International Economics

836 Pages·2013·7.65 MB·English

by  Dominick Salvatore

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International Economics
EleventhEdition
Dominick Salvatore
Fordham University
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Internationaleconomics[electronicresource]/DominickSalvatore.–11thed.
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To Lucille
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Preface
This is the eleventh edition of a text that has enjoyed a flattering market success,
having been adopted by more than 600 colleges and universities throughout
the United States, Canada, and other English-speaking countries and more
than 1,000 in other countries around the world. The text has been translated
into Chinese, French, Greek, Indonesian, Italian, Korean, Polish, Portuguese
(Brazilian), Spanish, Russian, and other languages. All the features that have
made the previous editions of this text one of the leading texts of International
Economics in the United States and around the world have been retained in the
eleventh edition. However, the content has been thoroughly updated and expanded
to include many new significant topics and important recent developments.
Significant International Developments
ThemainobjectiveoftheeleventheditionofInternationalEcconomics istopresent
a comprehensive, up-to-date, and clear exposition of the theory and principles
of international economics that are essential for understanding, evaluating, and
suggesting solutions to the important international economic problems and issues
facing the United States and the rest of the world today, and that countries are
likely to face in the coming years. These are:
1. Slow growth and high unemployment in advanced economies after the
“GreatRecession”—thedeepestfinancialandeconomiccrisissincetheGreat
Depression of 1929.
2. Rising protectionism in the United States and in other advanced countries in
the context of a rapidly globalizing world reduces the level of specialization
andtrade,anditraisesthespecteroftradewarsthatwouldbeverydetrimental
to the welfare of all nations.
3. Excessive volatility and large and persistent misalignments of exchange rates
discourage the international flow of trade and investments and could lead to
international financial and monetary crises.
4. Deep structural imbalances in the United States, slow growth in Europe and
Japan,andinsufficientrestructuringinthetransitioneconomiesofCentraland
Eastern Europe reduce the volume of international trade and could cause the
collapse of the dollar and/or the euro.
v
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Preface
5. Thedeeppovertyinmanydevelopingcountriesandthewideninginternationalinequal-
ities pose serious moral, political, and developmental problems for the United States
and other advanced countries.
6. Resource scarcity, environmental degradation, and climate change put at risk contin-
ued growth in the United States and other advanced countries, as well as sustainable
development in emerging markets.
Theseeventssignificantlyaffectthewell-beingoftheUnitedStatesandtherestoftheworld
but are, to a large extent, beyond U.S. control.
New to the Eleventh Edition
Chapter 1 has been thoroughly revised and updated to reflect the dramatic economic and
financial changes that have taken place in the world economy since the last edition of this
text. Section 1.6 has been thoroughly revised to identify the major international economic
(trade and financial) problems facing the United States and the world today, and so has the
discussion in Chapter 21 (Section 21.6), which examines how they can be resolved.
The rapid globalization of the world economy is providing major benefits to most coun-
tries, but it is also presenting many challenges to poor countries that are unable to take
advantageofglobalization,aswellastotheUnitedStatesandotheradvancedcountriesthat
faceincreasingcompetitionfromsomeemergingmarkets,especiallyChina.Thesetopicsare
discussed in several new sections and case studies in the trade and finance part of the text.
The dollar–euro exchange rate is as much in the news these days as the huge and
unsustainable trade deficits of the United States and sovereign debts in the Eurozone. The
relationship between U.S trade deficits, trade protectionism and misaligned exchange rates,
as well as the crisis in the Euro Area are examined, both theoretically and empirically, and
in all of their ramifications, in several trade and finance sections and case studies in this
new edition of the text.
Besides their effect on international trade and international competitiveness, the contin-
uing globalization of the world economy and liberalization of international capital markets
have further eroded governments’ control over national economic and financial matters.
Exchange rates exhibit great volatility and large misalignments, both of which interfere
with the flow of international trade and investments and distort the comparative advan-
tage of nations. At the same time, international macroeconomic policy coordination has not
progressed sufficiently to deal adequately with the potential problems and challenges that
increased interdependence in world financial markets create.
The eleventh edition of this book also presents an in-depth analysis of the dangerous
structuralimbalancesintheworldeconomyandprovidesanevolutionofthepolicyoptions
available to deal with them. The major imbalances in the world economy today are the
huge trade and budget (twin) deficits of the United States, the slow growth and high
unemployment in Europe, the decade-long stagnation in Japan, the serious competitive
challenge for both advanced and developing countries provided by the competition from
China, the danger of financial and economic crises in emerging market economies, world
poverty,resourcescarcity,andenvironmentaldegradation.Allofthesetopicsareaddressed
in this edition of the text.
Thereare122casestudiesinthetext.Manyarenew,andtheothershavebeenthoroughly
revised.
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Preface
The extended annotated Selected Bibliography at the end of each chapter has been thor-
oughly updated and extended, and it represents a major resource for further study and
