Description
Globalization and the Foundations of Trade in Economic Perspective
What do you know about Globalization?
Consider what you learned from the lecture and readings this week and discuss how economic interdependence has affected Saudi Arabia. Is it good or bad? Expand your thinking to additionally discuss the relationship between Saudi Vision 2030 and international competitiveness.
Directions:
Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and cite any other sources if appropriate.
Readings
Required:
Chapter 1 in International Economics
- Saudi Arabia Oil & Gas Report. (Q1 2021). Fitch Solutions Country Industry Reports , 1-84.
Saudi Vision 2030 Document. (2017). Retrieved from
INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 1: The
International
Economy and
Globalization
© 2019 Cengage. All rights reserved.
2
Chapter Outline
• Economic Interdependence: Federal Reserve Incites
Global Backlash
• Globalization of Economic Activity
• Waves of Globalization
• The United States as an Open Economy
• Why Is Globalization Important?
• Globalization and Competition
• Common Fallacies of International Trade
• Is International Trade an Opportunity or a Threat to
Workers?
• Has Globalization Gone Too Far?
© 2019 Cengage. All rights reserved.
3
Economic Interdependence (1 of 2)
High degree of economic interdependence
• No nation exists in economic isolation
• All aspects of a nation’s economy linked to
economies of trading partners
• Reflects historical evolution of the world’s
economic and political order
• Economic interdependence is complex, and its
effects are uneven
© 2019 Cengage. All rights reserved.
4
Economic Interdependence (2 of 2)
• High degree of economic
interdependence (cont.)
• Steps toward international cooperation
• Mutually advantageous for trading nations
• Protectionist pressures
• Some developing nations argue that liberalized
trading system serves to keep them in poverty
© 2019 Cengage. All rights reserved.
5
Economic Interdependence: Fed
Policy Incites Backlash
• Domestic economic policies have spillover
effects on other economies
• Quantitative easing by Fed, intended to
stimulate U.S. economy during Great
Recession
• criticized by U.S. trading partners as attempt
to improve American competitiveness through
depreciation of dollar
© 2019 Cengage. All rights reserved.
6
Globalization of Economic
Activity (1 of 2)
• Globalization
• Process of greater interdependence between
countries and their citizens
• Increased international flows of
• Goods, services, people
• Investments in equipment, factories, stocks, bonds
• Globalization is political, technological,
cultural, and economic
© 2019 Cengage. All rights reserved.
7
Globalization of Economic
Activity (2 of 2)
• What forces are driving globalization?
• Technological change
• Advances in transport technology
• Widespread liberalization of investment
transactions
• Development of international financial
markets
© 2019 Cengage. All rights reserved.
8
Waves of Globalization (1 of 14)
• History of globalization tied to evolution of
trade
• In late 1700s and 1800s, mass production
and improved transportation made
international trade easier; most goods
tradeable
• Rise of global manufacturing in 1990s
characterized by geographical fragmentation
of productive processes and offshoring of
industrial tasks
© 2019 Cengage. All rights reserved.
9
Waves of Globalization (2 of 14)
• First Wave of Globalization: 1870–1914
• Decreases in tariff barriers
• Technological developments
• Declining transportation costs; shift from sail
to steamships; railways
• Driven by European and American
businesses and individuals
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10
Waves of Globalization (3 of 14)
• First Wave of Globalization: 1870–1914 (cont.)
• Exports as share of world income nearly
doubled to 8%
• Per capita incomes increased 1.3% per year
• Previous 50 years: 0.5% per year
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11
Waves of Globalization (4 of 14)
• First Wave of Globalization: 1870–1914 (cont.)
• Nations that actively participated in
globalization became richest countries in
world
• Ended by World War I
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12
Waves of Globalization (5 of 14)
• Great Depression of 1930s
• Governments practiced protectionism
• Raised tariffs on imports
• Tried to shift demand into domestic markets to
promote domestic sales and jobs
• Exports as share of national income fell from 8%
to 5%
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13
Waves of Globalization (6 of 14)
• Second Wave of Globalization: 1945–1980
• Renewed incentive for globalization
• Falling transportation costs fostered increased
trade
• Trade liberalization not uniform
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14
Waves of Globalization (7 of 14)
• Differential impacts of second wave
• Developed countries largely freed of barriers
• Greatly increased the exchange of manufactured
goods
• Raised incomes
• Developing countries
• Only agricultural exports that do not compete with
agriculture in developed country free of barriers
© 2019 Cengage. All rights reserved.
15
Waves of Globalization (8 of 14)
• Second Wave of Globalization: 1945–1980
(cont.)
• New kind of trade
• Rich country specialization in manufacturing
niches
• Gained productivity through agglomeration
economies
• Firms clustered together
• Some clusters produced same product; others connected
by vertical linkages
• Benefits only those in clusters
© 2019 Cengage. All rights reserved.
16
Waves of Globalization (9 of 14)
• Second Wave of Globalization: 1945–1980
(cont.)
• Developing countries as group left behind
• Continuing trade barriers, unfavorable investment
climates, antitrade policies, dependence on
agricultural and natural-resource products
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17
Waves of Globalization (10 of 14)
• Latest Wave of Globalization (1980–
present)
• Some developing countries (e.g. China, India,
Brazil) broke into world markets for
manufacturing
• Other developing countries marginalized,
causing incomes to decrease and poverty to
rise
• Significant international capital movements
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18
Waves of Globalization (11 of 14)
• Latest Wave of Globalization (1980–
present) (cont.)
