(BQ) Part 2 book “International economics” has contents: Money, interest rates, and exchange rates, output and the exchange rate in the short run, fixed exchange rates and foreign exchange intervention, optimum currency areas and the euro, price levels and the exchange rate in the long run,… and other contents.
CHAPTER 14 Exchange Rates and the Foreign Exchange Market: An Asset Approach O ver the seven years between mid-2007 and mid-2014, the U.S dollar’s price against a basket of major foreign currencies remained roughly constant (despite a temporary rise in the spring of 2009) In the year and a half between mid-2014 and the start of 2016, however, the dollar’s value suddenly rose by a whopping 25 percent What changes in the U.S and world economy could possibly have driven such a dramatic change in the foreign exchange market? In this chapter we will begin our study of the causes and effects of exchange rate changes The price of one currency in terms of another is called an exchange rate At p.m London time on January 19, 2017 you would have needed 1.0612 dollars to buy one unit of the European currency, the euro, so the dollar’s exchange rate against the euro was $1.0612 per euro Because of their strong influence on the current account and other macroeconomic variables, exchange rates are among the most important prices in an open economy Because an exchange rate, the price of one country’s money in terms of another’s, is also an asset price, the principles governing the behavior of other asset prices also govern the behavior of exchange rates As you will recall from Chapter 13, the defining characteristic of an asset is that it is a form of wealth, a way of transferring purchasing power from the present into the future The price an asset commands today is therefore directly related to the purchasing power over goods and services that buyers expect it to yield in the future Similarly, today’s dollar/euro exchange rate is closely tied to people’s expectations about the future level of that rate Just as the price of Google stock rises immediately upon favorable news about Google’s future prospects, so exchange rates respond immediately to any news concerning future currency values Our general goals in this chapter are to understand the role of exchange rates in international trade and to understand how exchange rates are determined To begin, we first learn how exchange rates allow us to compare the prices of different countries’ goods and services Next, we describe the international asset market in which currencies are traded and show how equilibrium exchange rates are 378 CHAPTER 14 ■ Exchange Rates and the Foreign Exchange Market: An Asset Approach 379 determined in that market A final section underlines our asset market approach by showing how today’s exchange rate responds to changes in the expected future values of exchange rates LEARNING GOALS After reading this chapter, you will be able to: ■■ ■■ ■■ ■■ ■■ Relate exchange rate changes to changes in the relative prices of countries’ exports Describe the structure and functions of the foreign exchange market Use exchange rates to calculate and compare returns on assets denominated in different currencies Apply the interest parity condition to find equilibrium exchange rates Find the effects of interest rates and expectation shifts on exchange rates Exchange Rates and International Transactions Exchange rates play a central role in international trade because they allow us to compare the prices of goods and services produced in different countries A consumer deciding which of two American cars to buy must compare their dollar prices, for example, $44,500 (for a Lincoln Continental) or $27,000 (for a Ford Taurus) But how is the same consumer to compare either of these prices with the 3,500,000 Japanese yen it costs to buy a Nissan Leaf from Japan? To make this comparison, he or she must know the relative price of dollars and yen The relative prices of currencies can be viewed in real time on the Internet Exchange rates are also reported daily in newspapers’ financial sections Table 14-1 shows the dollar, euro, and pound exchange rates for currencies reported in the Financial Times on January 20, 2017 (these rates correspond to the ones quoted in London at p.m of the previous day, January 19, 2017) An exchange rate can be quoted in two ways: as the price of the foreign currency in terms of dollars (for example, $1.0612 per euro) or as its inverse, the price of dollars in terms of the foreign currency (for example, €0.9424 per dollar) The first of these exchange rate quotations (dollars per foreign currency unit) is said to be in direct (or “American”) terms; the second (foreign currency units per dollar) is in indirect (or “European”) terms.1 Households and firms use exchange rates to translate foreign prices into domestic currency terms Once the money prices of domestic goods and imports have been expressed in terms of the same currency, households and firms can compute the relative prices that affect international trade flows Domestic and Foreign Prices If we know the exchange rate between two countries’ currencies, we can compute the price of one country’s exports in terms of the other country’s money For example, how many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing The “mid” rates shown are the average of “bid” and “ask” prices for the U.S dollar Generally, a buyer of dollars will pay more (the ask price) than a seller will receive (the bid price) due to costs of intermediating the trade (for example by a bank or broker) The difference—the bid-ask spread—is a measure of transaction costs In Chapter 19, we will refer to “effective” exchange rate indexes, which are averages of exchange rates against individual trading partner currencies 380 Part THREE ■ Exchange Rates and Open-Economy Macroeconomics TABLE 14-1 Exchange Rate Quotations Source: Financial Times, January 20, 2017 50 British pounds (£50)? The answer is found by multiplying the price of the sweater in pounds, 50, by the price of a pound in terms of dollars—the dollar’s exchange rate against the pound At an exchange rate of $1.50 per pound (expressed in American terms), the dollar price of the sweater is (1.50+ >£) * (£50) = +75 A change in the dollar/pound exchange rate would alter the sweater’s dollar price At an exchange rate of 1.25 per pound, the sweater would cost only (1.25+ >£) * (£50) = +62.50, assuming its price in terms of pounds remained the same At an exchange rate of $1.75 per pound, the sweater’s dollar price would be higher, equal to (1.75+ >£) * (£50) = +87.50 Changes in exchange rates are described as depreciations or appreciations A depreciation of the pound against the dollar is a fall in the dollar price of pounds, for example, a change in the exchange rate from $1.50 per pound to $1.25 per pound The preceding example shows that all else equal, a depreciation of a country’s currency makes its goods cheaper for foreigners A rise in the pound’s price in terms of dollars—for example, from $1.50 per pound to $1.75 per pound—is an appreciation of the pound against the dollar All else equal, an appreciation of a country’s currency makes its goods more expensive for foreigners The exchange rate changes discussed in the example simultaneously alter the prices Britons pay for American goods At an exchange rate of $1.50 per pound, the pound price of a pair of American designer jeans costing $45 is (+45)>(1.50+ >£) = £30 CHAPTER 14 ■ Exchange Rates and the Foreign Exchange Market: An Asset Approach 381 A change in the exchange rate from $1.50 per pound to $1.25 per pound, while a depreciation of the pound against the dollar, is also a rise in the pound price of dollars, an appreciation of the dollar against the pound This appreciation of the dollar makes the American jeans more expensive for Britons by raising their pound price from £30 to (+45)>(1.25+ >£) = £36 The change in the exchange rate from $1.50 per pound to $1.75 per pound—an appreciation of the pound against the dollar but a depreciation of the dollar against the pound—lowers the pound price of the jeans from £30 to (+45)>(1.75+ >£) = £25.71 As you can see, descriptions of exchange rate changes as depreciations or appreciations can be bewildering because when one currency depreciates against another, the second currency must simultaneously appreciate against the first To avoid confusion in discussing exchange rates, we must always keep track of which of the two currencies we are examining has depreciated or appreciated against the other If we remember that a depreciation of the dollar against the pound is at the same time an appreciation of the pound against the dollar, we reach the following conclusion: When a country’s currency depreciates, foreigners find that its exports are cheaper and domestic residents find that imports from abroad are more expensive An appreciation has opposite effects: Foreigners pay more for the country’s products and domestic consumers pay less for foreign products Exchange Rates and Relative Prices Import and export demands, like the demands for all goods and services, are influenced by relative prices, such as the price of sweaters in terms of designer jeans We have just seen how exchange rates allow individuals to compare domestic and foreign money prices by expressing them in a common currency unit Carrying this analysis one step further, we can see that exchange rates also allow individuals to compute the relative prices of goods and services whose money prices are quoted in different currencies An American trying to decide how much to spend on American jeans and how much to spend on British sweaters must translate their prices into a common