research on various topics.
The Internet section at the end of each chapter has been updated and expanded and
gives the most important Internet site addresses or links to data sources, information, and
analyses for the topics presented in each chapter to show how to access and use the wealth
of information available on the Internet.
The Companion Web Site for the Text has also been thoroughly updated and expanded,
and it presents for each chapter additional examples, cases, and theoretical points, as well
as questions and problems that can be answered or solved using the Internet.
New, extended, and revised sections and case studies in the trade theory and policy
parts of the text include benefits and challenges of globalization; the gravity model; the
changing pattern of comparative advantage; variety gains from international trade; EU–US
trade disputes and protectionism; the pervasiveness of nontariff trade barriers; strategic
trade and industrial policies; the emergence of new economic giants; job losses in high
U.S. import-competing industries; international trade and de-industrialization of the United
Statesandotheradvancedcountries;internationaltradeandU.S.wageinequalities;benefits
andcostsofNAFTA;internationaltradeandenvironmentalsustainability;globalizationand
world poverty; trade and growth in developing countries; the collapse of the Doha Round;
and the debate over U.S. immigration policy.
New sections and case studies in international finance include size, currency, and
geographical distribution of the foreign exchange market; the carry trade; fundamental
forces and “news” in exchange rate forecasting; the exploding U.S. trade deficit with
China; the euro–dollar exchange rate defies forecasting; the Balassa–Samuelson effect in
transition economies; structural imbalances and exchange rate misalignments; the effective
exchange rate of the dollar and U.S. current account deficits; exchange-rate pass-through
to import prices; petroleum prices and growth; inflation targeting and exchange rates;
the global financial crisis and the Great Recession; slow recovery and growth after the
Great Recession; the Eurozone crisis and the future of the euro; internationalization of
the renminbi (yuan); exchange rate arrangements of IMF members; and reforms of the
international monetary system.
More international trade and finance data are included throughout the text.
Audience and Level
The text presents all the principles and theories essential for a thorough understanding of
internationaleconomics.Itdoessoonanintuitivelevelinthetextitself,andmorerigorously
in the appendices at the end of most chapters. In addition, partial equilibrium analysis is
presented before the more difficult general equilibrium analysis (which is optional). Thus,
thebookisdesignedforflexibility.Italsoovercomestheshortcomingsofotherinternational
economics texts in which the level of analysis is either too complicated or too simplistic.
Organization of the Book
Thebookisorganizedintofourparts.PartOne(Chapters2–7)dealswithtradetheory(i.e.,
the basis and the gains from trade). Part Two (Chapters 8–12) deals with trade policy (i.e.,
obstructionstotheflowoftrade).PartThree(Chapter13–15)dealswiththemeasurementof
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Preface
anation’sbalanceofpayments,foreignexchangemarkets,andexchangeratedetermination.
Part Four (Chapters 16–21) examines open-economy macroeconomics or the macro rela-
tionships between the domestic economy and the rest of the world, as well as the operation
of the present international monetary system.
In the typical one-semester undergraduate course in international economics, instructors
may wish to cover the 11 core chapters (1, 2–3, 5, 9, 13–17, 21) as well as the few other
asterisked sections in other chapters, and exclude the appendices. Undergraduate courses in
international trade could cover Chapters 1 to 12 and 21, whereas undergraduate courses in
internationalfinancecouldcoverChapters1and13to21.Themanyexamplesandreal-world
case studies presented also make the text very suitable for international economics courses
inbusinessprograms.Infirst-yeargraduatecoursesininternationaleconomicsandbusiness,
instructors may want to cover the appendices also and assign readings from the extensive
annotated bibliography at the end of each chapter.
For the Student
• The same example is utilized in all the chapters dealing with the same basic concept.
Thisfeatureisuniquetothistext.Forexample,thesamegraphicalandnumericalmodel
is used in every chapter, from Chapters 2 through 11 (the chapters that deal with trade
theory and policy). This greatly reduces the burden on the student, who does not have
to start fresh with a new example each time. It also shows more clearly the relationship
among the different topics examined.
• Actual numbers are used in the examples and the graphs are presented on scales. This
makes the various concepts and theories presented more concrete, accessible, and per-
tinent to the student, and the graphs easier to read and understand.
• There are 122 case studies (from 4 to 9 per chapter). These real-world case studies are
generally short and to the point and serve to reinforce understanding and highlight the
most important topics presented in the chapter.
• Thesectionsofeachchapterarenumberedforeasyreference.Longersectionsarebroken
into two or more numbered subsections. All of the graphs and diagrams are carefully
explained in the text and then summarized briefly in the captions.
• The judicious use of color and shading enhances the readability of the text and aids
studentunderstanding.
• Eachchapterendswiththefollowingteachingaids:
• Summary—A paragraph reviews each section of the text.
• A Look Ahead—Describes what follows in the subsequent chapter.
• Key Terms—Lists the important terms introduced in bold face type in the chapter.
A glossary of all these terms is provided at the end of the book.
• Questions for Review—Fourteen review questions are presented (two or more for
each section in the chapter).
• Problems—Fourteen to fifteen problems are provided for each chapter. These
ask the student to calculate a specific measure or explain a particular event.