Table Of Content

International Economics Theory and Policy SIXTH EDITION Paul R. Krugman Princeton University Maurice Obstfeld University of California, Berkeley Boston San Francisco New York London Toronto Sydney Tokyo Singapore Madrid Mexico City Munich Paris Cape Town Hong Kong Montreal Frete Universal Berlin Wlrtschaftswissenschatilicte Bibliothek For Robin and Leslie Ann Editor-in-Chief: Denise Clinton Executive Development Manager: Sylvia Mallory Development Editor: Jane Tufts Web Development: Melissa Honig Managing Editor: James Rigney Production Supervisor: Katherine Watson Design Manager: Regina Kolenda Text Design, Electronic Composition, and Project Management: Elm Street Publishing Services, Inc. Cover Designer: Regina Kolenda Cover Image: © Digital Vision Ltd. Supplements Editor: Andrea Basso Marketing Manager: Adrienne D'Ambrosio Manufacturing Coordinator: Hugh Crawford International Economics: Theory and Policy Copyright © 2003 by Paul R. Krugman and Maurice Obstfeld All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written consent of the publisher. For information on obtaining permission for the use of material from this work, please submit a written request to Pearson Education, Inc., Rights and Contracts Department, 75 Arlington St., Suite 300, Boston, MA 02116 or fax your request to (617) 848-7047. Printed in the United States of America. ISBN: 0-321-11639-9 WORLD STUDENT SERIES This edition may be sold only in those countries to which it is consigned by Pearson Education International. It is not to be re-exported and it is not for sale in the U.S.A. or Canada. 03 02 BRIEF CONTENTS Contents vii Preface xxii 1 Introduction 1 Part I International Trade Theory 9 2 Labor Productivity and Comparative Advantage: The Ricardian Model 10 3 Specific Factors and Income Distribution 38 4 Resources and Trade: The Heckscher-Ohlin Model 67 5 The Standard Trade Model 93 6 Economies of Scale, Imperfect Competition, and International Trade 120 7 International Factor Movements 160 Part 2 International Trade Policy 185 8 The Instruments of Trade Policy 186 9 The Political Economy of Trade Policy 218 10 Trade Policy in Developing Countries 255 11 Controversies in Trade Policy 276 Part 3 Exchange Rates and Open-Economy Macroeconomics 293 12 National Income Accounting and the Balance of Payments 294 13 Exchange Rates and the Foreign Exchange Market: An Asset Approach 324 14 Money, Interest Rates, and Exchange Rates 357 15 Price Levels and the Exchange Rate in the Long Run 388 16 Output and the Exchange Rate in the Short Run 433 17 Fixed Exchange Rates and Foreign Exchange Intervention 481 Part 4 International Macroeconomic Policy 53 I 18 The International Monetary System, 1870-1973 532 19 Macroeconomic Policy and Coordination under Floating Exchange Rates 568 20 Optimum Currency Areas and the European Experience 604 21 The Global Capital Market: Performance and Policy Problems 636 22 Developing Countries: Growth, Crisis, and Reform 665 vi Brief Contents Mathematical Postscripts 707 Postscript to Chapter 3: The Specific Factors Model 708 Postscript to Chapter 4: The Factor Proportions Model 714 Postscript to Chapter 5: The Trading World Economy 717 Postscript to Chapter 6: The Monopolistic Competition Model 726 Postscript to Chapter 21: Risk Aversion and International Portfolio Diversification 728 Index 737 CONTENTS Preface xxii 1 Introduction I What Is International Economics About? 3 The Gains from Trade 3 The Pattern of Trade 4 How Much Trade? 