currency to compute the price of sweaters in terms of jeans As we have seen, an exchange rate of $1.50 per pound means that an American pays $75 for a sweater priced at £50 in Britain Because the price of a pair of American jeans is $45, the price of a sweater in terms of a pair of jeans is (+75 per sweater)>(+45 per pair of jeans) = 1.67 pairs of jeans per sweater Naturally, a Briton faces the same relative price of (£50 per sweater)>(£30 per pair of jeans) = 1.67 pairs of jeans per sweater Table 14-2 shows the relative prices implied by exchange rates of $1.25 per pound, $1.50 per pound, and $1.75 per pound, on the assumption that the dollar price of jeans and the pound price of sweaters are unaffected by the exchange rate changes To test your understanding, try to calculate these relative prices for yourself and confirm that the outcome of the calculation is the same for a Briton and for an American 382 Part THREE ■ Exchange Rates and Open-Economy Macroeconomics +>£ TABLE 14-2 Exchange Rates and the Relative Price of American Designer Jeans and British Sweaters Exchange rate +>£ Relative price (pairs of jeans/sweater) 1.25 1.39 1.50 1.67 1.75 1.94 Note: The above calculations assume unchanged money prices of $40 per pair of jeans and £50 per sweater The table shows that if the goods’ money prices not change, an appreciation of the dollar against the pound makes sweaters cheaper in terms of jeans (each pair of jeans buys more sweaters) while a depreciation of the dollar against the pound makes sweaters more expensive in terms of jeans (each pair of jeans buys fewer sweaters) The computations illustrate a general principle: All else equal, an appreciation of a country’s currency raises the relative price of its exports and lowers the relative price of its imports Conversely, a depreciation lowers the relative price of a country’s exports and raises the relative price of its imports The Foreign Exchange Market Just as other prices in the economy are determined by the interaction of buyers and sellers, exchange rates are determined by the interaction of the households, firms, and financial institutions that buy and sell foreign currencies to make international payments The market in which international currency trades take place is called the foreign exchange market The Actors The major participants in the foreign exchange market are commercial banks, corporations that engage in international trade, nonbank financial institutions such as assetmanagement firms and insurance companies, and central banks Individuals may also participate in the foreign exchange market—for example, the tourist who buys foreign currency at a hotel’s front desk—but such cash transactions are an insignificant fraction of total foreign exchange trading We now describe the major actors in the market and their roles Commercial banks Commercial banks are at the center of the foreign exchange market because almost every sizable international transaction involves the debiting and crediting of accounts at commercial banks in various financial centers Thus, the vast majority of foreign exchange transactions involve the exchange of bank deposits denominated in different currencies Let’s look at an example Suppose ExxonMobil Corporation wishes to pay €160,000 to a German supplier First, ExxonMobil gets an exchange rate quotation from its own commercial bank, the Third National Bank Then it instructs Third National to debit ExxonMobil’s dollar account and pay €160,000 into the supplier’s account at a German bank If the exchange rate quoted to ExxonMobil by Third National is $1.2 per euro, +192,000 (= +1.2 per euro * :160,000) is debited from ExxonMobil’s account The final result of the transaction is the exchange of a $192,000 deposit at Third National Bank (now owned by the German bank that supplied the euros) for the €160,000 deposit used by Third National to pay ExxonMobil’s German supplier CHAPTER 14 ■ Exchange Rates and the Foreign Exchange Market: An Asset Approach 383 As the example shows, banks routinely enter the foreign exchange market to meet the needs of their customers—primarily corporations In addition, a bank will also quote to other banks exchange rates at which it is willing to buy currencies from them and sell currencies to them Foreign currency trading among banks—called interbank trading—accounts for much of the activity in the foreign exchange market In fact, the exchange rates listed in Table 14-1 are interbank rates, the rates banks charge each other No amount less than $1 million is traded at those rates The rates available to corporate customers, called “retail” rates, are usually less favorable than the “wholesale” interbank rates The difference between the retail and the wholesale rates is the bank’s compensation for doing the business EXCHANGE RATES, AUTO PRICES, AND CURRENCY WARS A utomobiles make up a significant share of international trade, and many advanced economies are significant exporters as well as importers of cars Competition is fierce—the United States exports Fords, Sweden exports Volvos, Germany exports BMWs, Japan exports Hondas, and Britain exports Land Rovers, to name just a few—and increased auto imports from abroad are likely to mean fewer sales for the domestic producer Exchange rates are therefore of critical importance to automakers For example, when Korea’s currency, the won, appreciates in the foreign exchange market, this hurts Korean producers in two distinct ways First, the prices of competing imported cars go down because foreign prices look lower when measured in terms of won Thus, imports flood in and create a more competitive home pricing environment for Korean producers like Hyundai and Kia Second, foreigners (whose currencies have depreciated against the won) find that the home-currency prices of Korean cars have risen, and they switch their purchases to cheaper suppliers Korean auto exports suffer as a result Later in the book (Chapter 16) we will discuss the pricing strategies that producers of specialized products like autos may adopt when trying to defend market shares in the face of exchange rate changes These effects of exchange rates on manufacturing producers explain why export industries complain when foreign countries adopt policies that * weaken their currencies In September 2010, as many industrial countries’ currencies depreciated because of slow economic growth, Brazil’s finance minister accused the richer countries of waging “currency wars” against the poorer emerging market economies After reading Chapter 17, you will understand why sluggish economic growth and currency depreciation might go together Chapter 18 discusses how a similar phenomenon of “competitive depreciation” occurred during the Great Depression of the 1930s Talk of currency wars emerged once again when Japan’s yen depreciated sharply early in 2013, as the Japanese government announced new monetary policies likely to weaken the yen Of course, Japanese auto firms were major beneficiaries, at the expense of their many foreign competitors According to an Associated Press (AP) report in May 2013, Nissan was able to cut the dollar prices of of the 18 models it sells in the United States: At the new dollar exchange rate of the yen, even somewhat lower dollar prices produced enough yen revenue to cover Japanese production costs as well as higher yen profits Nissan cut the price of its Altima by $580 and that of its Armada SUV by $4,400 As the AP reported, “Although Nissan denies it, industry analysts say the company can afford to cut prices because of efforts in Japan to weaken the yen against the dollar That makes cars and parts made in Japan cheaper than goods made in the U.S.”* “Nissan Cuts Prices on of Its U.S Models,” USA Today, May 1, 2013, available at: http://www.usatoday.com/story/ money/cars/2013/05/01/nissan-cuts-prices-juke/2127721/ 384 Part THREE ■ Exchange Rates and Open-Economy Macroeconomics Because their international operations are so extensive, large commercial banks are well suited to bring buyers and sellers of currencies together A multinational corporation wishing to convert $100,000 into Swedish kronor might find it difficult and costly to locate other corporations wishing to sell the right amount of kronor By serving many customers simultaneously through a single large purchase of kronor, a bank can economize on these search costs Corporations Corporations with operations in several countries frequently make or receive payments in currencies other than that of the country in which they are headquartered To pay workers at a plant in Mexico, for example, IBM may need Mexican pesos If IBM has only dollars earned by selling computers in the United States, it can acquire the pesos it needs by buying them with its dollars in the foreign exchange market Nonbank financial institutions Over the years, deregulation of financial markets in the United States, Japan, and other countries has encouraged nonbank financial institutions such as mutual funds to offer their customers a broader range of services, many of them indistinguishable from those offered by banks Among these have been services involving foreign exchange transactions Institutional investors such as pension funds often trade foreign currencies So insurance companies Hedge funds, which cater to very wealthy individuals and are not bound by the government regulations that limit mutual funds’ trading strategies, trade actively in the foreign exchange market Central banks In the last chapter, we learned that central banks sometimes intervene in foreign exchange markets While the volume of central bank transactions is typically not large, the impact of these transactions may be great The reason for this