• Some developing countries have competitive
advantage in labor-intensive manufacturing
(e.g. Bangladesh)
• Protectionist policies in developed countries
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19
Waves of Globalization (12 of 14)
• Latest Wave of Globalization (1980–
present) (cont.)
• Foreign outsourcing
• Products manufactured in more than one country
• Manufacturing moved to wherever costs were
lowest
• Job losses for some workers in developed countries
• Cries for laws restricting outsourcing
© 2019 Cengage. All rights reserved.
20
Waves of Globalization (13 of 14)
• Latest Wave of Globalization (1980–
present) (cont.)
• By 2000s, foreign outsourcing of
professionalized work
• Information Age
• Internet, high-speed data
• Sending upscale jobs offshore
• Accounting, chip design, engineering, basic research,
and financial analysis
© 2019 Cengage. All rights reserved.
21
Waves of Globalization (14 of 14)
• Latest Wave of Globalization (1980–
present) (cont.)
• Integrated factory floor increasingly
replaced by network of individual,
specialized suppliers
• Countries tend to specialize in specific
stages of production
• E.g. Boeing 787 Dreamliner
© 2019 Cengage. All rights reserved.
22
TABLE 1.1 The Fruits of Free
Trade: A Global Fruit Basket
On a trip to the grocery store, consumers can find goods from all over the globe.
Fruit
Country
Fruit
Country
Apples
New Zealand
Limes
El Salvador
Apricots
China
Oranges
Australia
Bananas
Ecuador
Pears
South Korea
Blackberries
Canada
Pineapples
Costa Rica
Blueberries
Chile
Plums
Guatemala
Coconuts
Philippines
Raspberries
Mexico
Grapefruit
Bahamas
Strawberries
Poland
Grapes
Peru
Tangerines
South Africa
Kiwifruit
Italy
Watermelons
Honduras
Lemons
Argentina
Source: From “The Fruits of Free Trade,” Annual Report, Federal Reserve Bank of Dallas, 2002, p. 3.
© 2019 Cengage. All rights reserved.
23
The U.S. as an Open Economy
(1 of 8)
• Trade patterns
• Openness
• Rough measure of the importance of international
trade in a nation’s economy
• Nation’s exports and imports as a percentage of its
Gross Domestic Product (GDP)
Exports + Imports )
(
Openness =
GDP
© 2019 Cengage. All rights reserved.
24
The U.S. as an Open Economy
(2 of 8)
• Openness (cont.)
• Large countries – lower measures of
openness
• Less reliant on international trade
• Firms can attain optimal production size without
having to export due to the population and
economic size
• Small countries – higher measures of
openness
© 2019 Cengage. All rights reserved.
25
The U.S. as an Open Economy
(3 of 8)
• Openness of the U.S. economy, 1890–
2018
• Less open to international trade, 1890–1950
• Two world wars + Great Depression of the 1930s
• Reduced dependence on trade
• National security reasons
• Protect home industries from import competition
© 2019 Cengage. All rights reserved.
26
The U.S. as an Open Economy
(4 of 8)
• Openness of the U.S. economy, 1890–
2018 (cont.)
• After World War II — negotiated reductions in
trade barriers
• Rising world trade; technological improvements in
shipping and communications
© 2019 Cengage. All rights reserved.
27
The U.S. as an Open Economy
(5 of 8)
• Openness of the U.S. economy, 1890–
2018 (cont.)
• Relative importance of international trade
increasing
• Example: need for personal computers with
imported components
© 2019 Cengage. All rights reserved.
28
The U.S. as an Open Economy
(6 of 8)
TABLE 1.3 Top 8 Countries with Whom the United States Trades, 2016
Country
Value of U.S.
Exports of Goods
(in billions of
dollars)
Value of U.S.
Imports of Goods
(in billions of dollars)
Total Value of
Trade
(in billions of
dollars)
China
115.8
462.8
578.6
Canada
266.8
278.1
544.9
Mexico
231.0
294.2
525.2
Japan
63.3
132.2
195.5
Germany
49.4
114.2
163.6
United Kingdom
55.4
54.3
109.7
South Korea
42.3
69.9
112.2
France
30.9
46.8
77.7
Source: From U.S. Department of Commerce, U.S. Census Bureau, Foreign Trade: U.S. Trade in Goods by Country, 2017.
© 2019 Cengage. All rights reserved.
29
The U.S. as an Open Economy
(7 of 8)
• Labor and Capital
• Labor mobility in U.S. has not risen in past
100 years
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30
The U.S. as an Open Economy
(8 of 8)
• U.S. increasingly tied to rest of the world
through investment flows
• Foreign ownership increasing
• Concerns over rising cost of debt
• International branches of U.S. banks
• U.S. securities are increasingly globalized
© 2019 Cengage. All rights reserved.
31
Why Is Globalization Important?
(1 of 5)
• Law of Comparative Advantage
• Each nation gains by producing goods in
which it has relative advantage
• If a good or service can be obtained more
economically through trade, it makes sense to
trade for it, not produce it
© 2019 Cengage. All rights reserved.
32
Why Is Globalization Important?
(2 of 5)
• Law of Comparative Advantage (cont.)
