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more Ninth Edition International Economics Steven Husted University of Pittsburgh Michael Melvin Arizona State University and BlackRock Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editor in Chief: Donna Battista Senior Acquisitions Editor: Noel Seibert Senior Editorial Project Manager: Carolyn Terbush Editorial Assistant: Emily Brodeur Director of Marketing: Maggie Moylan Executive Marketing Manager: Lori DeShazo Marketing Assistant: Kim Lovato Senior Managing Editor: Nancy Fenton Production Project Manager: Alison Eusden Project Manager: Pat Brown Art Director: Jon Boylan Text and Cover Designer: Jon Boylan Photo Researcher: Rachel Youdelman Manager, Rights and Permissions: Michal Joyce Image Permission Coordinator: Rachel Youdelman Manager, Cover Visual Research and Permissions: Rachel Youdelman Cover Art: 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references and index ISBN-13: 978-0-32-178386-8 (alk paper) ISBN-10: 0-32-178386-7 (alk paper) 1. International economic relations. 2. Commercial policy. 3. International finance. 4. United States—Commercial policy. I. Melvin, Michael, II. Title HF1359.H87 2013 337—dc23 2012011016 10 9 8 7 6 5 4 3 2 1 ISBN 10: 0-32-178386-7 ISBN 13: 978-0-32-178386-8 To Marie and Bettina This page intentionally left blank Contents Preface xiii About the Authors xvii Chapter An Introduction to International Trade 1 Characteristics of National Economies 2 Economic Growth 6 International Trade 7 The Direction of International Trade 10 What Goods Countries Trade? 15 Summary 22 • Exercises 22 Chapter Tools of Analysis for International Trade Models 23 Some Methodological Preliminaries 24 The Basic Model: Assumptions 26 n Global Insights 2.1: World Response to Higher Relative Price of Oil 28 The Basic Model: Solutions 34 Measuring National Welfare 36 National Supply and Demand 38 Summary 40 • Exercises 40 Appendix 2.1:Derivation of National Supply and Demand Curves 41 Chapter The Classical Model of International Trade 43 Absolute Advantage as a Basis for Trade: Adam Smith’s Model 44 Comparative Advantage as a Basis for Trade: David Ricardo’s Model 49 The General Equilibrium Solution of the Classical Model 50 The Gains from International Trade 54 n Global Insights 3.1: Japan’s Gains from Entry into World Trade in 1858 56 Trade and Wages 56 n Global Insights 3.2: Wage and Productivity Comparisons for the United States and Mexico 58 An Evaluation of the Classical Model 60 Summary 60 • Exercises 61 Appendix 3.1:The Classical Model with Many Goods 62 Appendix 3.2:Offer Curves and the Terms of Trade 64 Chapter The Heckscher–Ohlin Model 67 The HO Model: Basic Assumptions 68 n Global Insights 4.1: Capital/Labor Ratios of Selected U.S Industries 70 vii viii Contents The HO Theorem 72 Equilibrium in the HO Model 74 Some New HO Theorems 79 n Global Insights 4.2: Trade, Wages, and Jobs in the U.S Economy 82 Some Final Observations 83 Summary 83 • Exercises 84 Appendix 4.1:Alternate Proofs of Selected HO Theorems 85 The Heckscher–Ohlin Theorem (Price Definition) 85 The Rybczynski Theorem 87 The Stolper–Samuelson Theorem 88 Appendix 4.2:The Specific Factors Model 90 Chapter Tests of Trade Models: the Leontief Paradox and Its Aftermath 92 Tests of the Classical Model 93 Tests of the HO Model 95 Attempted Reconciliations of Leontief’s Findings 96 Other Tests of the HO Model 99 Recent Tests of the HO Model 100 Alternative Theories of Comparative Advantage 102 Human Skills Theory 102 Product Life Cycle Theory 102 Similarity of Preferences Theory 104 Intraindustry Trade 104 Increasing Returns and Imperfect Competition 107 Conclusions 110 Summary 111 • Exercises 112 • References 112 Chapter Tariffs 113 The Gains from Free Trade 114 Tariffs: An Introduction 116 Tariffs: An Economic Analysis 120 The Gains from Free Trade: One More Time 122 The Welfare Cost of Tariffs 124 Tariffs: Some Extensions 127 Export Tariff 127 n Global Insights 6.1: The Welfare Costs of Tariffs: Estimates from Certain U.S Industries 128 n Global Insights 6.2: Argentine Export Tariffs 130 The Optimal Tariff 131 n Global Insights 6.3: The Smoot-Hawley Tariff and Its Aftermath 134 How High Are Tariffs? 135 Summary 137 • Exercises 137 • References 138 Contents Chapter Nontariff Barriers and Arguments for Protection 139 Quotas 140 The Welfare Effects of Quotas 142 The Equivalence or Nonequivalence of Tariffs and Quotas 144 Other Nontariff Barriers 146 Customs Valuation Practices 146 Government Procurement Policies 146 Technical Barriers to Trade 147 Health and Safety Standards 148 Failure to Protect Intellectual Property Rights 149 Export Subsidies 150 Arguments for Protection 151 Invalid Arguments 151 Valid Arguments 153 n Global Insights 7.1: Trade, Technology, and U.S Pollution 162 Summary 165 • Exercises 166 • References 166 Chapter Commercial Policy: History and Practice 167 History of U.S Commercial Policy 168 n Global Insights 8.1: The GATT Agreement 172 The Uruguay Round and the Creation of the WTO 175 ▶ Trade Policy Case Study 1: U.S Tuna Quotas to Save Dolphins 177 The Doha Round 178 The Conduct of U.S Commercial Policy 179 Dumping 180 Antidumping Law 181 Countervailing Duty Law 184 Unfair Foreign Practices: Section 301 185 ▶ Trade Policy Case Study 2: The International Bananas Dispute 186 The Escape Clause: Section 201 187 Other Measures 188 ▶ Trade Policy Case Study 3: Tire Imports from China 189 Comparisons with Policies in Other Countries 190 Summary 191 • Exercises 192 • References 192 Chapter Preferential Trade Arrangements 193 Preferential Trade Arrangements: Economic Analysis 195 North American