impact is that participants in the foreign exchange market watch central bank actions closely for clues about future macroeconomic policies that may affect exchange rates Government agencies other than central banks may also trade in the foreign exchange market, but central banks are the most regular official participants Characteristics of the Market Foreign exchange trading takes place in many financial centers, with the largest volumes of trade occurring in such major cities as London (the largest market), New York, Tokyo, Frankfurt, and Singapore The worldwide volume of foreign exchange trading is enormous, and it has ballooned in recent years In April 1989, the average total value of global foreign exchange trading was close to $600 billion per day A total of $184 billion was traded daily in London, $115 billion in the United States, and $111 billion in Tokyo Twenty-four years later, in April 2013, the daily global value of foreign exchange trading had jumped to around $5.3 trillion A total of $2.72 trillion was traded daily in Britain, $1.26 trillion in the United States, and $374 billion in Japan.2 Telephone, fax, and Internet links among the major foreign exchange trading centers make each a part of a single world market on which the sun never sets Economic news April 1989 figures come from surveys carried out simultaneously by the Federal Reserve Bank of New York, the Bank of England, the Bank of Japan, the Bank of Canada, and monetary authorities from France, Italy, the Netherlands, Singapore, Hong Kong, and Australia The April 2013 survey was carried out by 53 central banks Revised figures are reported in “Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2013,” Bank for International Settlements, Basel, Switzerland, February 2014 Daily U.S foreign currency trading in 1980 averaged only around $18 billion CHAPTER 14 ■ Exchange Rates and the Foreign Exchange Market: An Asset Approach 385 released at any time of the day is immediately transmitted around the world and may set off a flurry of activity by market participants Even after trading in New York has finished, New York–based banks and corporations with affiliates in other time zones can remain active in the market Foreign exchange traders may deal from their homes when a late-night communication alerts them to important developments in a financial center on another continent The integration of financial centers implies that there can be no significant difference between the dollar/euro exchange rate quoted in New York at a.m and the dollar/euro exchange rate quoted in London at the same time (which corresponds to p.m London time) If the euro were selling for $1.1 in New York and $1.2 in L ondon, profits could be made through arbitrage, the process of buying a currency cheap and selling it dear At the prices listed above, a trader could, for instance, purchase €1 million in New York for $1.1 million and immediately sell the euros in London for $1.2 million, making a pure profit of $100,000 If all traders tried to cash in on the opportunity, however, their demand for euros in New York would drive up the dollar price of euros there, and their supply of euros in London would drive down the dollar price of euros there Very quickly, the difference between the New York and London exchange rates would disappear Since foreign exchange traders carefully watch their computer screens for arbitrage opportunities, the few that arise are small and very short-lived While a foreign exchange transaction can match any two currencies, most transactions (87 percent in April 2013) are exchanges of foreign currencies for U.S dollars This is true even when a bank’s goal is to sell one nondollar currency and buy another! A bank wishing to sell Swiss francs and buy Israeli shekels, for example, will usually sell its francs for dollars and then use the dollars to buy shekels While this procedure may appear roundabout, it is actually cheaper for the bank than the alternative of trying to find a holder of shekels who wishes to buy Swiss francs The advantage of trading through the dollar is a result of the United States’ importance in the world economy Because the volume of international transactions involving dollars is so great, it is not hard to find parties willing to trade dollars against Swiss francs or shekels In contrast, relatively few transactions require direct exchanges of Swiss francs for shekels.3 Because of its pivotal role in so many foreign exchange deals, the U.S dollar is sometimes called a vehicle currency A vehicle currency is one that is widely used to denominate international contracts made by parties who not reside in the country that issues the vehicle currency It has been suggested that the euro, which was introduced at the start of 1999, could evolve into a vehicle currency on a par with the dollar By April 2013, about 33 percent of foreign exchange trades were against euros—less than half the share of the dollar, and significantly below the figure of 39 percent clocked three years earlier Japan’s yen is the third most important currency, with a market share of 23 percent (out of 200, because two currencies are necessary for every foreign exchange trade) The pound sterling, once second only to the dollar as a key international currency, has declined greatly in importance.4 The Swiss franc/shekel exchange rate can be calculated from the dollar/franc and dollar/shekel exchange rates as the dollar/shekel rate divided by the dollar/franc rate If the dollar/franc rate is $0.80 per franc and the dollar/ shekel rate is $0.20 per shekel, then the Swiss franc/shekel rate is (0.20+ shekel)>(0.80+ franc) = 0.25 Swiss francs/shekel Exchange rates between nondollar currencies are called “cross rates” by foreign exchange traders For a more detailed discussion of vehicle currencies, see Richard Portes and Hélène Rey, “The Emergence of the Euro as an International Currency,” Economic Policy 26 (April 1998), pp 307–343 Data on currency shares come from the Bank for International Settlements, op cit., table For an assessment of the future roles of the dollar and the euro, see the essays in Jean Pisani-Ferry and Adam S Posen, eds., The Euro at Ten: The Next Global Currency? (Washington, D.C.: Peterson Institute for International Economics, 2009) These essays were written before the euro area crisis, to be discussed in Chapter 21 386 Part THREE ■ Exchange Rates and Open-Economy Macroeconomics Spot Rates and Forward Rates The foreign exchange transactions we have been discussing take place on the spot: Two parties agree to an exchange of bank deposits and execute the deal immediately Exchange rates governing such “on-the-spot” trading are called spot exchange rates, and the deal is called a spot transaction Foreign exchange deals sometimes specify a future transaction date—one that may be 30 days, 90 days, 180 days, or even several years away The exchange rates quoted in such transactions are called forward exchange rates In a 30-day forward transaction, for example, two parties may commit themselves on April to a spot exchange of £100,000 for $155,000 on May The 30-day forward exchange rate is therefore $1.55 per pound, and it is generally different from the spot rate and from the forward rates applied to different future dates When you agree to sell pounds for dollars on a future date at a forward rate agreed on today, you have “sold pounds forward” and “bought dollars forward.” The future date on which the currencies are actually exchanged is called the value date.5 Table 14-1 shows forward exchange rates for some major currencies Forward and spot exchange rates, while not necessarily equal, move closely together, as illustrated for monthly data on dollar/pound rates in Figure 14-1 Exchange rates ($/£) 2.2 Spot rate 2.0 1.8 1.6 1.4 Forward rate 1.2 1.0 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2016 Pearson MyLab Economics Real-time data FIG U R E 14-1 Dollar/Pound Spot and Forward Exchange Rates, 1983–2016 Spot and forward exchange rates tend to move in a highly correlated fashion Source: Datastream Rates shown are 90-day forward exchange rates and spot exchange rates, at end of month In days past, it would take up to two days to settle even spot foreign exchange transactions In other words, the value date for a spot transaction was actually two days after the deal was struck Nowadays, most spot trades of major currencies settle on the same day CHAPTER 14 ■ Exchange Rates and the Foreign Exchange Market: An Asset Approach 387 The appendix to this chapter, which discusses how forward exchange rates are determined, explains this close relationship between movements in spot and forward rates An example shows why parties may wish to engage in forward exchange transactions Suppose Radio Shack knows that in 30 days it must pay yen to a Japanese supplier for a shipment of radios arriving then Radio Shack can sell each radio for $100 and must pay its supplier ¥9,000 per radio; its profit depends on the dollar/ yen exchange rate At a spot exchange rate of $0.0105 per yen, Radio Shack would pay (+0.0105 per yen) * (¥9,000 per radio) = +94.50 per radio and would therefore make $5.50 on each radio imported But Radio Shack will not have the funds to pay the supplier until the radios arrive and are sold If over the next 30 days the dollar unexpectedly depreciates to $0.0115 per yen, Radio Shack will have to pay (+0.0115 per yen) * (¥9,000 per radio) = +103.50 per radio and so will take a $3.50 loss on each To avoid this risk, Radio Shack can make a 30-day forward exchange deal with Bank of America If Bank of America agrees to sell yen to Radio Shack in 30 days at a rate of $0.0107, Radio Shack is assured of paying exactly (+0.0107 per yen) * (¥9,000 per radio) = +96.30 per radio to the supplier By buying yen and selling dollars forward, Radio Shack is guaranteed a profit of $3.70 per radio and is insured against the possibility that a sudden exchange rate change will turn a profitable importing deal into a loss In the jargon of the foreign exchange market, we would say that Radio Shack has hedged its foreign currency risk From now on, when we mention an exchange rate but don’t specify whether it is a spot rate or a forward rate, we will always be referring to the spot rate Foreign Exchange Swaps A foreign exchange swap is a spot sale of a currency combined with a forward repurchase of that currency For example, suppose the Toyota auto company has just received $1 million from American sales and knows it will have to pay those dollars to a California supplier in three months Toyota’s asset-management department would meanwhile like to invest the $1 million in euro bonds A three-month swap of dollars into euros may result in lower brokers’ fees than the two separate transactions, possibly with different parties, of selling dollars for spot euros and selling the euros for dollars on the forward market Swaps make up a significant proportion of all foreign exchange trading Futures and Options Several other financial instruments traded in the foreign exchange market, like forward contracts, involve future exchanges of currencies The timing and terms of the exchanges can differ, however, from those specified in forward contracts, giving traders additional flexibility in avoiding foreign exchange risk When you buy a futures contract, you buy a promise that a specified amount of foreign currency will be delivered on a specified date in the future A forward contract between you and some other private party is an alternative way to ensure that you receive the same amount of foreign currency on the date in question But while you have no choice about fulfilling your end of a forward deal, you can sell your futures contract on an organized futures exchange, realizing a profit or loss right away Such a sale might appear advantageous, for example, if your views about the future spot exchange rate were to change A foreign exchange option gives its owner the right to buy or sell a specified amount of foreign currency at a specified price at any time up to a specified expiration date The other 788 Index Demand (Continued) current account balance and, 351, 356–360, 489 derived, 70 elasticities in, 531–533 for foreign currency assets, 388–396 import demand curves, 244–245, 245f for labor, 70–72, 71f labor allocation and, 85–89 long-run real exchange rate and, 471–474 market equilibrium and, 204–205 market size and, 218–220 optimum tariffs and, 308 real exchange rates and, 475–476 relative, 59–60 relative prices and, 153–157 trading world economy equilibrium and, 768–775 DeMarco, Laurie Pounder, 661n Deng Xiaoping, 322 Denmark corruption level in, 729n inflation convergence in, 688f Maastricht Treaty and, 690n Deposit insurance, 652–653, 658 Depreciation, 353 devaluation vs., 546n exchange rate, 380–381 monetary approach to exchange rate and, 455–456 output effects of, 494–495, 495f rate of, exchange rate, rate of return and, 392–394 real, 470–471 Derived demand, 70 Desai, Mihir, 234n Deutsche Bank, 648, 705t Devaluation, 546–547, 547f capital flight and, 550 under IMF, 600–601 Developing countries, 47, 720–763 agricultural subsidies and, 298 alternative forms of financial inflow to, 734–735 Asian takeoff, 321–323, 321f, 322f borrowing and debt by, 730–741 capital paradoxes in, 755–757 clothing industry in, 335 debt crisis of the 2,008s, 737–738 defaults by, 732–734 definition of, 311n East Asian crises and growth, 741–748 export patterns for, 140–142, 141f, 142f exports of, 48f financial inflows to, 731–732 fixed exchange rates and, 535–536 free trade gains in, 276 global capital flows and income distribution and, 754–759 in global economic growth, 724–725, 725f growth of, advanced nations and, 164–166 import-substituting industrialization in, 311, 312–319 income, wealth, and growth in, 721–725 income inequality and North-South trade, 128–130 international financial “architecture” and, 749–753 international reserves in, 742–744, 743f labor standards in, 338 lessons from crises in, 748–749 low-wage labor in, 335–341 money supply and price level increases in, 432, 433f original sin and, 735–737 price levels in, 467–469 purchasing power parity in, 467–469 structural features of, 725–730 tariff rates in, 319f trade liberalization in, 319–320, 320f trade policy in, 311–325 wages in, 336–337 Dexia, 705t Diaz-Alejandro, Carlos F., 740n Differentiated products, 202 Diminishing returns, 82–83, 83f Direct exchange rate quotations, 379 Disinflation, in 2,000–2,010, 614–618 Disposable income, current account and, 491, 491t Dissaving, 354 Distance, as trade barrier, 42–45 Distortion loss consumption, 254 production, 254 Dividends, 417n Dodd-Frank Act of 2,038, 666, 667 Doha Round, 292, 297–299 Dollar, U.S as convertible currency, 599–600 international currency and, 564–565 Plaza Accord and, 618 Dollar rate of return, 389, 391 euro deposits and, 393–395, 395t Dollar standard, 559 Dollarization, 737n, 751, 760 Domestic absorption, 357n Domestic credit, 555n Domestic market failures argument against free trade, 279–282, 280f Dominguez, Kathryn M., 557n Dong He, 389n Dooley, Michael, 630n Doom loop, 710–712 Dorn, David, 345–346 Dornbusch, Rudiger, 462n, 519n, 734n, 739n, 740n Dot-com crash, 621–622 Downs, Anthony, 283n Draghi, Mario, 713 Dumping, 222–224 Duty-free shops, 472 Dynamic gains, 276n, 295 Dynamic increasing returns, 191–192, 191f E East Asian economic growth, 741–748 ECB See European Central Bank (ECB) Economic and monetary union (EMU), 681, 689–690 convergence criteria and, 691–692 euro crisis and, 704–713 extent of intra-European trade and, 701–702 future of, 714 labor force mobility and, 702–703, 704t members of the, 682f Economic and monetary Union (EMU), 683t Economic development See also Developing countries manufacturing and, 311–312 Economic geography, 192–194 Economic growth, 160–162 ACP countries, 282 biased, 160–162, 161f developing countries in, 724–725, 725f environmental issues from, 341–343 international effects of, 163–166 of Mexico vs U.S., 164–166, 165f standard trade model on, 160–163 world relative supply and terms of trade, 162–163, 162f world trade economy equilibrium and, 772–773 Economic inefficiencies, 730n Economic integration, 208–212, 211f winners and losers from, 218–220, 219f Economic isolation, autarky, 64 Economic policy, euro and, 690–692 Economic reforms, sequence of, 749 Economic resilience, 627–628 Economic stability loss, 695–698 Economic welfare, 721, 722t Economies of scale, 73, 179–197 definition of, 180 external, 181–182 foreign direct investment and, 229–230 internal, 181–182, 198 international trade and, 186–192 interregional trade and, 192–194 knowledge spillovers and, 182, 184–185 labor market pooling and, 182, 183–184 market equilibrium and, 185, 185f market structure and, 181–182 outsourcing and, 232 specialized suppliers and, 182–183 Education East Asian miracle and, 746 Edwards, Lawrence, 129n Edwards, Sebastian, 740n Efficiency case for free trade, 275, 275f Efficiency loss, 252, 254f Égert, Balázs, 702n Eichenbaum, Martin, 523 Eichengreen, Barry, 597n, 625n, 632n, 736 Elasticities, trade, 531–533 Electoral competition, trade policy and, 283–284, 283f, 285 U.S steel tariffs and, 296–297 Elliott, Kimberly Ann, 338 Emerging markets commodity prices and, 727–728 financial regulation in, 659–660 swap lines to, 665 Employment See also Internal balance economic policies and, 349–350 full, price level stability and, 581–582 in high-tech industries, 332 offshoring and, 233–235 output per capita and, 723t policies to maintain full, 506–507, 506f, 508f political economy of trade and, 95–100 tariff-rate quota, 260 in tradable industries, 48–49, 49f in U.S manufacturing, 329f EMU See Economic and monetary union (EMU) Engel, Charles, 467n, 674n, 702 Engerman, Stanley L., 757n English Premiere League (EPL), 194– 195 Englund, Peter, 657n Entertainment industry exports, 339 Environmental issues gasoline dispute between Venezuela and the U.S., 295 globalization and, 338–339 Kuznets curve and, 341–342, 342f trade policies and, 326 Environmental issues, trade policies and, 341–345 carbon tariffs, 326, 344–345 economic growth and, 341–343 pollution havens, 343–344 Environmental Kuznets curve, 341–342, 342f Equalization of factor prices, 135–136 Equilibrium asset market, in the short run, 499–502 balance of payments, 590 foreign exchange market, 396–406 foreign exchange market, under fixed exchange rate, 541 foreign exchange market, with imperfect asset substitutability, 555–557, 572–574 interest parity and, 396–397 long-run, 430–434 market integration and, 208–212, 210f money market, under fixed exchange rate, 541–542 for open economies, short-run, 502–504, 503f output market, in the short run, 494–499 short-run, for open economies, 499–504 stability of, 770–772 trading world economy, 768–775 Equilibrium exchange rate, 399–401, 400f Equilibrium interest rate, 171, 171f money supply and, 420–423, 424f Equilibrium number of firms, 206 Equilibrium real exchange rate, 474 Equilibrium relative prices, 60, 158, 159f Equity capital inflows, 752–753 Equity instruments, 646–647, 735 Erste Group Bank, 705t Erten, Bilge, 727n Euro, 36, 349 adoption of, 681 Central African CFA franc to, 692 covered interest parity and, 411–413 crisis in, 626, 704–714 dollar rate of return and, 393–395, 395t economic policy and, 690–692 evolution of, 683–690 exchange rate, 378 future of the, 714 international currency