5 The Balance of Payments 6 Exchange Rate Determination 6 International Policy Coordination 7 The International Capital Market 7 International Economics: Trade and Money 8 Part I International Trade Theory 9 2 Labor Productivity and Comparative Advantage: The Ricardian Model 10 The Concept of Comparative Advantage 10 A One-Factor Economy 12 Production Possibilities 12 Relative Prices and Supply 14 Trade in a One-Factor World 14 Box: Comparative Advantage in Practice: The Case of Babe Ruth 16 Determining the Relative Price after Trade 16 The Gains From Trade 19 A Numerical Example 20 Relative Wages 22 Misconceptions about Comparative Advantage 23 Productivity and Competitiveness 23 The Pauper Labor Argument 24 Exploitation 24 Box: Do Wages Reflect Productivity? 25 Comparative Advantage with Many Goods 26 Setting Up the Model 26 Relative Wages and Specialization 27 Determining the Relative Wage in the Multigood Model 28 Adding Transport Costs and Nontraded Goods 30 Empirical Evidence on the Ricardian Model 31 Summary 34 VII viii Contents 3 Specific Factors and Income Distribution 38 The Specific Factors Model 39 Assumptions of the Model 39 Box: What Is a Specific Factor? 40 Production Possibilities 40 Prices, Wages, and Labor Allocation 44 Relative Prices and the Distribution of Income 49 International Trade in the Specific Factors Model 50 Resources and Relative Supply 51 Trade and Relative Prices 52 The Pattern of Trade 53 Income Distribution and the Gains From Trade 54 The Political Economy of Trade: A Preliminary View 57 Optimal Trade Policy 57 Income Distribution and Trade Politics 58 Box: Specific Factors and the Beginnings of Trade Theory 59 Summary 60 Appendix: Further Details on Specific Factors 63 Marginal and Total Product 63 Relative Prices and the Distribution of Income 64 4 Resources and Trade: The Heckscher-Ohlin Model 67 A Model of a Two-Factor Economy 68 Assumptions of the Model 68 Factor Prices and Goods Prices 69 Resources and Output 72 Effects of International Trade Between Two-Factor Economies 75 Relative Prices and the Pattern of Trade 76 Trade and the Distribution of Income 76 Factor Price Equalization 78 Case Study: North-South Trade and Income Inequality 80 Empirical Evidence on the Heckscher-Ohlin Model 82 Testing the Heckscher-Ohlin Model , 82 Implications of the Tests 85 Summary 86 Appendix: Factor Prices, Goods Prices, and Input Choices 89 Choice of Technique 89 Goods Prices and Factor Prices 91 5 The Standard Trade Model 93 A Standard Model of a Trading Economy 94 Production Possibilities and Relative Supply 94 Relative Prices and Demand 95 The Welfare Effect of Changes in the Terms of Trade 98 Contents ix Determining Relative Prices 98 Economic Growth: A Shift of the RS Curve 99 Growth and the Production Possibility Frontier 100 Relative Supply and the Terms of Trade . 101 International Effects of Growth 101 Case Study: Has the Growth of Newly Industrializing Countries Hurt Advanced Nations? 103 International Transfers of Income: Shifting the RD Curve 104 The Transfer Problem 105 Effects of a Transfer on the Terms of Trade 105 Presumptions about the Terms of Trade Effects of Transfers 107 Case Study: The Transfer Problem and the Asian Crisis 108 Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD 109 Relative Demand and Supply Effects of a Tariff 109 Effects of an Export Subsidy 110 Implications of Terms of Trade Effects: Who Gains and Who Loses? 