Free Trade Agreement 197 n Global Insights 9.1: Details of the NAFTA 198 ix www.downloadslide.com Index 377 international division of labor and, 47–48 specialization and, 51 with subsidy, 159 welfare and, 36, 109–10, 123–24 Free-trade area (FTA) agreements, 201–2 See also Bush, George W., Obama, Barack defined, 194 effect of, 196 welfare analysis of, 196 Frenkel, Jacob A., 306n Fried, Harold O., 451n Friedman, Milton, 25, 25n Froot, Kenneth, 295n FTA See Free-trade area (FTA) Fuertes, Ana M., 304n Fukao, K., 201n Fund investment purchases, 116 Futures market, 258–59 G G-5 countries, 338 Gagnon, Joseph, 103n, 315–16 Garber, Peter M., 162n GATT See General Agreement on Tariffs and Trade (GATT) The GATT Agreement, 172–73 GDP See Gross domestic product (GDP) General Agreement on Tariffs and Trade (GATT) conference, 173n criticism of, 176 four key principles, 171 improving functions of, 175 U.S tariff reduction under, 174 General equilibrium for closed economy, 34–35 defined, 26 modeling systems, 83, 95 General equilibrium model assumptions of, 26–34 autarky and, 34, 51 classical model of solution, 50–54 for demand, 34–36, 38–39 free-trade policies, benefits from, 114–15 international trade and, 51 for supply, 34–36, 38–39 Generalized system of preferences (GSP), 119 Geometric economic model, 25 Germany categories of imports/exports by, 19, 21 as importer/exporter of services, 18 trading partners of, 14 Ghosh, Atish, 340n Global financial crisis (2008–2009), 9n Global insight Argentine, export tariffs, 130 Big Mac PPP, 303 black Swan, financial market, 354 capital/labor ratios of selected U.S industries, 69 carry trade, 295 current account deficit in U.S., 243–44 Eurozone crisis, 360–61 exchange rate indexes, 254 G20 summit, 340 Japan, entry into world trade, 56 NAFTA, details, 198 oil price hike, 28 outsourcing in U.S., 229–30 pass-through effect and profits, 316 Plaza Agreement, 338–39 preferential trade arrangements, selected countries, 206–7 Smoot-Hawley tariff, 134 The Dutch disease, 223–24 The GATT agreement, 172–73 trade, technology, and U.S pollution, 162 trade, wages, and jobs in the U.S economy, 82 wage and productivity United States and Mexico comparisons, 58–59 welfare costs of tariffs, U.S industries, 128–29 Global production, 18 GNP See Gross national product (GNP) Gold exchange standard, 269 Gold standard defined, 264 1880–1914, 264–68 interior period (1918–1939), 268–70 maintaining, 264 Gold stock, 267, 273 Goldberg, Pinelopi, 316n Golub, Stephen S., 93n Goods See also Products categories of, as exports/imports, 19–21 comparative advantage, 39 counterfeit, 150 most commonly traded, 15–21 population growth and availability of, 38 U.S and E.U percent of annual consumption of, 97 Goods-market equilibrium, 342–43 Government assistance in developing countries, 172 commercial policy and, 114 corruption in, 363 gains from tariffs, 125 procurement policies, 146–47 Government revenue, 139–40, 153–56 developed countries, 154–55 developing countries, 154–55 income tax, 153 quotas and, 143 tariff, 153 Gravity model, 15 Great Trade Collapse, Greenaway, David, 106n Grimwade, N., 203n Gross domestic product (GDP) See also Per capita GDP (or GNP) in autarky, 73n to calculate per capita, 200n commodity satisfaction and, 36–38 cross-country comparison of per capita, 200 defined, developing countries and, 211–12 difference between GDP and GNP, to export ratio, 217–18 formula for, 37 measure for national welfare, 36–38 real/nominal, 37 Standard of living, measure of, 210–11 Gross national product (GNP), See also Per capita GDP (or GNP) Grossman, Gene M., 100n, 162n, 340n Grubel, Herbert G., 105n Grubel-Lloyd index, 105 Grubert, Harry, 150n, 222n GSP See Generalized system of preferences (GSP) Guest workers, 225 H Haltham, Gerald, 340n Harrigan, James, 18, 101, 101n Hartmann, Philipp, 278n Hau, Harald, 278n Havrylyshyn, Oli, 100n Health and safety standards, 148–49 in NAFTA, 199 NTB and, 148–49 WTO agreement, 148 Heckscher, Eli, 62 Heckscher-Ohlin (HO) model, 67–83 basic assumptions, 68–72 of commodity compositions of international trade, 83 comparative advantage determined in, 76–78, 85–87 www.downloadslide.com 378 Index Heckscher-Ohlin (HO) model (continued) comparison with classical model, 76–78 complete specialization in, 76 contradictions to, 106 economy U.S., implications in, 81–82 equilibrium in, 74–78 factor price equalization theorem, 80–81 income redistribution and, 156 input-output table, 95 Linder’s hypothesis and, 104 modified versions of, 101 specific factors model and, 90–91 supply and, 68–72, 76–78 tests of, 95–96, 99–100, 110–11 Hedge defined, 255 futures market and, 258 Helpman, Elhanan, 110n, 157n, 165n Henn, C., 203 Higgins, Matthew, 310 High-income countries economic characteristics of selected countries, 4–5 growth rates from 2000–2006, 6–7 High-income economies, See also Index of openness Highly open economies, 9–10 See also Index of openness Hill, Catharine, 150n Hine, R., 106n Hirofumi Shibata, 144n HO theorem, 72–74, 79–82 alternate proofs of selected, 85 factor price equalization theorem, 80–81 price definition, 85–87 price ratio, 73 proof of, 73, 86 Rybczynski theorem, 79–80, 87–88, 215n, 222 Stolper-Samuelson theorem, 81–82, 88–89 Hodrick, Robert J., 306n Home market, preservation of the, 153 Hong Kong openness of economy, 9, 10 trade in manufactures with U.S., 136 Horizontal bands, 274 Housing price “bubble,” 360 Huber, Richard, 56 Hufbauer, Gary Clyde, 128, 128n, 140n, 150n Human skills theory, 102 Husted, Steven, 10n, 225n, 226n I IBF See International banking facilities (IBFs) IBS See International banking facilities (IBFs) Ichimura, S., 