and, 564–565 international reserves in, 744 long-run real exchange rates and, 475–476, 476t money supply and dollar/euro exchange rate, 427–430, 428f, 429f offshore currency trading and, 649 real dollar exchange rate with, 470–471 in regional exchange rate arrangement, 535 Swiss franc and, 552–554 as vehicle currency, 385 West African CFA franc to, 692 Euro zone defaults in, 736n economic policy in, 690–692 inflation rates in, 627f members of the, 682f reserve requirement, 653 Eurobanks, 649 Eurocurrencies, 649 Eurodollars, 649 Europe See also European Union (EU) soccer industry, 194–195 U.S trade with, 39–41, 39f, 40f, 42f European Banking Authority, 653 European Central Bank (ECB), 662, 653n, 665, 681, 683t, 684 creation of, 689–690 euro crisis and, 712–713 Maastricht Treaty on, 692 European Commission, 684 euro crisis and, 710 European Currency Union (ECU), 684n European Economic Area (EEA), 683t, 685 European Economic Community (EEC), 256, 301–302 European Financial Stability Facility (EFSF), 683t, 709–710 Index European Free Trade Area, 685 European Monetary System (EMS), 620–621, 683t, 686–689 credibility theory of the, 687–689 European option, 388n European Parliament, 692 European Recovery Plan, 64 European Stability Mechanism (ESM), 683t, 709–710 European System of Central Banks (ESCB), 683t European Union (EU), 683t British exit from, 301–302, 346, 625–626, 684–686 Chinese solar panel voluntary export restraint to, 263 Common Agricultural Policy, 256–257, 256f, 286, 293, 296 as customs union, 300–302 euro adopted by, 681 euro zone and, 681, 682f Exchange Rate Mechanism, 535 import quotas on, 282 Lithuania, 316 luxury cars industry, 253 market integration initiatives, 689 national procurement in, 265 oilseed market, 260–261 unemployment and labor mobility in, 702–704, 703f as unified market, 683–684 U.S steel tariffs and, 296–297 U.S trade with, 39–41, 39f, 40f, 42f wage convergence in, 102–104 Eurosystem, 692 Excess returns, 330 Exchange control, 726 Exchange rate mechanism (ERM), 683t, 686n revised, 692–693 Exchange rate unions, 535 Exchange rates, 378–413, 414 asset market equilibrium and, 499–501, 500f asset returns and, 392–394, 393f as automatic stabilizers, 612, 630–631 balance of payments and, 370, 371t–372t carry trade and, 403–406, 404f changes and expected returns, 398–399 currency wars and, 383 definition of, 378 demand for foreign currency assets and, 388–396 determination of, 35 in developing countries, 726 developing countries and, 748 domestic and foreign prices and, 379–381 equilibrium, 399–401, 400f European Monetary System and, 686–689 expectations and, 401–403, 402f Fisher effect in, 456–459, 458n, 484–486 fixed, 534–578, 632 flexible-price monetary approach and, 484–486, 485f floating, 610–632 foreign exchange market and, 382–388 foreign exchange market efficiency and, 672–674 foreign exchange market equilibrium and, 396–406 forward, 386–387, 386f forward, covered interest parity and, 411–413 general model of long-run, 469–477 gold standard and, 560–563 inflation and, 434–444 interest parity condition and, 396–397 789 interest rates and, 401–403, 402f international interest rates and real, 477 international transactions and, 379–382 law of one price and, 450–451 liquidity trap and, 519–524 in the long run, 449–486 managed floating, 534, 535, 551–557 monetary approach to, 453–459 monetary trilemma and, 588–589 money market linkages with, 424–427, 426f money supply and dollar/euro, 427–430, 428f, 429f money supply and long-term, 430–434 money supply and short-term, 424–430 net foreign wealth and, 369–370 nominal, 470 nominal and real, in long-run equilibrium, 474–476, 476f output market equilibrium and, 494–499 overshooting, 441 pass-through, 516–519 permanent money supply changes and, 438–440, 439f, 440f purchasing power parity and, 449–469 quotations of, 380t real, 469–477, 490–491 regimes in, capital mobility and, 750–752 relative prices and, 381–382, 382t reserve currencies and, 558–559 shadow floating, 575–576 short-run, output and, 487–533 spot, 386–387, 386f stabilization policies on, with fixed exchange rate, 543–548 Expected utility, 778, 781, 781f Expected value, 645 Expenditure-changing policies, 604–605, 605f Expenditure-switching policies, 604–605, 605f Export credit subsidies, 265 Export restraints, 244 Export subsidies, 166, 167–168, 255–257 definition of, 255 effects of, 255, 255f, 266t European Common Agricultural Policy, 256–257, 256f Export supply curves, 244–246, 245f Export-biased growth, 163 Export-Import Bank, 265 Export-led strategy, 316– 317 Exports current account and, 356–358 in gross domestic product, 29–30, 30f, 31f of natural resources in developing countries, 726 patterns of between developed and developing countries, 140–142, 141f, 142f productivity and, 74, 74f subsidies, 166–169 supply curves, 244–245, 245f trade costs and firms decisions on, 220–222 U.S firms reporting, 220–221, 220t voluntary restraints on, 262–263 External balance Bretton Woods and, 603–609, 603f definition of, 579, 581 floating exchange rates and, 614, 631 under the gold standard, 590 intertemporal trade and, 671 as macroeconomic policy goal, 579–580, 582–588 problems with excessive deficits in, 583 problems with excessive surpluses in, 583, 587–588 790 Index External economies of scale, 179, 181–182 See also Economies of scale football clubs, 194 market equilibrium and, 185, 185f theory of, 182 External prices, 166–167 Externalities, 327–330 F Factor content of trade, 136–140 Factor intensity, 115 Factor prices, 121–124, 764–767 Factor substitution, 117–118, 117n, 118f, 119f Factor supplies, 767 Factor-price equalization, 135–136 Factor-proportions model, 764–767 Factor-proportions theory, 115, 138–140, 337 “Fair price” rule, 224 Fajgelbaum Pablo D., 157–158 Fallick, Bruce, 81 Fallows, James, 333 Farhi, Emmanuel, 700n FDI See Foreign direct investment (FDI) FDIC See Federal Deposit Insurance Corporation (FDIC) Federal Deposit Insurance Corporation (FDIC), 653, 654–655, 656 Dodd-Frank Act and, 666 Federal Reserve System, 368 in Bretton Woods system, 611–612 gold exchange standard in, 563 as lender of last resort, 654 on money supply, 416 in subprime mortgage crisis, 662–663 swap lines, 663–665, 664f unconventional monetary policy by, 522 Feenstra, Robert, 133n Feldstein, Martin, 670–671, 743 Financial account, 362, 366–367 Financial account balance, 362 Financial crises, coping with, 753 Financial derivatives, 367, 388 Financial globalization, 642–680 Financial Stability Board (FSB), 666 Financial Stability Forum, 666 Financial Stability Oversight Counsel (FSOC), 667 Financial trilemma, 658–659, 700 Firms See also Corporations dumping by, 222–224 foreign direct investment by, 225–233 in the global economy, 198–242 imperfect competition and, 199–207 intra-industry trade and, 212–215 monopolistic competition and, 200–215 multinational corporations, 41, 225–229 performance and, 215–220 response of to trade, 215–220 trade costs and export decisions of, 220–222 Fiscal expansion fixed exchange rate and, 545–546, 546f government spending multiplier and, 522–524 permanent, effects of, 512–513, 512f temporary, 505–506, 506f Fiscal federalism, 700, 704 Fiscal policy, 30 definition of, 504 exchange rate changes and adjustment to, 547–548 to maintain full employment, 506–507, 506f, 508f permanent fiscal policy shifts in, effects of, 509–513 permanent shifts in, output and exchange rate effects of, 509–513 problems in formulating, 508–509 stabilization, fixed exchange rate and, 545–546, 546f temporary changes in, output and exchange rates and, 504–508 Fiscal Stability Treaty, 712, 714 Fiscal stimulus packages, 509 Fischer, Stanley, 519n Fisher, Irving, 458n, 627 Fisher effect, 456–459, 458f, 484–486, 581n deflation and, 628 Fixed costs, 203n Fixed exchange rates, 534–578, 657 See also Bretton Woods agreement balance of payments crises and, 548–551, 575–578 euro and, 681 between Euro and CFA franc, 694 floating exchange rates vs., 632 how they are set, 540–543 optimum currency areas and, 693–700 reasons to study, 535–536 stabilization policies with, 543–548 Flexible-price monetary approach, 453–459, 484–486, 485f Floating exchange rates, 610–632 as automatic stabilizers, 612, 630–631 capital flows and, 751–752 case for, 610–614 deflation and, 626–629 early years of, 614–618 external balance and, 614, 631 lessons learned on since 2,001, 628–632 macroeconomic interdependence under, 619–629 monetary policy autonomy and, 610–611, 628–629 policy coordination and, 631–632 symmetry and, 610, 611–612, 630 Flood, Robert, 565n, 575n Foley, C Fritz, 234n Folkerts-Landau, David, 630n Food consumer spending on, 157–158 factor and goods prices, 121–122, 121f, 122f factor substitution and, 117–118, 117n, 118f, 119f inputs in, 119, 120f, 121, 121f prices, wages, and labor allocation for, 85–89 production function for, 83–84, 84f relative price and relative supply of, 153–154, 154f relative price of, 88–89, 89f, 90f Football clubs, 194–195 Foreign aid, 773–774 Foreign branches of banks, 648 Foreign direct investment (FDI), 34, 225–233 in developing countries, 735 horizontal, 228, 229–230 international portfolio diversification and, 668 patterns of flow in, 225–228, 226f, 227f vertical, 228, 230 Foreign exchange intervention, 534–578 central bank swap lines and, 663–665, 664f gold standard and, 560–563 money supply and, 538–540 reserve currencies and, 558–559 signaling effect of, 557 sterilized, 539, 551–557 Foreign exchange market, 382–388 actors in, 382–383 carry trade in, 403–406, 404f characteristics of, 384–385 definition of, 382 demand for foreign currency assets and, 388–396 efficiency of, 671–675 equilibrium in, 396–406 equilibrium in, under fixed exchange rate, 