111 Summary 113 Appendix: Representing International Equilibrium with Offer Curves 117 Deriving a Country's Offer Curve 117 International Equilibrium 118 6 Economies of Scale, Imperfect Competition, and International Trade 120 Economies of Scale and International Trade: An Overview 120 Economies of Scale and Market Structure 122 The Theory of Imperfect Competition 123 Monopoly: A Brief Review 123 Monopolistic Competition 126 Limitations of the Monopolistic Competition Model 131 Monopolistic Competition and Trade 132 The Effects of Increased Market Size 132 Gains from an Integrated Market: A Numerical Example 133 Economies of Scale and Comparative Advantage 136 The Significance of Intraindustry Trade 139 Why Intraindustry Trade Matters 140 Case Study: Intraindustry Trade in Action: The North American Auto Pact of 1964 141 Dumping 142 The Economics of Dumping 142 Case Study: Antidumping as Protectionism 145 Reciprocal Dumping 146 The Theory of External Economies 147 Specialized Suppliers 147 Labor Market Pooling 148 Knowledge Spillovers 149 Contents External Economies and Increasing Returns 150 External Economies and International Trade 150 External Economies and the Pattern of Trade 150 Trade and Welfare with External Economies 151 Dynamic Increasing Returns 152 Box: Tinseltown Economics 153 Summary 155 Appendix: Determining Marginal Revenue 158 7 International Factor Movements 160 International Labor Mobility 161 A One-Good Model Without Factor Mobility 161 International Labor Movement 162 Extending the Analysis 163 Case Study: Wage Convergence in the Age of Mass Migration 165 Case Study: Immigration and the U.S. Economy 166 International Borrowing and Lending 167 Intertemporal Production Possibilities and Trade 167 The Real Interest Rate 168 Intertemporal Comparative Advantage 169 Direct Foreign Investment and Multinational Firms 169 Box: Does Capital Movement to Developing Countries Hurt Workers in High-Wage Countries? 170 The Theory of Multinational Enterprise 172 Multinational Firms in Practice 173 Case Study: Foreign Direct Investment in the United States 175 Box: Taken for a Ride? 177 Summary 177 Appendix: More on Intertemporal Trade 181 Part 2 International Trade Policy 185 8 The Instruments of Trade Policy 186 Basic Tariff Analysis 186 Supply, Demand, and Trade in a Single Industry 187 Effects of a Tariff 189 Measuring the Amount of Protection 190 Costs and Benefits of a Tariff 192 Consumer and Producer Surplus 192 Measuring the Costs and Benefits 195 Other Instruments of Trade Policy 196 Export Subsidies: Theory 197 Case Study: Europe's Common Agricultural Policy 198 Contents xi Import Quotas: Theory 200 Case Study: An Import Quota in Practice: U.S. Sugar 200 Voluntary Export Restraints 202 Case Study: A Voluntary Export Restraint in Practice: Japanese Autos 203 Local Content Requirements 203 Box: American Buses, Made in Hungary 204 Other Trade Policy Instruments 205 The Effects of Trade Policy: A Summary 206 Summary 206 Appendix I: Tariff Analysis in General Equilibrium 210 A Tariff in a Small Country 210 A Tariff in a Large Country 212 Appendix II: Tariffs and Import Quotas in the Presence of Monopoly 214 The Model with Free Trade 214 M The Model with a Tariff 215 The Model with an Import Quota 216 Comparing a Tariff and a Quota 216 9 The Political Economy of Trade Policy 218 The Case for Free Trade 218 Free Trade and Efficiency 219 Additional Gains from Free Trade 219 Political Argument for Free Trade 221 Case Study: The Gains from 1992 221 National Welfare Arguments Against Free Trade 223 The Terms of Trade Argument for a Tariff 223 The Domestic Market Failure Argument Against Free Trade 224 How Convincing Is the Market Failure Argument? 226 Box: Market Failures Cut Both Ways: The Case of California 227 Income Distribution and Trade Policy 229 Electoral Competition 229 Collective Action 230 Modeling the Political Process 231 Who Gets Protected? 232 Box: Politicians for Sale: Evidence from the 1990s 233 International Negotiations and Trade Policy 234 The Advantages of Negotiation 235 International Trade Agreements: A Brief History 237 The Uruguay Round 239 Trade Liberalization 239 From the GATT to the WTO 240 Benefits and Costs 241 Box: Settling a Dispute—and Creating One 242 Preferential Trading Agreements 243