99n IIT See Intraindustry trade (IIT) IMF See International Monetary Fund (IMF) IMM See International Monetary Market (IMM) Immigration economic implications to, 231 international flow of labor, 224 laws, 226n reasons for, 225–26 temporary/permanent, 224–25 U.S 1820–2009, 290 Immizerizing growth, 222, 223 Imperfect competition, increasing returns and, 107–10 Import(s), 123 categories of, from selected countries, 21 categories of products as, 21 defined, domestic, effect of devaluation on, 316 gains from free trade in, 114–16 quota, 165 quotas, 8–9 of selected countries, 4–5 tariff, 116, 124, 130, 163 trade deficit/surplus, 10 Importance of being unimportant, 56 Import-substitution development policies, 214–15 Import-substitution development strategies, 214 Income See also High-income countries; Low-income countries; Middleincome countries developing countries collecting, 153–54 distribution of, 79, 230 elasticity of demand, 217 gap, 82 internal transfer of, 125 investments, 115 redistribution, 156 tax, 153, 156, 168n, 170n U.S distribution of, 82 Income per capita See Per capita GDP (or GNP) Incomplete specialization, 76 Increasing returns to scale defined, 107 gains from trade and, 108 internal/external, 107, 109 international trade and, 108n PPF and, 107–8 Index of openness defined, international trade, impact on, pattern of behavior for, of selected countries, 4–5 United States and Japan (exports), 10 India export tariff on basmati rice, 130 Leontief paradox, 100 openness of economy, 9, 10 Indifference curve, 31 Individual consumer choice, 31–33 Indonesia, bans on rice export, 130 Industrialized countries See Developed countries Industries, interrelated, 95 Industry restructuring, 140 Infant industry argument, 159 Inflation fixed exchange rates, 282 U.S., 272, 301 Injury test, 181 Input-output table, 95–96 Intellectual property defined, 149 Doha Round and, 179 improved protection, 202 protection and NAFTA, 194, 199 protection of pharmaceutical products, 149 protection of pharmaceutical products and developing countries, 149 rights, Uruguay Round and, 150 Intellectual rights, 149–50 Interdependent national economies, 116 Interest parity covered, 256 uncovered, 289–92 Interest rate(s), 450 balance between deposit and loan, 358 constant, 344 exchange rates and, 292–94 nominal, 363 real, 320 term structure of, 292 Interest rate parity covered and uncovered model, 289–92 Interindustry trade, 109–10 Internal balance, 327 International banking facilities (IBFs), 355–56 International business, country-risk analysis, 364 International diversification, 358 www.downloadslide.com Index 379 International debt, 358–61 debt/equity swaps, 361 petrodollars, recycling of, 358–59 resecheduling, 358–59 See also Paris Club sovereign debt, 358 International division of labor, 44–45 International Dolphin Conservation Program Act, 178 International flows of factors, 224–32 brain drain, 226 capital, 226–29 economic analysis, 229–32 guest workers, 225 labor, 224–26 International Monetary Fund (IMF), 240, 340, 360 International Monetary Market (IMM), 258 International monetary system Bretton Woods System (1944–1973), 270–74 Interwar Period (1918–1939), 268–70 present approach, 274–78 The Gold Standard (1880–1914), 264–68 International policy coordination, 337–40 International price discrimination, 150n, 181 International reserves, 239–40 International trade, 7–10 See also Free trade; Microeconomics, international; Trade barriers to, 7–9 classical theory of, 43 comparative advantage/disadvantage goods, 54 consumption point, 54–55 direction of, 10–15 economic growth and, 116, 210–32 effects of, 68, 109–10 gains from, 54–56 general equilibrium solution and, 50–51 geographic distribution of, by region 1965–2010, 10, 13 importance of, for countries, 9–10 increasing returns to scale and, 110n law, 140 limited success in liberalizing, in services, 175 as pro competitive, 115 reduction/increase in, 7–10 regulation of volume of, 24 relationship between economic growth and, 79 of services, 18, 20 wages and, 80 welfare effects of, 110 Interwar Period (1918–1939), 268–70 Intraindustry trade (IIT), 104–7 comparative advantage and, 106 defined, 104 between developed countries, 109 in developing countries, 105 explanations of, 107–10 for manufactured goods for selected countries (1995), 104–5 Intrilligator, Michael, 157n Investment See also Direct foreign investment income/savings and, 115–16 in NAFTA, 199 Irwin, Douglas, 45n, 48n, 159n, 165n, 171n, 215n, 336n IS curve, 342–44 defined, 342 derivation of, 344 equilibrium, 342, 348–49 ITC investigation, 189–90 See also United States International Trade Commission (USITC) J J curve effects, 312 and elasticities, 313–15 Jackson, Andrew, 169–70 Jamaica, openness of economy in, Japan categories of export/import, 18, 19, 20, 21 comparison of U.S and Japan export patterns, 20 as exporter, 10 GSP programs, 119 as importer/exporter of services, 18 Leontief paradox, 99 openness of economy, percentage of world trade by, 13 resistance to pass-through effect, 316 trade flows with U.S., 103n trading partners, 13, 14 U.S.