541 equilibrium in, with imperfect asset substitutability, 555–557, 572–574 futures and options in, 387–388 gains from trade in, 644–645 interest rates and returns in, 392, 393f money market linkages with, 426–427, 426f return, risk, and liquidity in, 395–396 risk premiums in, 674 spot and forward rates in, 386–387 Foreign exchange options, 387–388 Foreign exchange reserves, 564 Foreign exchange turnover, 564 Foreign outsourcing, 230–237 Forward discounts, 412 Forward exchange rate premiums, 673 Forward exchange rates, 386–387, 386f covered interest parity and, 411–413 Forward premiums, 412 Forward-falling supply curve, 185, 185f Foster, James, 466 Four zones of economic discomfort, 604 France See also European Union (EU) foreign assets and liabilities of, 669, 669t gold bloc by, 596 inflation convergence in, 688f inflation rates in, 607t output per capita in, 723t red-tape barriers in, 265 Frankel, Jeffrey A., 467n, 557n, 565n Free trade, 34 additional gains from, 276–277, 276f case for, 275–278 economic isolation, autarky over time and space, 64 efficiency case for, 275, 275f exploitation and, 67–68 income distribution and, 79–80 liberalization since 2,013, 319–320 market failure justification and, 313–314 monopolies and, 270–271 national welfare arguments against, 278–282 pauper labor argument on, 67 political argument for, 277–278 preferential trading agreements and, 299–303 productivity/competitiveness and, 65–67 Free trade areas, 299–302 French Revolution, hyperinflation in, 436 Friberg, Richard, 472 Frieden, Jeffry, 594–595 Friedman, Milton, 436n Function of external prices, 166–167 Funding currencies, 404–405 Futures contracts, 387–388 G Gains from trade, 32–33, 62–63 income distribution and, 92–95 international capital market and, 642–647 portfolio diversification and, 645–646 risk aversion and, 645 types of, 643–645, 644f The Gap, 67, 68 Garber, Peter M., 575n, 630n Gasoline dispute between Venezuela and the U.S., 295, 341 GATT See General Agreement on Tariffs and Trade (GATT) GDP See Gross domestic product (GDP) Genberg, Hans, 461n General Agreement on Tariffs and Trade (GATT), 35–36, 598n congressional votes on, 285 creation of, 291 Mexico 31, 740n preferential trading agreements and, 299–303 trade rounds, 291–292 Uruguay Round, 34, 287, 292–294 World Trade Organization compared with, 293–294 General equilibrium analysis, 59, 244 import-substituting industrialization and, 314–315 Genoa Conference, 595 Geography theory of income distribution, 753, 757 Germany See also European Union (EU) against U.S dollar, 606 Brexit and, 686 emergency liquidity assistance in, 654 euro crisis and, 705–707, 706f foreign assets and liabilities of, 669, 669t in global growth, 725f gold standard in, 596 inflation convergence in, 688f inflation rates in, 607t labor mobility in, 704t monetary dominance of, 687–689, 690 offshoring and labor market outcomes, 233–235 reunification of, 35, 620, 687 wage rates in, 136t Germany, wage convergence in, 103 Gervais, Antoine, 192t GG schedule, 693–695, 694f, 697–698, 698f, 699f GG-LL model, 693–700 Ghana, inflation targeting, 442 Ghosh, Atish, 443, 734n, 752n Giavazzi, Francesco, 688n Gifts, in capital account, 357n Giddey, Thibaud, 648n Ginevičius R., 316n Glaeser, Edward L., 759n Glick, Reuven, 701n Global financial crisis of 2008–2009, 625–626 bailouts in, 654, 655–657 case study on, 660–663 central bank swap lines and, 663–665 developing countries’ recovery from, 750 euro crisis and, 705–706, 709 foreign exchange instability and central bank swap lines in, 663–665, 664f international regulation after, 665–667 international regulation before, 659–665 onshore-offshore interest differentials and, 671, 672f Globalization backlash against, 34, 335 environmental issues and, 326, 338–339, 341–345 financial, 642–680 labor standards and, 338 low-wage labor and, 335–341 two waves of, 45–46 Global payment currency, 564 Gnan, Ernest, 606n GNP See Gross national product (GNP) Gold bloc, by France, 596 Gold exchange standard, 562–563 Index Gold standard, 35, 560–563 benefits and drawbacks of, 561–562 definition of, 558 external balance under, 590 Great Depression and, 597–598 internal balance under, 591–595 macroeconomic policies under the, 589–595 mechanics of, 560 origins of, 590 price-specie-flow mechanism and, 591–592 return to after World War I, 595–596 symmetric monetary adjustment under, 560–561 Gold Standard Act of 1,928, 594 Gold supplies, 594 Goldberg, Linda S., 665n Goldin, Claudia, 130n Goldman Sachs, 648, 663 Goldsmith, James, 67 Goods prices, 121–124, 766–767 trade in, 643–645, 644f Gopinath, Gita, 459n Gorodnichenko, Yuriy, 523 Gorton, Gary B., 660n Gourinchas, Pierre-Olivier, 459n, 733n, 756–757 Government agencies, in international capital markets, 648 Government budget deficit, 360–361 Government consumption, 359n in developing countries, 726 Government demand, 488 DD schedule shifts and, 496–499, 496f Government investment, 359n Government purchases, 351, 355 national saving and, 359, 359n Government regulation See Regulation Government saving, 359–360 Government spending multiplier, 522–524 Gravity model of trade, 38, 39–44 Great Depression, 45–46, 290 bank failures in, 652n defaults in, 732 deflation in, 626, 627 external vs internal balances and, 596 gold standard and, 596, 597–598 government safeguards after, 653–655 import-substituting industrialization and, 315 liquidity trap in, 519 structural features of developing countries based in, 730 Greece default by, 736n emergency liquidity assistance in, 654 Euro crisis and, 704, 708t, 709–714 Greenfield foreign direct investment, 225 Greenpeace, 344 Greenspan, Alan, 657 Gross domestic product (GDP), 38–39, 39f Asian takeoff and, 321, 321f, 322f bank assets and, 705, 705t current account deficits and, 584–587 definition of, 353 efficiency case for free trade and, 275, 275f, 276f gains from liberalization and, 298 gravity model of trade and, 39–41, 40f gross national product compared with, 353–354 gross public debt ratio to, 710–711, 711f of India, 323 international comparison of, 312t, 463–466 791 international trade and, 30, 31f Lithuanian export, 316, 316t productivity and, 66–67 rates in 1,991–2,043, 615t trade liberalization and, 319–320, 320f U.S., 29, 30f Gross national product (GNP), 351–354 aggregate money demand and, 419, 420f capital depreciation and, 353 components of U.S., 352f definition of, 351 European Union trade and, 701 gross domestic product compared with, 353–354 national income and, 352–353 Grossman, Gene, 234n, 286n, 341, 674n Group of Twenty (G20), 632 Grove, Andy, 332 H Haan, Jakob De, 442n Haber, Stephen, 757n Hadri, Kaddour, 728n Haircuts, 654 Haiti, export patterns for, 141, 141f Hansen, Lars Peter, 673n Hanson, Gordon, 133n, 345–346 Hatton, Timothy J., 593n Hausmann, Ricardo, 736 Headline inflation, 443 Heckscher, Eli, 115 Heckscher-Ohlin model, 115–150, 151 biased growth and, 160 empirical evidence on, 136–143 factor and goods prices in, 121–124 on factor-price equalization, 135–136 on income distribution, 127–135 input mix in, 119–121 on international trade between two-factor economies, 125–136 prices and production in, 116–119 on relative prices and patterns of trade, 126–127 resources and output in, 124–125 two-factor economy model in, 116–125 Hedge funds, 384 Help centers, 47 Helpman, Elhanan, 286n Henderson, J Vernon, 193n Herbert, Bob, 67n Hertner, Peter, 648n High-income economies, 721, 722t High-tech industries, 327–330, 332 semiconductors, 333–334 wages in, 336–337, 336t Hindu rate of growth, 323 Hines, James R., 234n Hoang, Mai-Chi, 362n Hodrick, Robert J., 673n Hollywood, 339 Home bias, 668 Homogenization, cultural, 338–339 Hong Kong Asian financial crisis and, 747, 748 in Asian takeoff, 321–323 current account of, 745t economic miracle in, 742 education in, 746 as financial center, 649 income growth in, 724 output per capita in, 723t Horioka, Charles, 670–671 Horizontal FDI, 229–230 Housing markets, 36, 661 792 Index Howard, John, 341 Howell, Kristy L., 362n Hu, Wayne, 564n Huber, Peter, 704t Human capital, 755–757 Human resources, 50 Hume, David, 29, 30, 591 Humpage, Owen F., 557n Hungary, inflation targeting, 442 Hyperinflation, 436–438, 437f Hyundai, 383 I IIP See Net international investment position (IIP) IMF See International Monetary Fund (IMF) Immigration Brexit and, 301–302, 684–686 international labor mobility and, 101–106 labor force effects of, 105, 106f in mutually beneficial trade, 32 U.S economy and, 104–106 Immiserizing growth, 163–164 Imperfect asset substitutability, 555–557, 572–574 Imperfect capital markets, 313–314 Imperfect competition, 199–207 strategic trade policy and, 330–334 Import demand curves, 244–246, 245f Import quotas, 257–261 effects of, 265–266, 266t monopolies and, 271–273 rent seeking and, 277 Import tariffs, 166 Import-biased growth, 163 Imports current account and, 356–358 demand curve, 244–245, 245f in gross domestic product, 29–30, 30f, 31f quotas on, 257–261, 265–266, 266t, 271–273 sugar industry restrictions on, 95, 100 tariffs on, 79, 166–169 unemployment related to, 96–99 Import-substituting industrialization, 311–312 Asian takeoff and, 321–322, 725 definition of, 314 in developing countries, 730 infant industry argument on, 312–314 problems of, 317–319 protectionism in, 314–315 Income See also National income; Wages aggregate money demand and, 419, 420f in Bangladesh, 340 convergence in per capita, 722–724, 723t in developing countries, 311, 721–725 disposable, current account and, 491, 491t effects of immigration on, 104–106 exports/imports in national, 29–30, 30f, 31f global capital flows and, 754–759 national, 352–353 real, aggregate demand and, 492, 492f real, price levels and, 467–469, 468f