• International trade also gains from
competitive process
• Competition essential to innovation, efficiency
• Global competition can result in high-cost
domestic producers exiting market
© 2019 Cengage. All rights reserved.
33
Why Is Globalization Important?
(3 of 5)
• Open economies
• More competition lowers prices
• Strong incentive for highest quality
• Weakens monopolies
© 2019 Cengage. All rights reserved.
34
Why Is Globalization Important?
(4 of 5)
• Open economies (cont.)
• More firm turnover
• Less productive firms exit
• Improvement for industry
© 2019 Cengage. All rights reserved.
35
Why Is Globalization Important?
(5 of 5)
• Economic growth rates closely related to
openness, education, communications
infrastructure
• International trade can provide stability for
producers via exports
• Rapid growth increases demand for
commodities
© 2019 Cengage. All rights reserved.
36
Globalization and Competition
(1 of 3)
• Globalization Forces Kodak to Reinvent Itself
• Kodak had 90% camera market; did not address
competition with new technology
• Fuji entered U.S. market with lower-priced film and
supplies; Kodak ignored them
• By mid-1990s, Fuji had 17% of market, Kodak, 75%
• Kodak finally developed digital camera but was
undercut by smart phones; filed for Ch 11
bankruptcy
• Kodak now a small digital imaging company
© 2019 Cengage. All rights reserved.
37
Globalization and Competition
(2 of 3)
• Bicycle Imports Force Schwinn to
Downshift
• Schwinn bicycles once standard
• Competitors produced mountain bikes and
racing bikes; cheap imports entered market
• Schwinn moved production to non-union
state; obtained foreign parts. Uneven quality;
Schwinn declared bankruptcy
• Today Schwinn made in China
© 2019 Cengage. All rights reserved.
38
Globalization and Competition
(3 of 3)
• Element Electronics Survives by Moving TV
Production to America
• Once, 150 U.S. TV manufacturers
• Imports from Japan, China, South Korea, others
• Flat panel TVs lighter, cheaper to ship from Asia
• By 2000, no U.S. TV manufacturers
• Costs in China rising; U.S. factories more
competitive
• Element Electronics became only TV
manufacturer in U.S.; “Made in America” logo
© 2019 Cengage. All rights reserved.
39
Common Fallacies of
International Trade (1 of 2)
• “Trade is a zero-sum activity”
• False; both partners gain from trade
• “Imports result in unemployment and
burden the economy, while exports
promote growth and jobs”
• False; source of fallacy is failure to consider
connection between imports and exports
© 2019 Cengage. All rights reserved.
40
Common Fallacies of
International Trade (2 of 2)
• “Tariffs, quotas, and other imports result in
more jobs for domestic workers”
• False; fails to recognize that a reduction in
imports does not occur in isolation
© 2019 Cengage. All rights reserved.
41
Is the United States Losing Its
Innovation Edge?
• Some economists say U.S. is losing its
innovation edge
• Manufacturing is key to R & D that generates
inventions
• Other economists disagree
• All of the key technologies and high-valueadded activities are U.S.
© 2019 Cengage. All rights reserved.
42
International Trade: Opportunity
or Threat to Workers? (1 of 6)
• International trade is both opportunity and
threat for firms and workers (e.g. exports
and closing mill in NC)
© 2019 Cengage. All rights reserved.
43
International Trade: Opportunity
or Threat to Workers? (2 of 6)
TABLE 1.4 Millions of American Jobs Supported by Exports:
Totals, Goods, and Services
Year
Total
Goods
Services
2009
9.6
5.8
3.8
2010
10.2
6.2
4.0
2011
10.9
6.6
4.3
2012
11.2
6.7
4.5
2013
11.4
6.7
4.7
2014
11.6
6.8
4.8
2015
11.5
6.7
4.8
Source: Chris Rasmussen, Office of Trade and Economic Analysis, International Trade Administration,
U.S. Department of Commerce, Jobs Supported by Exports 2015: An Update, April 8, 2016.
© 2019 Cengage. All rights reserved.
44
International Trade: Opportunity
or Threat to Workers? (3 of 6)
• International trade increases total
productivity
• Wages paid by exporters higher than nonexporters
• Exporting industries require more
educated workforce
© 2019 Cengage. All rights reserved.
45
International Trade: Opportunity
or Threat to Workers? (4 of 6)
• Not all workers gain from international
trade
• Some places lose jobs to cheap imports
• Concern over mass immigration for lowwage work
• Particular threat to unskilled workers in
developed countries
© 2019 Cengage. All rights reserved.
46
International Trade: Opportunity
or Threat to Workers? (5 of 6)
• Hurts unskilled workers in import-competing
industries
• Wages increase for skilled workers
• Workers — more productive
• Imports do NOT decrease the total jobs in
nation
© 2019 Cengage. All rights reserved.
47
International Trade: Opportunity
or Threat to Workers? (6 of 6)
• International trade
• Just another kind of technology
• Adds value to inputs
© 2019 Cengage. All rights reserved.
48
Has Globalization Gone Too Far?
(1 of 2)
• Mainstream economists=open economies
provide more than closed
• Critics=U.S. trade policies primarily benefit
large corporations rather than average
citizens
© 2019 Cengage. All rights reserved.
49
Has Globalization Gone Too Far?