-Japan PPP, 301 world trade in nineteenth century, 55 Jobs preservation of, 140 in U.S., 82 Johnson, Harry, 95n, 215n, 306n, 336n Jones, Ronald, 83n, 97n Jones Act of 1920, 141 Jordan Free Trade Agreement, 201–2 Jorion, Phillippe, 303n K Kaboski, Alessandria, Karikari, John, 144n Keesing, Donald, 102, 102n Kenen, Peter, 83n, 97n Kennedy Round, 8, 171, 173 Keynes, John Maynard, 269 Killeen, William, 278n Kindleberger, Charles, 134, 134n Klein, Michael W., 316n Klitgaard, Thomas, 310n, 315 Knetter, Michael M., 315–16, 316n Koechlin, Francette, 6n Komunjer, Ivana, 94n Konieczny, Jerzy, 144n Kortem, Samuel, 94, 94n Kreinin, Mordechai, 93n, 97n Kreuger, Alan B., 162n Kroszner, Randall, 171n Krueger, Anne, 145n, 150n, 201n Krugman, Paul, 82, 82n, 109n, 110n, 164, 164n, 165, 208, 208n Kyoto Protocol, 177 L La Jolla Agreement, 178 Labor See also Average product of labor (APL); Diminishing returns to labor; Division of labor, international; Marginal product of labor; Skilled-labor intensive abundant, 71 capital/labor ratio, 70 intensity, relative, 69 intensive, 69 international flow of, 224–26, 229 market, 230 output ratio, 47, 62 productivity, 93 productivity, wage rates and trade, 57–58 theory of value, 46 value marginal product of, 230 Labor-saving (capital-saving) technical change, 221 Lahreche-Rein, Amina, 316n Lai, Kon S., 305n Lamy, Pascal, 179 Lapan, Harvey, 144n, 282n Larue, Bruno, 144n Latin America debt crisis (1970s), 358 preferential trade arrangements in, 207 world trade of (1965–2007), 13 Law of one price, 300–1, 303, 316 Lawrence, Robert, 82, 82n, 230n www.downloadslide.com 380 Index Leamer, Edward, 83n, 100–1, 100n, 101n Lehman Brothers, 354 Lender, 321 Leontief, Wassily, 95–96, 96n, 99n input-output table, 95 Leontief paradox, 100n Canada, 99 defined, 96 developing explanations for, 96 India, 99–100 Japan and, 99 Keesings model as explanation of, 102 Linder’s hypothesis and, 104 Product life cycle theory to reconcile, 103 two/three factor basis, 97 U.S., 99 Less than fair value (LTFV), 180, 181 Levich, Richard, 257n Levin, Jay H., 278n Levinson, Arik, 162, 162n LIBOR See London interbank offered rate (LIBOR) Lincoln, Abraham, 153n Linder, Stefan, 104 Linder’s hypothesis, 104 Linkage effects, 212 Lizondo, Jose, 144n Lloyd, Peter J., 105n LM curve, 344–45 defined, 342 derivation of, 345 equilibrium, 342, 347 money supply and, 345, 348–49 Locomotive effect, 339 Logrolling, 170 London interbank offered rate (LIBOR), 353, 358 Long-run exchange rate See also Swan Diagram monetary approach, 305–7 PPP theory, impact on, 299–305 Lothian, James R., 293n, 303n Low-income countries growth rates from 2000–2009, 6–7 Low-income economies, See also Index of openness LTFV See Less than fair value Lucas, Robert E., Jr., 7n M MacDonald, Ronald, 307n MacDougall, G D A., 93–94, 93n Macroeconomics, See also Finance, international BP curve, 345–46 equilibrium level, 346 fiscal policies, 348–50 internal external balance, 334–36 international policy coordination in, 2, 337–40 IS curve, 342–44 LM curve, 345–46 monetary policies, 347–48 Mundell-Fleming model, 342 open economy model, 327–34 principles of, 326–27 Magee, Stephen, 81n, 127n, 145n, 156, 156n Managed float(ing), 277 Manna, Michele, 278n Manzanares, Andres, 278n Marazzi, Mario, 317n Margin, 226 Marginal cost, 30, 86–87, 181 Marginal product of labor, 230 Marine Mammal Protection Act (MMPA), 177 Mark, Nelson C., 307n, 342n Market failure, 161 forces, 48 power, 133 Markusen, James, 228n Marshall-Lerner condition, 312 Marston, Richard, 317n Martin, Will, 175n Maskus, Keith, 99, 99n, 101, 101n, 149n Mayer, Wolfgang, 157n McGilvray, James, 93n Meese, Richard A., 307n Melitz, Marc, 159n Melvin, Michael, 280n, 282n, 304n Mercantilism, 45 MERCOSUR See Southern Cone Common Market Methodology, 25 Metzler, Lloyd A., 68n Mexico categories of imports/exports by, 19, 21 economic characteristics of, 200 environmental standards, 161 loan deal, 363n NAFTA and, 194, 198–99 openness of economy, 10 reasons for low productivity levels, 200 trading partners of, 13 wage and productivity comparisons for U.S and, 58–59 MFN See Most favored nation status MFN tariffs v antidumping, 184 Microeconomics, international, See also International trade Middle East Free Trade Area, 202 world trade of (1990–2007), 7–8 Middle-income countries economic characteristics of selected countries, 4–5 growth rates from 2000–2006, Middle-income economies, 4–5 See also Index of openness Midrigan, Virgiliu, Mill, John Stuart, 43 Milner, Chris, 106n Minier, J., 162n MMPA See Marine Mammal Protection Act (MMPA) MNC See Multinational Corporations (MNC) Moffett, Michael H., 356n MohsenBahmani-Oskooee, 257n Monetary aggregate target, 471 Monetary approach, 305–7 to exchange rates, 305–6 to exchange rates equation, 295 Monetary expansion v contraction, 347, 349 Monetary policy under fixed exchange rates, 347 floating exchange rates, under, 348–49 independence of, 348 independent, central banks and, 272 in open-economy, 272, 347–49 Monetary systems, international, 264–82 Money illusion, 26–29 Money market equilibrium, 342, 345 Money-demand curve, 344–45 Monopolies local, power of, 115 tariff v quota, 145 trade policy and foreign, 163 Monopolistic competition, 109 Monti, Mario, 205 Montreal Protocol, 177 Moore, Michael, 278n Morgan, J P., 354 Most favored nation status (MFN), 119, 171, 172 Multilateralism, 206–7 Multinational Corporations (MNC), 227 Mundell, Robert A., 342n Mundell-Fleming model, 342 Mussa, Michael, 285n Mutti, Jack, 127n, 150n Myint, Hla, 212n www.downloadslide.com Index 381 N NAFTA See North American Free Trade Agreement (NAFTA) National defense, 140 argument for protection, problem with, 157 noneconomic goals for, 156–57 National demand, 38–39 National economies, characteristics of, 2–10 National supply, 38 Neary, Peter, 224n Neely, Christopher J., 257n, 291n Netherlands, openness of economy, 9, 10 Neutral economic growth, 216–17 example of, 217, 218 patterns of production/consumption with, 216 Neutral technical change, 221 New Zealand, percentage of world trade by, 13 Newly industrialized country (NIC), 13, 215 News, 292 NIC See Newly industrialized country (NIC) Nixon, Richard, 