real, world trade income and, 769–770 trading world economy equilibrium and, 768–770 transfers of, world trade economy and, 773–774 Income distribution, 79–114 capital paradoxes and, 755–757 in developing countries, 311–312, 721–725 Doha Round and, 299t in the EU, 102–104 gains from trade and, 92–95 geography theory of, 753, 757 government and, 757–759 inequality in, 128–130, 721–724 international trade and, 73 North-South inequality in, 128–130 politics of trade and, 95–100 relative prices and, 89–91, 127–128 skill-biased technological change and, 130–135 specific factors model and, 80–92 trade policies and, 282–287 unequal gains from trade and, 157–158 Income effects, 155 portfolio diversification and, 782–784 Increasing returns See Economies of scale India in Asian takeoff, 321–323, 321f call/help centers in, 47 economic boom in, 323 foreign direct investment by, 226, 227f foreign direct investment in, 226 in global growth, 724 import-substituting industrialization in, 315 inflation rates in, 628 international reserves in, 743f, 744 manufacturing protection in, 313 output per capita in, 723t pollution havens in, 343–344 productivity and wages in, 66 rent seeking in, 277 wage rates in, 136t Indifference curves, 154–155, 155f, 779–780, 780f Indirect exchange rate quotations, 379 Indonesia auto industry, 214–215 current account of, 745t economic miracle in, 742 education in, 746 as emerging market, 660 financial crisis in, 747–748 inflation targeting, 442 Industrial districts, 182 Industrialization, economic development and, 311–312 infant industry argument on, 312–314 Infant industry argument, 192, 312–314 technology and, 326–330 Inflation in 2,000–2,010, 614–618 after World War I, 595 Bretton Woods and, 606–608 central bank independence and, 692n credibility theory of the European Monetary System and, 687–689 definition of, 434 in developing countries, 726 exchange rate trends and, 629–630, 629f exchange rates and, 434–444 expectations for, 436 Fisher effect and, 456–459 imported, 607–609 internal balance and, 581–582 international policy coordination failures and, 639–641 price rigidity vs price flexibility and, 434–438 purchasing parity power and, 455–456 rates in 1,991–2,043, 615t targeting, 441–443 in Zimbabwe, 436–438, 437f Inflation bias, 508–509 Inflows, 751–752 Information, insufficient, 331–332 Information technology, 327–330 ING Group, 705t Inputs East Asian, 745–746 economies of scale and, 180–181, 180t in two-factor economies, 119–121, 120f Inshoring, 235 Institutional quality, 757–759 Instrumental variables, 758 Insufficient information, 331–332 Integrated markets, 208–212, 211t winners and losers from, 218–220, 219f Intel, 228, 332, 333 Intellectual property rights, 294, 303–304 Inter-American Development Bank, 735 Interbank trading, 383 Interest parity condition, 396–397 covered, 411–413 foreign exchange market efficiency and, 672–673 inflation, purchasing parity power, and, 455–456 Interest rates, 414 AA schedule shifts and, 501–502 aggregate money demand and, 418–419 carry trade and, 403–406, 404f commodity price cycles and, 728 dollar/euro exchange rate and money supply and, 427–430, 428f, 429f equilibrium, 171, 171f, 420–423, 424f exchange rates and, 401–403, 402f Fisher effect in, 456–459, 458n, 484–486 flexible-price monetary approach and, 484–486, 485f foreign exchange market returns and, 392, 393f individual demand for money and, 417–418 inflation, purchasing parity power, and, 455–456 inflation targeting and, 441–443 international, real exchange rate and, 476–477 liquidity trap and, 519–524 monetary approach to exchange rate and, 454–459 money supply and equilibrium, 420–423, 424f nominal, 477–479 onshore-offshore differentials in, 671, 672f output and, 423, 424f real, 170–172 real interest parity, 477–479 zero lower bound on, 519–520 Intermediate goods, 264 Internal balance Bretton Woods and, 601–602, 603f definition of, 579 under the gold standard, 591–595 as macroeconomic policy goal, 579–582 Internal economies of scale, 181–182 See also Economies of scale Internal prices, 166–167 Internalization motive, 230 International borrowing and lending, 169–172 alternative forms of financial flow and, 734–735 current account and, 357, 582–588 defaults in, 732–734 by developing countries, 730–741 to developing countries, 730–741 by New Zealand, 584–587 International broadcasting revenues, 194 International capital market, 642–680 banking/financial fragility and, 650–657 capital and risk allocation in, 668–675 challenges of banking regulation and, 657–667 debt and equity instruments in, 646–647 definition of, 642 gains from trade and, 642–647 international banking and, 647–650 international regulatory cooperation and, 659–665 offshore banking and currency trading in, 648–649 shadow banking system and, 649–650 structure of, 647–648 International Comparison Program (ICP), in PPP, 463–466, 465f historical background, 463 international poverty line, 465 limitations, 465–466 world’s GDP, 464–465 worldwide surveys, 464 International currency, 563–566 International debt, 564 International economics trade and money in, 37 what it’s about, 31–36 International labor mobility, 683–684 International loans, 564 International Monetary Fund (IMF), 166, 291, 435f Asian financial crisis and, 747–748 Basel II monitoring by, 660 Bretton Woods system, 598–601 on Brexit, 686 convertibility and expansion of private financial flows and, 599–600 coping with crises and, 753 debt crisis of the 1980s and, 737 defaults and, 734 euro crisis and, 709 on exchange rate arrangements, 536n goals and structure of, 598–599 swap lines and, 665 trade elasticities estimates by, 532–533, 533t International monetary systems, 579–641 Bretton Woods system, 598–601 classification of, 588–589 definition of, 579 floating exchange rates and, 610–632 under the gold standard, 597–598 internal/external balance and, 601–609 in the interwar years, 595–596 macroeconomic policy goals in, 580–588 policy coordination in, 631–632 rethinking of after Asian financial crisis, 749–753 International negotiations, 288 advantages of, 289–290 benefits and costs of, 295–296 definition of, 289 GATT and WTO, 293–297 history of trade agreements and, 290–292 labor standards and, 338 trade liberalization and, 292–293 Uruguay Round, 292–293 International portfolio diversification, 778–784 International regulatory cooperation, 659–665 International reserves in developing countries, 742–744, 743f self-insurance through stockpiling, 748 International trade access to, economic development and, 757 analysis of, 37 balance of payments and, 34–35 comparative advantage and, 53–56 economies of scale and, 179–197 exchange rates in, 378–413 external economies and, 186–192 gains from, 32–33 Heckscher-Ohlin model on, 125–136 Index how much to allow, 33–34 income distribution and gains from, 92–95 international policy coordination on, 35–36 patterns of, 33 political economy of, 95–100 relative prices and, 91–92, 92f Ricardian model on, 73–76 specific factors model on, 91–92 statistics on, 29, 30f International Trade Commission, 224 International Trade Organization (ITO), 291, 598n International transfers, 353 Internet, distance barriers and, 44–46 Interregional trade, 192–194 Intertemporal budget constraint, 177, 583, 585 Intertemporal comparative advantage, 172 Intertemporal production possibility frontier, 170, 170f Intertemporal trade, 169–172, 176–178 consumption demand and, 529–530 current account and, 357–358 in developing countries, 731–732 extent of, 670–671 external balance and, 582 trade gains from, 644 Intra-industry trade, 211–215 ASEAN-4, 214–215 definition of, 211 in optimum currency areas, 699–700 significance of, 212–213, 213t Investment DD schedule shifts and, 498 gross national product and, 354–355 international rates of, 670f national saving and, 359 net foreign, 359 portfolio diversification and, 645–646, 668–670, 669t, 778–784 Investment banks, 648 Investment demand, 488 Investor-state dispute settlement, 303–304 IPhones, 231–232 Ireland emergency liquidity assistance in, 654 euro crisis and, 710–711 income convergence in, 722 inflation convergence in, 688f output per capita in, 723t U.S trade with, 41 Isard, Peter, 459n Isovalue lines, 153 Italy See also European Union (EU) foreign assets and liabilities of, 669, 669t inflation convergence in, 688f inflation rates in, 607t labor mobility in, 704t output per capita in, 723t Ito, Keito, 214n Ivashina, Victoria, 412n J James, Jessica, 674n, 675n Janssens, Marc, 461n Japan in carry trade, 403–406, 404f economic crisis in, 620–621, 626 exchange rates, currency wars, and, 383 financial crisis in, 747–748 in global growth, 725f high-tech industries in, 328 inflation rates in, 627f in international capital market, 36 liquidity trap in, 521–522 net foreign wealth, 369–370 793 official reserve transactions, 368 output per capita in, 723t rice policy, 80, 286–287 semiconductor industry, 333–334 voluntary export restraints, 262–263 wage rates in, 136t wages and manufacturing in, 46 yen as vehicle currency, 385 yen/dollar PPP and, 460, 460f J-curve, 515–516, 516f Marshall-Lerner condition and, 533 Jeanne, Olivier, 756–757 Jensen, J Bradford, 49f, 192t, 220t, 222n Johnson, Robert C., 232n Johnson, Simon, 758–759 Jomini, Patrick, 257n Jones, Ronald, 80 J.P Morgan Chase, 662 K Kaczmar, Krzysztof, 648n Kalaūinskaite, K., 316n Kalemli-Ozcan, Sebnem, 756n Kambourov, Gueorgui, 81 Kamin, Steven, 661n Kaminsky, Graciela L., 652n Katz, Lawrence F., 130n Kenen, Peter B., 700n Kennedy, Craig, 665n Kennedy, Paul, 65n Kennedy Round, 292 Kenya, output per capita in, 723t Keynes, John Maynard, 45, 562, 588n on the gold standard, 591 Khandelwal, Amit K., 157–158 Kia, 383 Klenow, Peter J., 435n