(2 of 2)
• Gnawing sense of unfairness and
frustration over environment, American
workers, international labor standards
• Noneconomic aspects of globalization also
shape international debate
© 2019 Cengage. All rights reserved.
50
Globalization and the Foundations of Trade in Economic Perspective
What do you know about Globalization?
Consider what you learned from the lecture and readings this week and discuss how
economic interdependence has affected Saudi Arabia. Is it good or bad? Expand your
thinking to additionally discuss the relationship between Saudi Vision 2030 and international
competitiveness.
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 500 word
limit.
Readings
Required:
Chapter 1 in International Economics
Saudi Arabia Oil & Gas Report. (Q1 2021). Fitch Solutions Country Industry Reports , 1-84.
Saudi Vision 2030 Document. (2017). Retrieved
from
Recommended:
Chapter 1 PowerPoint slides – International Economics
Altman, S.A. & Bastian, P. (2021). The state of globalization in 2021. Harvard Business Review
Digital Articles, 19.
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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,
Seventeenth edition
Robert J. Carbaugh
Senior Vice President, Higher Ed
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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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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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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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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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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
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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
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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).
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x
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
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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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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
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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:
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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
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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 economic sanctions—Ch. 6
Boeing outsources work, but protects its secrets—Ch. 2
WTO rules against subsidies to Boeing and Airbus—Ch. 6
Does wage insurance make free trade more acceptable to workers?—Ch. 6
China’s hoarding of rare earth metals declared illegal by WTO—Ch. 6
The environment and free trade—Ch. 6
TRADE CONFLICTS BETWEEN DEVELOPING NATIONS
AND INDUSTRIAL NATIONS
Russia hit by sanctions over Ukraine—Ch. 6
U.S. economic sanctions and Iran—Ch. 6
Declining oil prices test OPEC—Ch. 7
China’s economic challenges U.S.–Mexico tomato dispute—Ch. 8
Is state capitalism winning?—Ch. 7
Canada’s immigration policy—Ch. 9
Is international trade a substitute for migration?—Ch. 3
Economic growth strategies: Import substitution versus export-led
growth—Ch. 7
Does foreign aid promote the growth of developing countries?—Ch. 7
The globalization of intellectual property rights—Ch. 7
Microsoft scorns China’s piracy of software—Ch. 6
China’s export boom comes at a cost: How to make factories play fair—Ch. 7
Do U.S. multinationals exploit foreign workers?—Ch. 9
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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xiv
Preface
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LIBERALIZING TRADE: THE WTO VERSUS REGIONAL TRADING
ARRANGEMENTS
Modernizing NAFTA—Ch. 8
Brexit and the Eurozone—Ch. 8
Free-trade agreements bolster Mexico—Ch. 8
Deflation and the Eurozone—Ch. 8
Does the WTO reduce national sovereignty?—Ch. 6
Regional integration versus multilateralism—Ch. 8
Will the euro survive?—Ch. 8
TURBULENCE IN THE GLOBAL FINANCIAL SYSTEM
Foreign currency trading becomes automated—Ch. 11
Is Trump’s trade doctrine misguided?—Ch. 10
Germany’s current account surplus—Ch. 10
The sinking of Russia’s ruble—Ch. 14
Swiss franc soars after exchange rate peg scrapped—Ch. 14
Reserve currency burdens for the United States—Ch. 11
Foreign exchange market rigging—Ch. 12
Exchange rate misalignments—Ch. 12
Does currency depreciation stimulate exports?—Ch. 14
Currency carry trade—Ch. 11
China announces currency independence—Ch. 15
People’s Bank of China punishes speculators—Ch. 11
Currency manipulation and currency wars—Ch. 14
Paradox of foreign debt: How the United States borrows at low cost—Ch. 10
Why a dollar depreciation may not close the U.S. trade deficit—Ch. 13
Japanese firms send work abroad as yen makes its products less
competitive—Ch.13
Preventing currency crises: Currency boards versus dollarization—Ch. 14
Organizational Framework: Exploring Further
Sections
Although instructors generally agree on the basic content of the international economics course, opinions vary widely about what arrangement of material is appropriate. This book is structured to provide considerable organizational flexibility.
The topic of international trade relations is presented before international monetary relations, but the order can be reversed by instructors choosing to start with
monetary theory. Instructors can begin with Chapters 10–15 and conclude with
Chapters 2–9. Those who do not wish to cover all the material in the book can
easily omit all or parts of Chapters 6–9 and Chapters 14–15 without loss of
continuity.
The seventeenth edition streamlines its presentation of theory to provide greater
flexibility for instructors. This edition uses online Exploring Further sections to discuss more advanced topics. By locating the Exploring Further sections within
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
xv
MindTap rather than in the printed textbook, more textbook coverage can be
devoted to contemporary applications of theory. The Exploring Further sections
consist of the following:
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Comparative advantage in money terms—Ch. 2
Indifference curves and trade—Ch. 2
Offer curves and the equilibrium terms of trade—Ch. 2
The specific-factors theory—Ch. 3
Offer curves and tariffs—Ch. 4
Trump’s American First Program: Steel and Aluminum Tariffs—Ch. 4
Tariff-rate quota welfare effects—Ch. 5
Export quota welfare effects—Ch. 5
Welfare effects of strategic trade policy—Ch. 6
Government procurement policy and the European Union—Ch. 8
Economies of scale and NAFTA—Ch. 8
Techniques of foreign-exchange market speculation—Ch. 11
A primer on foreign-exchange trading—Ch. 11
Fundam…
Purchase answer to see full
attachment
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 1: The
International
Economy and
Globalization
© 2019 Cengage. All rights reserved.