173n, 273 No separate legal tender, 274 Nogues, Julio, 139n Nominal interest rate, 320 Nominal price, 27 Nontariff barriers (NTB), 146–51 antidumping and, 183 arguments for protection and, 139–65 customs valuation practices, 146 defined, 114 failure to protect intellectual rights, 149–50 government procurement policies, 146–47 health and safety standards, 148–49 intra-E.U., 203 reducing, 175 technical barriers to trade, 147–48 Normative analysis, 25 North American Agreement on Environmental Cooperation, 199 North American Agreement on Labor Cooperation, 199 North American Free Trade Agreement (NAFTA), 135, 197–201 Canada in, 194, 197–201, 207 details of, 198–99 economic characteristics of countries, 200 effect on U.S economy, 201 fear of environmental decline, 161 formation of, 208 health and safety standards in, 199 intellectual property protection and, 199 investment in, 199 Mexico and, 194, 197–98 1994 to 2004, 197 preferential trade arrangements, 197–201 safeguards protection in, 199 services in, 199 tariffs in, 199 trade effects of, 58 U.S and, 194 NTB See Nontariff barriers (NTB) Nurkse, Ragnar, 268n O Obama, Barack, 147, 189, 202, 229 American Recovery and Reinvestment Act, 147 FTAs negotiations, 202 ITC investigation, 189–90 outsourcing policies of, 229 Trans-Pacific Partnership (TPP), 202 Oegg, Barbara, 140n Offer curves, terms of trade and, 64–66 Official settlements balance, 244–45 Offshore banking origin of, 491–96 practices, 497–501 Ohlin, Bertil, 68, 68n Okubo, T., 201n Olechowski, Andrzej, 139n Omnibus Trade Act of 1988, 173 OPEC’s See Organization of Petroleum Exporting Countries (OPEC’s) Open-economy, 326–40 equilibrium, 327–29 fiscal policy, 334, 336–37, 348 internal/external balance, 334–37 international policy coordination, 337–40 monetary policy, 342, 347, 348–49 multiplier, 331 Mundell-Fleming model, 342 small, 320, 322 index of openness, world trends in, and economic growth, 9–10 Open-economy multiplier, 331 Oppenheimer, Peter, 156n Opportunity (social) cost, 30 v actual cost, 160–61 cause to increase, 30 constant, 29, 30, 34 defined, 29 increasing, 29, 30, 35 minus sign in definition of, 30n Optimal tariff, 133 Options, use of, 258–59 Organization of Petroleum Exporting Countries (OPEC’s), 135, 213 balance of payments surplus, 358–59 Osler, Carol, 285n Output expansion in, 80 labor ratio, 46–47, 62 Outsourcing, 229–30 See also Global production Outward-looking development strategies, 215 Overvalued currency, 269 P Pacific region See also TransPacific Partnership (TPP) GNP per capita, Packer, Frank, 364n Panagariya, Arvind, 197n Panama Declaration, 178 openness of economy, Papageorgio, C., 203n Parallel markets, 205 Paris Club, 361 Parsley, David, 305n Pass-through analysis, 315 Pass-through effect, 315–17 Pass-through period, 315 Patent infringement, 188 Per capita GDP (or GNP), 104, 200, 200n, 211 Perfect capital mobility, 347–48 Perfect competition, 30–31, 159–60 in factor markets, 31 Pareto optimal, 159 Permanent normal trade relations (PNTA), 119n Perot, H Ross, 198n Peterson Institute of International Economics (PIIE), 128 “The Petition of the Candlemakers” (Bastiat), 152 Petrodollars, 358 Petroleum, 15, 18, 28, 70 PIIE See Peterson Institute of International Economics (PIIE) Plaza Agreement, 338–39 PNTA See Permanent normal trade relations (PNTA) Political gains from trade, 116 Pollution havens hypothesis, 161 www.downloadslide.com 382 Index Pomfret, Richard, 197n Population growth, goods/services due to, availability of, 45 Positive analysis, 25 PPF See Production possibility frontier (PPF) PPP See Purchasing power parity (PPP) Predatory dumping, 180 Preferences CIC and, 33–34 individual and indifference curves, 31–35 Preferential trade arrangements, 193–208 in Africa, 206 in Asia, 207 developing countries, between, 206–7 economic analysis of, 195–97 E.U., 194, 203, 206–8 FTA, 194 impact on welfare, 201 to maximize trade creation, 197 NAFTA, 198–99 Preferential trading relations, 197 Present approach, international monetary system, 274–78 Price adjustment pattern, 54 adjustments, 344, 317 autarky, 38, 39, 48, 55 autarky, ratio, 39, 52n, 55, 72, 86 consumer surplus and, 120 currency, 311 demand and, 36 exchange rates and, 298 growth, welfare, and, 222 mint parity, 265 nominal, 27 quotas and, 142–43 standard deviations of, and exchange rates, 287 supports, 160 Price, international See also International price discrimination; Terms of Trade determining, 35 discrimination, 181 effect of rising, 74 equilibrium, 131 foreign demands effect on, 55 trade triangles and, 53 Price, relative, 27–29, 74n, 311 effect of, 311 elasticities approach to balance of trade and, 318 of energy, 28 market, 35–36 as motivation for change, in human behavior, 28 Pricing to market, 315, 317 Primary-export-led development policies, 211–14 linkage effects, 212 Primary-export-led development strategies, 211 problems, 212 Primary-export-led growth strategies, 212 Private property rights, 353 Producer surplus changes in, 122–23 defined, 121 gains from free trade and, 122–24 Product life cycle, defined, 103 Product life cycle theory, 102–4 Production, 86 factors of, 35–36, 37, 56 factors of, mobility of, 31–33 gains from trade, 54–56 inefficiency in, 29 tariffs and, 124, 127–28 Production gains, 114 Production possibility frontier (PPF) defined, 29 factor abundance, 71n increasing returns to scale and, 107–8 price ratio, 42 Productivity differentials, 93 wages and, 58–60 Products See also Goods categories of, as imports/exports, 18–20 most commonly traded, 15–18 Protection, 151–65 of agriculture, 140, 175 effect, 116, 125–26 effective, 169–70 of