 483
Speculators Attack East Asian Currencies…………………… 485
Capital Controls……………………………………………………………… 485
Should Foreign Exchange Transactions Be Taxed?………. 486
Increasing the Credibility of Fixed Exchange Rates…………. 487
Currency Board………………………………………………………… 487
For Argentina, No Panacea in a Currency Board………… 489
Swiss Franc Soars after Exchange Rate
Anchor Scrapped……………………………….490
Dollarization……………………………………………………………. 491
Summary………………………………………………………………………… 492
Key Concepts and Terms………………………………………………… 494
Study Questions………………………………………………………………. 494
CHAPTER 15
Macroeconomic Policy in an Open Economy……….. 495
Economic Objectives of Nations……………………………………… 495
Policy Instruments………………………………………………………….. 496
Aggregate Demand and Aggregate Supply:
A Brief Review…………………………………………………………… 496
Monetary and Fiscal Policies in a Closed Economy…………. 497
Monetary and Fiscal Policies in an Open Economy…………. 498
Effect of Fiscal and Monetary Policies under Fixed
Exchange Rates……………………………………………………. 500
Effect of Fiscal and Monetary Policies under Floating
Exchange Rates……………………………………………………. 501
Monetary and Fiscal Policies
Respond to Financial Turmoil in
the Economy……………………………………. 502
Macroeconomic Stability and the Current Account:
Policy Agreement versus Policy Conflict……………………. 503
Inflation with Unemployment………………………………………… 503
International Economic Policy Coordination………………….. 504
Policy Coordination in Theory…………………………………… 505
Does Policy Coordination Work?……………………………….. 506
Does Crowding Occur in an Open
Economy?………………………………………….507
Summary………………………………………………………………………… 508
Key Concepts and Terms………………………………………………… 509
Study Questions………………………………………………………………. 509
Glossary ������������������������������������������������������������������������������������������������������������� 511
Index ������������������������������������������������������������������������������������������������������������������ 529
Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Preface
I believe the best way to motivate students to learn a subject is to demonstrate how
it is used in practice. The first sixteen editions of International Economics reflected
this belief and were written to provide a serious presentation of international economic theory with an emphasis on current applications. Adopters of these editions
strongly supported the integration of economic theory with current events.
The seventeenth edition has been revised with an eye toward improving this
presentation and updating the applications as well as including the latest theoretical
developments. Like its predecessors, this edition is intended for use in a one-quarter
or one-semester course for students having no more background than principles of
economics. This book’s strengths are its clarity, organization, and applications that
demonstrate the usefulness of theory to students. The revised and updated material
in this edition emphasizes current applications of economic theory and incorporates recent theoretical and policy developments in international trade and finance.
Here are some examples.
International Economics Themes
This edition highlights five current themes that are at the forefront of international
economics:
■■














GLOBALIZATION OF ECONOMIC ACTIVITY
Is international trade an opportunity or a threat to workers?—Ch. 1
U.S. apple growers and competition from China—Ch. 1
Is international trade responsible for the loss of American jobs?—Ch. 3
Shifting competitiveness in shipping routes—Ch. 3
How containers revolutionized the world of shipping—Ch. 3
Factor mobility, exit barriers, and trade—Ch. 2
Dynamic gains from digital trade—Ch. 2
Wooster, Ohio bears brunt of globalization—Ch. 2
Comparative advantage and global supply chains—Ch. 2
Caterpillar bulldozes Canadian locomotive workers—Ch. 9
The Tax Cuts and Jobs Act of 2017: Apple Plans to Build a New
Campus—Ch. 9
Diesel engines and gas turbines as engines of growth—Ch. 1
Waves of globalization—Ch. 1
Constraints imposed by capital flows on the choice of an exchange rate
system—Ch. 14
xii
Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Preface
■■