2
Chapter Outline
• Economic Interdependence: Federal Reserve Incites
Global Backlash
• Globalization of Economic Activity
• Waves of Globalization
• The United States as an Open Economy
• Why Is Globalization Important?
• Globalization and Competition
• Common Fallacies of International Trade
• Is International Trade an Opportunity or a Threat to
Workers?
• Has Globalization Gone Too Far?
© 2019 Cengage. All rights reserved.
3
Economic Interdependence (1 of 2)
High degree of economic interdependence
• No nation exists in economic isolation
• All aspects of a nation’s economy linked to
economies of trading partners
• Reflects historical evolution of the world’s
economic and political order
• Economic interdependence is complex, and its
effects are uneven
© 2019 Cengage. All rights reserved.
4
Economic Interdependence (2 of 2)
• High degree of economic
interdependence (cont.)
• Steps toward international cooperation
• Mutually advantageous for trading nations
• Protectionist pressures
• Some developing nations argue that liberalized
trading system serves to keep them in poverty
© 2019 Cengage. All rights reserved.
5
Economic Interdependence: Fed
Policy Incites Backlash
• Domestic economic policies have spillover
effects on other economies
• Quantitative easing by Fed, intended to
stimulate U.S. economy during Great
Recession
• criticized by U.S. trading partners as attempt
to improve American competitiveness through
depreciation of dollar
© 2019 Cengage. All rights reserved.
6
Globalization of Economic
Activity (1 of 2)
• Globalization
• Process of greater interdependence between
countries and their citizens
• Increased international flows of
• Goods, services, people
• Investments in equipment, factories, stocks, bonds
• Globalization is political, technological,
cultural, and economic
© 2019 Cengage. All rights reserved.
7
Globalization of Economic
Activity (2 of 2)
• What forces are driving globalization?
• Technological change
• Advances in transport technology
• Widespread liberalization of investment
transactions
• Development of international financial
markets
© 2019 Cengage. All rights reserved.
8
Waves of Globalization (1 of 14)
• History of globalization tied to evolution of
trade
• In late 1700s and 1800s, mass production
and improved transportation made
international trade easier; most goods
tradeable
• Rise of global manufacturing in 1990s
characterized by geographical fragmentation
of productive processes and offshoring of
industrial tasks
© 2019 Cengage. All rights reserved.
9
Waves of Globalization (2 of 14)
• First Wave of Globalization: 1870–1914
• Decreases in tariff barriers
• Technological developments
• Declining transportation costs; shift from sail
to steamships; railways
• Driven by European and American
businesses and individuals
© 2019 Cengage. All rights reserved.
10
Waves of Globalization (3 of 14)
• First Wave of Globalization: 1870–1914 (cont.)
• Exports as share of world income nearly
doubled to 8%
• Per capita incomes increased 1.3% per year
• Previous 50 years: 0.5% per year
© 2019 Cengage. All rights reserved.
11
Waves of Globalization (4 of 14)
• First Wave of Globalization: 1870–1914 (cont.)
• Nations that actively participated in
globalization became richest countries in
world
• Ended by World War I
© 2019 Cengage. All rights reserved.
12
Waves of Globalization (5 of 14)
• Great Depression of 1930s
• Governments practiced protectionism
• Raised tariffs on imports
• Tried to shift demand into domestic markets to
promote domestic sales and jobs
• Exports as share of national income fell from 8%
to 5%
© 2019 Cengage. All rights reserved.
13
Waves of Globalization (6 of 14)
• Second Wave of Globalization: 1945–1980
• Renewed incentive for globalization
• Falling transportation costs fostered increased
trade
• Trade liberalization not uniform
© 2019 Cengage. All rights reserved.
14
Waves of Globalization (7 of 14)
• Differential impacts of second wave
• Developed countries largely freed of barriers
• Greatly increased the exchange of manufactured
goods
• Raised incomes
• Developing countries
• Only agricultural exports that do not compete with
agriculture in developed country free of barriers
© 2019 Cengage. All rights reserved.
15
Waves of Globalization (8 of 14)
• Second Wave of Globalization: 1945–1980
(cont.)
• New kind of trade
• Rich country specialization in manufacturing
niches
• Gained productivity through agglomeration
economies
• Firms clustered together
• Some clusters produced same product; others connected
by vertical linkages
• Benefits only those in clusters
© 2019 Cengage. All rights reserved.
16
Waves of Globalization (9 of 14)
• Second Wave of Globalization: 1945–1980
(cont.)
• Developing countries as group left behind
• Continuing trade barriers, unfavorable investment
climates, antitrade policies, dependence on
agricultural and natural-resource products
© 2019 Cengage. All rights reserved.
17
Waves of Globalization (10 of 14)
• Latest Wave of Globalization (1980–
present)
• Some developing countries (e.g. China, India,
Brazil) broke into world markets for
manufacturing
• Other developing countries marginalized,
causing incomes to decrease and poverty to
rise
• Significant international capital movements
© 2019 Cengage. All rights reserved.
18
Waves of Globalization (11 of 14)
• Latest Wave of Globalization (1980–
present) (cont.)