environment, 160–62 Invalid arguments, 151–53 national defense argument for, problem with, 157 non economic goals, 156–57 subsidies as, 158–59 valid arguments, 153–65 valid v invalid arguments, 151n Protectionists, 116 policies and E.U., 175 Protective effect, 116 Protrade biased growth, 219 defined, 219 effect on terms of trade, 222 example of, 220 Prusa, Thomas, 184 Pugh, Senta, 93n Purchasing power parity (PPP), 298 See also Absolute PPP of Big Mac, 303 comparisons of standard of living, in open economy, 326n relative v absolute, 300–1 v absolute PPP, 300 of selected countries, 4–5 Put option, 258 Q Quantitative quotas, 140n Quantity definition, 71n Quota(s) See also Specific types auction license, 143–44 auctioned, systems of, 144 consumer surplus and, 182–44 corruption, 145 defined, 114, 139–40 effects of, 142–44 government revenue, 143 on imports/exports, internal/external impacts, 141 licenses, 141–44, 145n, 186 monopolies and, 145 protection, 145 rents, 142–43 rights, 143–44, 145 set at levels greater than zero, 140 v tariffs, 142, 144–45 unallocated global, 141 value, 140 welfare effects of, 142–44 R Real interest rate, 320 Reciprocal demand, 53–54, 56, 64, 66, 75 mechanics of, 77 Reciprocal Trade Agreements Act of 1934, 134, 171, 174 Regional trading agreements circa 2006, 193n Regionalism, 206–8 Reinhart, Carmen M., 282n Relative price, 27 Relative price change, 27 Relative wage ratio, 57, 62 Reserve(s), international, 239–40, 244–45, 260–61, 267, 269 holdings, 272, 364 Reserve-currency, international, 362 Revenue effect, 116 Ricardian model, 75 Ricardian theory See Classical model of international trade Ricardo, David, 43–44, 49–50 www.downloadslide.com Index 383 Ricardo-Viner model, 90 Rice, Patricia, 106n Riezman, Raymond, 153n Risk, 353 See also Specific risks premium, 294, 294n, 295–96 Rogers, John H., 285n, 300n Rogoff, Kenneth, 307n, 340n Romalis, John, 102n, 201, 201n Roosevelt, Franklin D., 134, 171 Rose, Andrew, 15n, 103n Ruffin, Roy J., 106n Rush, Mark, 303n Russia export tariffs on wheat and barley, 130 trading partners of, 15 Rybczynski theorem, 79–80, 87–88, 215n, 222 proof of, 79, 87 S Safeguards protection, 190–91 in NAFTA, 199 Salas, C., 198n Samuelson, Paul, 81n strong factor abundance assumption, 71n Sanitary and Phytosanitary Agreement (SPA), 148 Sarno, Lucio, 293n Saving(s) borrowing, 116 Savvides, Andreas, 282n Schadler, Susan, 363n Scheinkman, José, 83n Schott, Jeffery, 140n, 143n Schott, Peter, 101, 102n Schreyer, Paul, 6n Scott, R., 198n Section 301, 185–86, 187 Section 337, 188 Section 406, 188 Services See also Specific countries and services cross-border trade in, 175 international trade of, 15, 18 limited success in liberalizing, 175 in NAFTA, 199 population growth and availability of, 38 Shang-Jin Wei, 305n Sheets, Nathan, 317n Shock, 338 Short-run exchange rate asset market models, 288–89 Current account balance (CAB) and, 315 IMF conditionality, 363 PPP theory, impact on, 299 uncovered interest rate parity (UIRP) model, 291–92 Similarity of preferences theory, 104 Simpson, David, 93n Singapore categories of exports/imports, 19, 21 openness of economy, 9, 10 trading partners of, 15 Singer, Hans, 212n Single European Act, 203, 204 Single Market Act, 205 Single Market Initiative, 204–5 SITC See Standard International Trade Classification (SITC) code Skilled-labor intensive, 102 Slovak Republic, openness of economy, 10 Small, open economy, 320 Smith, Adam, 43, 44–48, 157 Smith, Stephen, 211n Smithsonian agreement, 273 Smoot-Hawley tariff of 1930, 119n, 133n, 134, 168–70, 170n, 171n aftermath, 134 as logrolling process, 170 Social cost See Opportunity (social) cost Solocha, Andrew, 58–59, 58n Somerville, R A., 364n Sources of Comparative Advantage (Leamer), 100 Southern Cone Common Market (MERCOSUR), 207 SPA See Sanitary and Phytosanitary Agreement (SPA) Spatareanu, Mariana, 104n Special Drawing Rights (SDRs) U.S quota (2011), 362 Specific factors model, 90–91 Specific tariff, 119 Spot exchange rate, 252–54, 256, 260, 289 Spot market, 255, 258, 259 Spot rates, 252–54, 294n Spraos, John, 213n Spread, dollar price, 253 Srinivasan, T N., 145n, 157n Standard deviations of prices and exchange rates, 287 Standard International Trade Classification (SITC) code, 15n Standard of living, 38, 81 See also Per capita GDP (or GNP) GDP measure of, 210 improved, 110, 116 increase/decrease in, 38 trade and, 55 trading partners and, 104 Static gains from trade, 114 Stern, Robert, 93n, 99, 99n, 139n, 157n, 201n Stewart, Martin, 106n Stolper, Wolfgang, 81n Stolper-Samuelson theorem, 81–82 proof of, 88–89 Stonehill, Arthur, 356n Strike price, 258 Subsidy See also Specific types actionable, 184–85 defined, 114 to encourage domestic development, 165 with free trade, 159 GATT agreement and, 172 non-actionable, 184–85 prohibited, 184 v tariff, 158 tariff protection and foreign, 150 welfare effects of domestic production, 158 Supply, 46 classical model and, 76–78 comparative advantage and, 104 general equilibrium model, 34, 38–39 HO model and, 68–72, 76–78 money, 267–68, 344–45, 348–49 Supply and demand curves, 39, 41–42 Sveikauskas, Leo, 101, 101n Swagel, Phillip, 184, 184n, 230n Swan diagram, 336–37 T TAA See Trade adjustment assistance (TAA) Tabellini, Guido, 340n Taffler, R J., 364n Takacs, Wendy, 143n, 144n Tariff(s), 10–11 See also Ad valorem tariff; Compound tariff; Deadweight cost; Export tariffs; Specific tariffs; Specific United States tariffs average across goods for selected countries, 136 Civil War, 170 on consumption, effect of, 124–25, 127 consumption behavior and, 126–27 defined, 114, 116–17 economic analysis of, 120–21 