■■













xiii
FREE TRADE AND PROTECTIONISM
Does trade with China take away blue-collar American jobs?—Ch. 3
Would a tariff wall protect American jobs?—Ch. 4
Donald Trump’s border tax: How to pay for the wall—Ch. 4
Vaughan Basset Furniture and dumping—Ch. 5
U.S. lifts its restrictions on oil exports—Ch. 6
U.S. Export-Import Bank avoids shutdown—Ch. 6
Whirlpool agitates for antidumping tariffs on clothes washers—Ch. 5
Wage increases and China’s trade—Ch. 3
Should shoe tariffs be stomped out?—Ch. 4
Element Electronics brings TV manufacturing back to the
United States—Ch. 1
Government procurement policies and buy American—Ch. 5
Carbon tariffs—Ch. 6
Carrier agrees to keep jobs in India—Ch. 6
Lumber imports from Canada—Ch. 6
Bangladesh’s sweatshop reputation—Ch. 7
Does the principle of comparative advantage apply in the face of job
outsourcing?—Ch. 2
Trade adjustment assistance—Ch. 6
North Korea and econ…
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Description ‫المملكة العربية السعودية‬ ‫وزارة التعليم‬ ‫الجامعة السعودية اإللكترونية‬ Kingdom of Saudi Arabia Ministry of Education Saudi Electronic University College of Administrative and Financial Sciences Assignment 2 Entrepreneurship and small business (MGT 402) Due Date: 02/11/2024 @ 23:59 Course Name: Entrepreneurship and small business Course Code: MGT402 Student’s Name: Semester:

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Description Case Study: Creating a culture of safety in response to an adverse event in healthcare (110 points) For this assignment, you will access the Saudi Digital Library to research a specific case of an adverse event that occurred in healthcare. Using the case that you have identified, you will

Management Question

Description ‫المملكة العربية السعودية‬ ‫وزارة التعليم‬ ‫الجامعة السعودية اإللكترونية‬ Kingdom of Saudi Arabia Ministry of Education Saudi Electronic University College of Administrative and Financial Sciences Assignment 2 Entrepreneurship and small business (MGT 402) Due Date: 02/11/2024 @ 23:59 Course Name: Entrepreneurship and small business Course Code: MGT402 Student’s Name: Semester:

Organizational Behaviour (MGT 301)

Description 1-please plagiarism not acceptable 2-references are required 3-number of words as required ‫المملكة العربية السعودية‬ ‫وزارة التعليم‬ ‫الجامعة السعودية اإللكترونية‬ Kingdom of Saudi Arabia Ministry of Education Saudi Electronic University College of Administrative and Financial Sciences Assignment 2 Organizational Behaviour (MGT 301) Due Date: 02/11/2024 @ 23:59 Course Name:

2 questions in mgt

Description ‫المملكة العربية السعودية‬ ‫وزارة التعليم‬ ‫الجامعة السعودية اإللكترونية‬ Kingdom of Saudi Arabia Ministry of Education Saudi Electronic University College of Administrative and Financial Sciences Assignment 2 Communications Management (MGT 421) Due Date: 2/11/2024 @ 23:59 Course Name: Communication Management Student’s Name: Course Code: MGT421 Student’s ID Number: Semester: 1st

Management Question

Description Hello everyone , I have an assignment about the subject Strategic Management i will attach the assignment file and the case the assignment based on. and here the instructions : Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing

Business Question

Description ‫المملكة العربية السعودية‬ ‫وزارة التعليم‬ ‫الجامعة السعودية اإللكترونية‬ Kingdom of Saudi Arabia Ministry of Education Saudi Electronic University College of Administrative and Financial Sciences Assignment 2 Management of Technology (MGT 325) Due Date: 02/11/2024 @ 23:59 Course Name: Management of Technology Student’s Name: Course Code: MGT325 Student’s ID Number:

5 questions in mgt 425

Description ‫المملكة العربية السعودية‬ ‫وزارة التعليم‬ ‫الجامعة السعودية اإللكترونية‬ Kingdom of Saudi Arabia Ministry of Education Saudi Electronic University College of Administrative and Financial Sciences Assignment-2 MGT425-Spreadsheet Decision Modeling Due Date: 02/11/2024 (End of Week-10) @ 23:59 Course Name: Spreadsheet Decision Modeling Course Code: MGT425 Student’s Name: Semester: First CRN:

Business Question

Description # Please I need this assignment within 24 hours, # Should not have a plagiarism, # Follow the “General Instructions” in the Assignment Because learning changes everything.® Chapter 1 Overview of Marketing Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written