• Some developing countries have competitive
advantage in labor-intensive manufacturing
(e.g. Bangladesh)
• Protectionist policies in developed countries
© 2019 Cengage. All rights reserved.
19
Waves of Globalization (12 of 14)
• Latest Wave of Globalization (1980–
present) (cont.)
• Foreign outsourcing
• Products manufactured in more than one country
• Manufacturing moved to wherever costs were
lowest
• Job losses for some workers in developed countries
• Cries for laws restricting outsourcing
© 2019 Cengage. All rights reserved.
20
Waves of Globalization (13 of 14)
• Latest Wave of Globalization (1980–
present) (cont.)
• By 2000s, foreign outsourcing of
professionalized work
• Information Age
• Internet, high-speed data
• Sending upscale jobs offshore
• Accounting, chip design, engineering, basic research,
and financial analysis
© 2019 Cengage. All rights reserved.
21
Waves of Globalization (14 of 14)
• Latest Wave of Globalization (1980–
present) (cont.)
• Integrated factory floor increasingly
replaced by network of individual,
specialized suppliers
• Countries tend to specialize in specific
stages of production
• E.g. Boeing 787 Dreamliner
© 2019 Cengage. All rights reserved.
22
TABLE 1.1 The Fruits of Free
Trade: A Global Fruit Basket
On a trip to the grocery store, consumers can find goods from all over the globe.
Fruit
Country
Fruit
Country
Apples
New Zealand
Limes
El Salvador
Apricots
China
Oranges
Australia
Bananas
Ecuador
Pears
South Korea
Blackberries
Canada
Pineapples
Costa Rica
Blueberries
Chile
Plums
Guatemala
Coconuts
Philippines
Raspberries
Mexico
Grapefruit
Bahamas
Strawberries
Poland
Grapes
Peru
Tangerines
South Africa
Kiwifruit
Italy
Watermelons
Honduras
Lemons
Argentina
Source: From “The Fruits of Free Trade,” Annual Report, Federal Reserve Bank of Dallas, 2002, p. 3.
© 2019 Cengage. All rights reserved.
23
The U.S. as an Open Economy
(1 of 8)
• Trade patterns
• Openness
• Rough measure of the importance of international
trade in a nation’s economy
• Nation’s exports and imports as a percentage of its
Gross Domestic Product (GDP)
Exports + Imports )
(
Openness =
GDP
© 2019 Cengage. All rights reserved.
24
The U.S. as an Open Economy
(2 of 8)
• Openness (cont.)
• Large countries – lower measures of
openness
• Less reliant on international trade
• Firms can attain optimal production size without
having to export due to the population and
economic size
• Small countries – higher measures of
openness
© 2019 Cengage. All rights reserved.
25
The U.S. as an Open Economy
(3 of 8)
• Openness of the U.S. economy, 1890–
2018
• Less open to international trade, 1890–1950
• Two world wars + Great Depression of the 1930s
• Reduced dependence on trade
• National security reasons
• Protect home industries from import competition
© 2019 Cengage. All rights reserved.
26
The U.S. as an Open Economy
(4 of 8)
• Openness of the U.S. economy, 1890–
2018 (cont.)
• After World War II — negotiated reductions in
trade barriers
• Rising world trade; technological improvements in
shipping and communications
© 2019 Cengage. All rights reserved.
27
The U.S. as an Open Economy
(5 of 8)
• Openness of the U.S. economy, 1890–
2018 (cont.)
• Relative importance of international trade
increasing
• Example: need for personal computers with
imported components
© 2019 Cengage. All rights reserved.
28
The U.S. as an Open Economy
(6 of 8)
TABLE 1.3 Top 8 Countries with Whom the United States Trades, 2016
Country
Value of U.S.
Exports of Goods
(in billions of
dollars)
Value of U.S.
Imports of Goods
(in billions of dollars)
Total Value of
Trade
(in billions of
dollars)
China
115.8
462.8
578.6
Canada
266.8
278.1
544.9
Mexico
231.0
294.2
525.2
Japan
63.3
132.2
195.5
Germany
49.4
114.2
163.6
United Kingdom
55.4
54.3
109.7
South Korea
42.3
69.9
112.2
France
30.9
46.8
77.7
Source: From U.S. Department of Commerce, U.S. Census Bureau, Foreign Trade: U.S. Trade in Goods by Country, 2017.
© 2019 Cengage. All rights reserved.
29
The U.S. as an Open Economy
(7 of 8)
• Labor and Capital
• Labor mobility in U.S. has not risen in past
100 years
© 2019 Cengage. All rights reserved.
30
The U.S. as an Open Economy
(8 of 8)
• U.S. increasingly tied to rest of the world
through investment flows
• Foreign ownership increasing
• Concerns over rising cost of debt
• International branches of U.S. banks
• U.S. securities are increasingly globalized
© 2019 Cengage. All rights reserved.
31
Why Is Globalization Important?
(1 of 5)
• Law of Comparative Advantage
• Each nation gains by producing goods in
which it has relative advantage
• If a good or service can be obtained more
economically through trade, it makes sense to
trade for it, not produce it
© 2019 Cengage. All rights reserved.
32
Why Is Globalization Important?
(2 of 5)
• Law of Comparative Advantage (cont.)
• International trade also gains from
competitive process
• Competition essential to innovation, efficiency
• Global competition can result in high-cost
domestic producers exiting market
© 2019 Cengage. All rights reserved.