employment levels and, 128–29 escalation, 137 government gains from, 125 government revenue, 116–17 hypothetical elimination of, 129 impact of, 124 import, 116, 125, 127 introduction to, 116–20 www.downloadslide.com 384 Index Tariff(s) (continued) for large country, 131–32 on luxury items, 156 MFN applied rates, for selected countries by product group 2006, 136 monopolies and, 144–45 in NAFTA, 198–99 negotiating power, 168 optimal, 131–35 price supports and, 160 production and, 124–25, 127 prohibitive, 116–17 protection, 151 v quotas, 142, 144–45 rates in developing/developed countries, 136 revenue in developing/developed countries, 116–17 on Russian wheat and barley, 130 v sales tax, 156 schedules, 172–73 size of, 132 v subsidy, 158 war, 133–34 welfare cost of, 124–27, 144–45 Tariff of Abominations, 169 Tariff Act of 1930, 134, 168 Tariff History of the United States (Taussig), 169–70, 170n Tariff of Abominations, 169–71 Tariff rate quotas (TRQs), 141 Tatemoto, M., 99n Taussig, Frank, 169–70, 170n Tax imposition of, 25 income, 153, 168n income redistribution and, 156 income v value added, 153 pollution, 160–61 revenue, 153 sales v tariffs, 156 Taylor, Mark P., 293n, 303n, 304n, 307n Taylor, M, Alan, 300n Technological (technical) change, 221–22 Technology See also Comparative technology parity availability of, 69 international diffusion of, advancement, 115 TED spread, 354 Telmer, Chris, 293n Term structure, 292–94 Terms of trade antitrade biased growth effect on, 220 defined, 24, 51 of developing countries, 213 gains from trade and, 54–56 offer curves and, 64–66 protrade biased growth effect on, 219 Theory, testing validity of, 25 Theory of second best, 159–60 Thomas, Lee, 257n Thompson, Earl, 157n Thursby, Marie, 104n Todaro, Michael, 211n Tokyo Round, 8, 171, 173, 173n Torrens, Robert, 43–44, 49 Trade See also Free trade; International trade; Political gains from trade; Preferential trade arrangements; Static gains from trade absolute advantage as basis for, 44–48 adjustment assistance, 188 assistance programs, 119 barriers, 80, 147–48 bills, 182 in counterfeit goods, 150 creation, 196–97, 201 development and, 211–15 distorting, 116 diversion, 196–97, 201, 207–8 effect of, on payments to various factors of production, 24 foreign monopoly and, 163 imbalances, 46 liberalization, 80 partners, 13–15, 99 patterns, 97 policy initiatives, 167 regional liberalization of, 207–8 strategic policies of, 163–65 in U.S., 82 on U.S wages, impact of, 82 wages and, 56–60 war, 133 Trade Act of 1974, 174, 185 Trade adjustment assistance (TAA), 188 Trade Agreements Act of 1934, 134, 171, 174 Trade Agreements Act of 1979, 174 Trade and Tariff Act of 1984, 174 Trade balance currency-contract period and, 314–15 exchange rates and, 316 Trade Bill of 2002, 173 Trade deficits, 10, 240n, 247 Trade equilibrium, international, 51, 53–54, 66, 75–76 Trade Expansion Act of 1962, 157, 173, 174 Trade Reform Act of 1974, 173, 173n Trade Related Intellectual Property Rights (TRIPs), 150 Trade surpluses, 10, 240, 247, 314 Trade triangle, 216n comparing, 54 congruency property, 75 congruent, 53–54 defined, 53 in international trade equilibrium, 54 Trademarks, 149–50 Transactions classifications, 245–47 Transaction costs, 257, 257n arbitrage, 290 of reserve currency, 352 TransPacific Partnership (TPP), 202 See also Obama, Barack Travis, W P., 97, 97n Trefler, Daniel, 97n, 101, 101n Triffin, Robert, 264n TRIPs See Trade Related Intellectual Property Rights (TRIPs) TRQs See Tariff rate quotas (TRQs) Tuerck, David, 152n, 157, 157n Tullock, Gordon, 145n U U.K See United Kingdom (U.K.) Unconditional most favored nation status, 171 Unemployment compensation, 188 Unfair foreign practices: section 301, 185–86 United Kingdom (U.K.) APL ratio, 93 categories of import/export, 19, 21 as importer/exporter of services, 18 return to gold standard, 269 selected industry exports, 70 trading partners of, 13 United States (U.S.) agricultural policies in, 179 antidumping cases (1980–2006), 183 APL ratio, 93 balance of payments, simplified (2007), 245 balance of trade decreases, 314 capital, flow in, 227 capital/labor ratios, 70, 216–19, 316 categories of import/export, 19, 21 China, agreement with (2005), 141 commercial policy, conduct of, 179–86 commercial policy, history, 168–74 consumer price index, 254 consumption of crude oils (2008), 28 current account deficit, 243–44, 312, 332 dollar value (2000s), 314 economic characteristics of, 200 www.downloadslide.com Index 385 economy (1947), 95–96 embargo on Cuba, 140 employment of nonbank MNCs (2006), 227 environmental laws, 162 E.U and, disputes over health and safety standards, 148 Eurobank spreads and, comparing, 352 evolution of trade laws, 168 farm policy, 160 foreign export subsidy, 150 FTA agreements, 201–2 government debt, 245 history of trade policy, 168–77 immigration 1820–2005, 225 implications of HO model in, economy, 81–82 imports, 201, 255 as importer/exporter of services, 18 inflation rate, 282 international asset position, 242 international trade in, 82 international transactions, 235, 237, 238 Japan, trade flows with, 103n Japan and U.S export patterns, comparison of, 20 Japan-U.S PPP, 301 jobs in, 82 Leontief paradox, 99–100 measure of money supply, 358 Mexico, trade with, 82 multifiber arrangements, 140 NAFTA, 58, 161, 194 openness of economy, 9, 10 outsourcing, 229–30 participation in Tokyo Round, 173 percent of annual consumption of goods and services, 97 percentage of world trade by, 13 ratio of immigrants to total population, 224 selected industry exports, 70 tariff code, 119, 134 tariff reduction under GATT, 174 tariff revenue, 117n tariff