33
Why Is Globalization Important?
(3 of 5)
• Open economies
• More competition lowers prices
• Strong incentive for highest quality
• Weakens monopolies
© 2019 Cengage. All rights reserved.
34
Why Is Globalization Important?
(4 of 5)
• Open economies (cont.)
• More firm turnover
• Less productive firms exit
• Improvement for industry
© 2019 Cengage. All rights reserved.
35
Why Is Globalization Important?
(5 of 5)
• Economic growth rates closely related to
openness, education, communications
infrastructure
• International trade can provide stability for
producers via exports
• Rapid growth increases demand for
commodities
© 2019 Cengage. All rights reserved.
36
Globalization and Competition
(1 of 3)
• Globalization Forces Kodak to Reinvent Itself
• Kodak had 90% camera market; did not address
competition with new technology
• Fuji entered U.S. market with lower-priced film and
supplies; Kodak ignored them
• By mid-1990s, Fuji had 17% of market, Kodak, 75%
• Kodak finally developed digital camera but was
undercut by smart phones; filed for Ch 11
bankruptcy
• Kodak now a small digital imaging company
© 2019 Cengage. All rights reserved.
37
Globalization and Competition
(2 of 3)
• Bicycle Imports Force Schwinn to
Downshift
• Schwinn bicycles once standard
• Competitors produced mountain bikes and
racing bikes; cheap imports entered market
• Schwinn moved production to non-union
state; obtained foreign parts. Uneven quality;
Schwinn declared bankruptcy
• Today Schwinn made in China
© 2019 Cengage. All rights reserved.
38
Globalization and Competition
(3 of 3)
• Element Electronics Survives by Moving TV
Production to America
• Once, 150 U.S. TV manufacturers
• Imports from Japan, China, South Korea, others
• Flat panel TVs lighter, cheaper to ship from Asia
• By 2000, no U.S. TV manufacturers
• Costs in China rising; U.S. factories more
competitive
• Element Electronics became only TV
manufacturer in U.S.; “Made in America” logo
© 2019 Cengage. All rights reserved.
39
Common Fallacies of
International Trade (1 of 2)
• “Trade is a zero-sum activity”
• False; both partners gain from trade
• “Imports result in unemployment and
burden the economy, while exports
promote growth and jobs”
• False; source of fallacy is failure to consider
connection between imports and exports
© 2019 Cengage. All rights reserved.
40
Common Fallacies of
International Trade (2 of 2)
• “Tariffs, quotas, and other imports result in
more jobs for domestic workers”
• False; fails to recognize that a reduction in
imports does not occur in isolation
© 2019 Cengage. All rights reserved.
41
Is the United States Losing Its
Innovation Edge?
• Some economists say U.S. is losing its
innovation edge
• Manufacturing is key to R & D that generates
inventions
• Other economists disagree
• All of the key technologies and high-valueadded activities are U.S.
© 2019 Cengage. All rights reserved.
42
International Trade: Opportunity
or Threat to Workers? (1 of 6)
• International trade is both opportunity and
threat for firms and workers (e.g. exports
and closing mill in NC)
© 2019 Cengage. All rights reserved.
43
International Trade: Opportunity
or Threat to Workers? (2 of 6)
TABLE 1.4 Millions of American Jobs Supported by Exports:
Totals, Goods, and Services
Year
Total
Goods
Services
2009
9.6
5.8
3.8
2010
10.2
6.2
4.0
2011
10.9
6.6
4.3
2012
11.2
6.7
4.5
2013
11.4
6.7
4.7
2014
11.6
6.8
4.8
2015
11.5
6.7
4.8
Source: Chris Rasmussen, Office of Trade and Economic Analysis, International Trade Administration,
U.S. Department of Commerce, Jobs Supported by Exports 2015: An Update, April 8, 2016.
© 2019 Cengage. All rights reserved.
44
International Trade: Opportunity
or Threat to Workers? (3 of 6)
• International trade increases total
productivity
• Wages paid by exporters higher than nonexporters
• Exporting industries require more
educated workforce
© 2019 Cengage. All rights reserved.
45
International Trade: Opportunity
or Threat to Workers? (4 of 6)
• Not all workers gain from international
trade
• Some places lose jobs to cheap imports
• Concern over mass immigration for lowwage work
• Particular threat to unskilled workers in
developed countries
© 2019 Cengage. All rights reserved.
46
International Trade: Opportunity
or Threat to Workers? (5 of 6)
• Hurts unskilled workers in import-competing
industries
• Wages increase for skilled workers
• Workers — more productive
• Imports do NOT decrease the total jobs in
nation
© 2019 Cengage. All rights reserved.
47
International Trade: Opportunity
or Threat to Workers? (6 of 6)
• International trade
• Just another kind of technology
• Adds value to inputs
© 2019 Cengage. All rights reserved.
48
Has Globalization Gone Too Far?
(1 of 2)
• Mainstream economists=open economies
provide more than closed
• Critics=U.S. trade policies primarily benefit
large corporations rather than average
citizens
© 2019 Cengage. All rights reserved.
49
Has Globalization Gone Too Far?
(2 of 2)
• Gnawing sense of unfairness and
frustration over environment, American
workers, international labor standards
• Noneconomic aspects of globalization also
shape international debate
© 2019 Cengage. All rights reserved.
50
Globalization and the Foundations of Trade in Economic Perspective
What do you know about Globalization?
Consider what you learned from the lecture and readings this week and discuss how
economic interdependence has affected Saudi Arabia. Is it good or bad? Expand your
thinking to additionally discuss the relationship between Saudi Vision 2030 and international
competitiveness.
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 500 word
limit.
Readings
Required:
Chapter 1 in International Economics
Saudi Arabia Oil & Gas Report. (Q1 2021). Fitch Solutions Country Industry Reports , 1-84.
Saudi Vision 2030 Document. (2017). Retrieved
from
Recommended:
Chapter 1 PowerPoint slides – International Economics
Altman, S.A. & Bastian, P. (2021). The state of globalization in 2021. Harvard Business Review
Digital Articles, 19.
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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,
Seventeenth edition
Robert J. Carbaugh
Senior Vice President, Higher Ed
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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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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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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
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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
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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
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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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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
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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:
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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
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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 economic sanctions—Ch. 6
Boeing outsources work, but protects its secrets—Ch. 2
WTO rules against subsidies to Boeing and Airbus—Ch. 6
Does wage insurance make free trade more acceptable to workers?—Ch. 6
China’s hoarding of rare earth metals declared illegal by WTO—Ch. 6
The environment and free trade—Ch. 6
TRADE CONFLICTS BETWEEN DEVELOPING NATIONS
AND INDUSTRIAL NATIONS
Russia hit by sanctions over Ukraine—Ch. 6
U.S. economic sanctions and Iran—Ch. 6
Declining oil prices test OPEC—Ch. 7
China’s economic challenges U.S.–Mexico tomato dispute—Ch. 8
Is state capitalism winning?—Ch. 7
Canada’s immigration policy—Ch. 9
Is international trade a substitute for migration?—Ch. 3
Economic growth strategies: Import substitution versus export-led
growth—Ch. 7
Does foreign aid promote the growth of developing countries?—Ch. 7
The globalization of intellectual property rights—Ch. 7
Microsoft scorns China’s piracy of software—Ch. 6
China’s export boom comes at a cost: How to make factories play fair—Ch. 7
Do U.S. multinationals exploit foreign workers?—Ch. 9
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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xiv
Preface
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LIBERALIZING TRADE: THE WTO VERSUS REGIONAL TRADING
ARRANGEMENTS
Modernizing NAFTA—Ch. 8
Brexit and the Eurozone—Ch. 8
Free-trade agreements bolster Mexico—Ch. 8
Deflation and the Eurozone—Ch. 8
Does the WTO reduce national sovereignty?—Ch. 6
Regional integration versus multilateralism—Ch. 8
Will the euro survive?—Ch. 8
TURBULENCE IN THE GLOBAL FINANCIAL SYSTEM
Foreign currency trading becomes automated—Ch. 11
Is Trump’s trade doctrine misguided?—Ch. 10
Germany’s current account surplus—Ch. 10
The sinking of Russia’s ruble—Ch. 14
Swiss franc soars after exchange rate peg scrapped—Ch. 14
Reserve currency burdens for the United States—Ch. 11
Foreign exchange market rigging—Ch. 12
Exchange rate misalignments—Ch. 12
Does currency depreciation stimulate exports?—Ch. 14
Currency carry trade—Ch. 11
China announces currency independence—Ch. 15
People’s Bank of China punishes speculators—Ch. 11
Currency manipulation and currency wars—Ch. 14
Paradox of foreign debt: How the United States borrows at low cost—Ch. 10
Why a dollar depreciation may not close the U.S. trade deficit—Ch. 13
Japanese firms send work abroad as yen makes its products less
competitive—Ch.13
Preventing currency crises: Currency boards versus dollarization—Ch. 14
Organizational Framework: Exploring Further
Sections
Although instructors generally agree on the basic content of the international economics course, opinions vary widely about what arrangement of material is appropriate. This book is structured to provide considerable organizational flexibility.
The topic of international trade relations is presented before international monetary relations, but the order can be reversed by instructors choosing to start with
monetary theory. Instructors can begin with Chapters 10–15 and conclude with
Chapters 2–9. Those who do not wish to cover all the material in the book can
easily omit all or parts of Chapters 6–9 and Chapters 14–15 without loss of
continuity.
The seventeenth edition streamlines its presentation of theory to provide greater
flexibility for instructors. This edition uses online Exploring Further sections to discuss more advanced topics. By locating the Exploring Further sections within
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
xv
MindTap rather than in the printed textbook, more textbook coverage can be
devoted to contemporary applications of theory. The Exploring Further sections
consist of the following:
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Comparative advantage in money terms—Ch. 2
Indifference curves and trade—Ch. 2
Offer curves and the equilibrium terms of trade—Ch. 2
The specific-factors theory—Ch. 3
Offer curves and tariffs—Ch. 4
Trump’s American First Program: Steel and Aluminum Tariffs—Ch. 4
Tariff-rate quota welfare effects—Ch. 5
Export quota welfare effects—Ch. 5
Welfare effects of strategic trade policy—Ch. 6
Government procurement policy and the European Union—Ch. 8
Economies of scale and NAFTA—Ch. 8
Techniques of foreign-exchange market speculation—Ch. 11
A primer on foreign-exchange trading—Ch. 11
Fundam…
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