schedule for 2012, 117–19 tariff structure, 97 tariffs 1792–2005, 169 trade, technology and, pollution, 162 trade balance effects during currencycontract period following devaluation, 313–14 trade law, 168, 179 trade surplus/deficit, 10 trade with specific countries, 157 trading partners, 13 Treasury bill interest rate, 354 TRQs on specific products, 141 tuna quotas to save dolphins, 177–78 wage and productivity comparisons for Mexico and, 58–59 wages in, 44, 93 welfare costs of tariffs in, estimates from certain industries, 128–29 as world’s largest debtor, 242 United States Department of Commerce (DOC), 182–85 role in antidumping cases, 182 role in countervailing duty law, 184–85 United States International Trade Commission (USITC), 127n, 202 United States trade law, 188–89 Section 337, 188 Section 406, 188 United States Trade Representative (USTR), 185–86 United States-Australia Free Trade Area, 202 United States-Chile Free Trade Area, 202 United States-Israel Free Trade Area, 201 United States-Singapore Free Trade Area, 202 Uncovered interest parity, 294–96 Undervalued currency, 302 Upstream subsidy, 184 Uruguay Round, 8, 128, 140, 173, 173n, 184, 208 achievement of, 175n, 176 completion of, 179 government procurement policies and, 146–47 intellectual property rights and, 149–50 WTO, and creation of, 175–77 WTO/GATT and, 171 Urzua, Carlos, 213n U.S See United States (U.S.) USITC See United States International Trade Commission (USITC) USTR See United States Trade Representative (USTR) V Valderrama, Diego, 317n Valente, Giorgio, 293n Value marginal product of labor, 230 van Wijnbergen, Sweder, 224n Vanek, Jaroslav, 83n, 97, 97n, 100 Venebles, Anthony, 106n VER See Voluntary export restraint (VER) Verbal economic model, 24 Vernon, Raymond, 102, 102n Vietnam, bans on rice export, 130 Voluntary export restraint (VER), 144 Von Haberler, Gottfried, 151n, 152n Vousden, Neil, 165n W Wages classical model of international trade and, 56–60 comparative advantage and, 57 in developing countries, 58 immigration and, 232 payment, 68 productivity and, 58–59 relative ratio, 57, 62 to rental payments, 71n trade and, 56–60, 82 U.S., 44, 93 Wahl, D., 100n Walras Law, 53 War of 1812, 168, 170 Warner, Andrew, 229n Warr, Peter, 224n Waschik, Robert, 144n The Wealth of Nations (Smith), 44, 44n, 157 Weinstein, David E., 9n, 102n Welfare, 36–38, 222–23 analysis of FTA, 196 congress and, 180 cost of tariffs, 124–27, 128–29, 133 effects of domestic production subsidy, 158 effects of free trade, 36, 110 effects of quotas, 142–44 effects of VER, 144 export tariffs, impact of, 127–30 free trade and, 36, 110, 123–24 FTA analysis, 196 GDP measure for national, 36–38 international trade, effects of, 110 measuring, 36–38 patriotism and, 151–52 price and, 222–23 quotas, impact of, 142–44 raising domestic, 163 summary of, in export market towards free trade, 124 summary of, in import market towards free trade, 123 trade creation and, 196 U.S., estimated costs of tariffs in, 128–29 Williams, James, 83n Winters, L Alan, 139n, 175n Wood, Geoffrey, 139n Workhorse model See Mundell-Fleming model World trade, petroleum, 15 www.downloadslide.com 386 Index World Trade Organization (WTO), 18n, 140 agreement on government procurement, 147 “Buy American” provisions, 147 article VII, 146 basic rules of, 176 countervailing duties, 190–91 creation of, and Uruguay Round, 175–77 cross-border trade, 175 dispute panel See also Case studies, U.S tuna quotas to save dolphin dispute settlement procedures, 176, 284 dispute settlement system 2008, 176–77 environment and, 187 health and safety agreement, 148 members (2012), 176, 188–89 panel decisions, 176 rules, 176–77, 179, 187 technical barriers to trade, agreement, 147–48 trade policies and, 162, 187 Uruguay Round and, 171, 175–77 World War II, 95–96, 206, 220, 270, 273 World Watch Institute, 97, 97n WTO See World Trade Organization (WTO) Y Yeager, Leland, 152n, 157, 157n Yeats, Alexander, 139n Yin-Wong Cheung, 305n Yoon-Bai Kim, 303n Z Zhu, Susan, 103n www.downloadslide.com This page intentionally left blank www.downloadslide.com The Nighttime Lights of the World dataset was compiled from satellite orbits The lights depict the areas on earth with major human settlements One can also interpret the map as showing the most developed regions with bright lights relative to less developed regions Image and data processing by NOAA’s National Geophysical Data Center DMSP date collected by U.S Air Force Weather Agency www.downloadslide.com www.downloadslide.com For this map, economies are classified by income group Low-income economies are those with a GNP per capita of US$995 or less in 2009; lower middle-income, US$996–$3,945; upper middle-income, $3,946–$12,195; and highincome, US$12,196 or more Map created based on data and classifications from page 341 of the 2011 World Development Report The World Bank: World Development Indicators (WDI) 2010: World Development Report 2011 http://wdr2011.worldbank.org/sites/default/files/WDR2011_Indicators.pdf www.downloadslide.com ... Waldman/Jensen Macroeconomics The Economics of Macro Issues The Age of the Economist The Economics of Public Issues Gerber International Economics* Urban Economics González-Rivera Forecasting for Economics. . .International Economics The Pearson Series in Economics Abel/Bernanke/Croushore Hartwick/Olewiler Macroeconomics* The Economics of Natural Resource Use Bade/Parkin Foundations of Economics* ... all caps Library of Congress Cataloging-in-Publication Data Husted, Steven L International economics/ Steven Husted, Michael Melvin. 9th ed p cm Includes bibliographical references and index