Kletzer, Lori G., 49f Knight, Malcolm D., 533t Knowledge spillovers, 182, 184–185, 194 in high-tech, 332 Kochin, Levis A., 597n Koech, Janet, 438n Korea, inflation targeting, 442 Korsakiene R., 316n Kravis, Irving, 468–469, 469n Krueger, Alan, 341 Krugman, Paul R., 461n, 462n, 522n, 575n Kuznets curve, 341–342, 342f L La Porta, Rafael, 759n Labán, Raúl, 740n Labor allocation of, 85–89 biased expansion of production possibilities and, 124–125 capital-skill complementarity and income share of, 134–135, 134f excess demand for, money supply and, 435–436 future of the EU and, 714 international mobility of, 683–684 marginal product of, 82–83, 83f as mobile factor, 80 production possibility frontier and, 82–85 in specific factors model, 81–85 trade policies and low-wage, 335–341 Labor force effects, immigration, 105, 106f Labor market outcomes, 233–235 Labor market pooling, 182, 183–184, 194 Labor mobility Brexit and, 301–302, 684–686 economic stability loss and, 696 794 Index Labor mobility (Continued) European Union, 702–703, 704t international, 101–106 in specific factors model, 81 Labor productivity, 33 comparative advantage and, 52–78 competitiveness and, 65–67 with many goods, 68–72 offshoring and, 233–235 in one-factor economies, 54–57 production possibility frontier and, 55–56, 55f relative prices and supply and, 56–57 relative wages and, 63–65 in Ricardian model, 54–76 wages and, 65–67 Labor standards, 338 Labor-capital ratios, 121f relative prices and, 124 Labor-intensive production, 121 Laeven, Luc, 654n Laissez-faire, 327, 590 Landry, Anthony, 459n Lane, Philip R., 669t Latin America banking fragility in, 749 debt crisis in, 737–741 defaults in, 732 output per capita in, 723t per capita income in, 721 price level increases in, 432, 433f Law of one price, 450–451 empirical evidence on, 459–461, 460f purchasing power parity and, 451–452 sticky prices and, 472 Lawrence, Robert Z., 95n, 99n, 129n Laya, Patricia, 105, 164n Leamer, Edward E., 138 Learning curve, 191–192, 191f Legal framework, 746 Lehman Brothers, 662, 671 Leliaert, Hilde, 461n Lender of last resort (LLR), 653–655 central bank swap lines and, 663–665, 664f international banking and, 658 Leontief, Wassily, 137–138, 137t Leontief paradox, 137–138, 137t Lerner, Abba, 531–533 Less-developed countries (LDCs), 311n Lewis, Karen, 674n Lewis, Michael, 711n Li, Nicholas, 459n Liabilities, in bank balance sheets, 651–652 Life expectancy, 722, 722t Lin, Justin Yifu, 692n Lindert, Peter H., 734n Lipsey, Robert, 468–469, 469n Liquidity, 391–392 carry trade and, 403–406 in foreign exchange market, 395–396 individual demand for money and, 418 of money, 416 Liquidity Coverage Ratio, 665–666 Liquidity trap, 519–524 deflation and, 628 government spending multiplier and, 522–524 Lithuania, 316–317 Living standards, 720 LL schedule, 695–698, 697f, 698f LLR See Lender of last resort (LLR) Local content requirements, 263–265 Location motive, 230–231 London as financial center, 649 onshore-offshore interest differentials, 671, 672f Long run, 424 general model of exchange rates in, 469–477 international interest rates and real exchange rate in, 477 monetary approach to exchange rates and, 453–459, 484–486, 485f price levels and exchange rate in, 449–486 purchasing power parity in, 449–469 real interest parity in, 477–479 Long-run equilibrium, 430–434 nominal and real exchange rates in, 474–476, 476f Long-run neutrality of money, 431n Lopez-de-Silanes, Florencio, 759n Loungani, Prakash, 728n Lower middle-income economies, 721, 722t Lowflation, 626 Low-income economies, 721, 722t Lucas, Robert E., Jr., 755–756 Lula da Silva, Ignacio, 739 Lund, Susan, 564n Lustig, Hanno, 674n Lustig, Nora, 741n Luxembourg, as financial center, 649 M M1, 416 M2, 416n M3, 416n Maastricht Treaty, 689–690 convergence criteria in, 691–692 MacDougall, G D A., 73n Macroeconomic policies current account and, 513–515 failures of international coordination of, 639–641 goals of in open economies, 579–580 under the gold standard, 589–595 stabilization, with fixed exchange rate, 543–548 Macroeconomics, 349–350 Macroprudential perspective, 666–667, 751–752 Madoff, Bernard, 585n Magee, Christopher S., 285 Malaysia auto industry, 214–215 current account of, 745t economic miracle in, 742 financial crisis in, 747–748 output per capita in, 723t solar panel production in, 169 Malin, Benjamin A., 435n Managed floating exchange rates, 534, 535, 551–557 definition of, 534 Manovskii, Iourii, 81 Mantegna, Guido, 35 Manufacturing, 33 in Canada, 216, 220 in economic development, 311–312 employment levels in, 48–49, 49f in the EU, 102–104 in high-tech industries, 332 North-South trade in, 128–130, 143 problems of favoring, 317–319 promoting through protection, 314–315 U.S., and imports from China, 97–99, 99f U.S employment in, 329f in world trade, 46–47, 46f, 47t Manyika, James, 564n Maradona (Argentina), 195 Marginal cost, 201–202, 202f markup over, 206, 222–224 performance and, 216–218 Marginal product of labor, 82–83, 83f labor allocation and, 85–87, 86f Marginal revenue, 200–201 determining, 242 Marginal social benefit, 280 Marginal utility, 778–779 Mark, Nelson C., 675n Market disruption, 291 Market equilibrium external economies and, 185, 185f monopolistic competition and, 204–207, 205f Market failures, infant industry protection and, 313–314, 327 labor standards and, 338 Market integration, 208–212, 211t winners and losers from, 218–220, 219f Market size integration and, 218–220 monopolistic competition and, 207–209, 208f Market value method, 370 Markup over marginal cost, 206 dumping and, 222–224 Marsh, Ian W., 674n, 675n Marshall, Alfred, 182, 184, 531–533 Marshall-Lerner condition, 490n, 531–533 Marston, Richard C., 673n Martin, Will, 298t Maturity mismatch, 651 McCormick, Frank, 412n McDonald’s wages at, 103f, 104 McGuire, Patrick, 665n McKinley, William, 594 McKinnon, Ronald, 630 Meade, Ellen E., 692n Median voter model, 283–284, 283f Medicare, 607 Medium of exchange, money as, 415 Meese, Richard A., 675 Melitz, Marc J., 216n Meltzer, Allan H., 467n Menu costs, 472 Mercosur, 302–303, 681 merit-based immigration policy, 105 Merrill Lynch, 662 Mexico See also North American Free Trade Agreement (NAFTA) automobile industry in, 265 debt crisis of the 2,008s, 737–738, 740–741 economic growth of and U.S economy, 164–166, 165f as emerging market, 660 floating exchange rate in, 748 import-substituting industrialization in, 317t income inequality and, 128–130 output per capita in, 723t relative wages in, 63 tariff-rate quota and, 258–261, 260f, 261f U.S trade with, 42–43, 42f wage rates in, 136t, 336–337 Mexico Paraguay, inflation targeting, 442 Microeconomics, 349 Middle-income economies, 721, 722t Milesi-Ferretti, Gian Maria, 669t Mining employment levels in, 48–49, 49f in world trade, 46–47, 46f Misalignments, 631 Mishkin, Frederic S., 416n, 538n, 660n Mitchener, Kris James, 596n Miu, Jason, 665n Mobile factors, 80, 81 Models See specific models Mody, Ashoka, 713n Monetary approach to the exchange rate, 453–459 fundamental equation of, 453–455 inflation, PPP, interest rates and, 455–456 Monetary efficiency gain, 693–695, 694f Monetary policy, 30 autonomy in, floating exchange rates and, 610–611, 628–629 balance of payments and, 34–35 definition of, 504 euro and, 681 euro crisis and, 712–713 failures of international coordination of, 639–641 flexible-price approach to, 484–486, 485f inflation targeting, 441–443 to maintain full employment, 506–507, 506f, 508f monetary trilemma and, 588–589 permanent fiscal policy shifts in, effects of, 509–513 problems in formulating, 508–509 reserve currency systems and, 558–559 stabilization, with fixed exchange rate, 543–545, 544f temporary changes in, output and exchange rates and, 504–508 Monetary trilemma, 588–589, 589f, 659, 750–752 Money aggregate demand for, 418–419, 420f definition of, 415–416 demand for by individuals, 417–418 exchange rates and, 424–427 interest rates and, 424–427 long-run equilibrium and, 430–434 macroeconomics on, 350 as medium of exchange, 415 price level, 430–434 as store of value, 416 as unit of account, 415–416 Money, international, 37 Money market equilibrium in, 420–422, 421f equilibrium in, under fixed exchange rate, 541–542 exchange rate linkages with, 424–427, 426f long-run real exchange rates and, 475–476, 476t Money multiplier effect, 538 Money supply, 414 AA schedule shifts and, 501–502 balance of payments and, 539–540 capital flight and, 548–551, 549f central banks and, 416–417 definition of, 416 determination of, 416–417 dollar/euro exchange rate and, 427–430, 428f, 429f equilibrium interest rate and, 420–423, 424f Fisher effect in, 456–459, 458n, 484–486 hyperinflation and, 436–438, 437f inflation, exchange rates, and, 434–444 interest rates and, 422–423, 423f long-run effects of, 430–434 monetary approach to exchange rate and, 454–459 permanent changes in, exchange rate and, 438–440, 439f, 440f permanent increase in, effects of, 509–512, 510f, 511f real exchange rates and, 475 short-term exchange rates and, 424–430 Index temporary increase in, 504–505, 505f Monga, Célestin, 692n Monopolies, 179 free trade and, 270–271 marginal revenue and, 200–201, 242 pure, 200 tariffs and quotas and, 270–273 trade costs and exports decisions, 220–222 Monopolistic competition, 200–215 assumptions on, 203–204 average and marginal costs in, 201–202, 202f differentiated products and, 202–203 market equilibrium and, 204–207, 205f market size and, 207–209 model for, 776–777 trade and, 207–215 Moore’s Law, 333 Mooslechner, Peter, 606n Moral hazard, 655–657 East Asian economies and, 745–746 Morgan Stanley, 663 Mortgage crisis, 36, 625, 660–663 See also Global financial crisis of 2008–2009 Mortgage-backed securities (MBS), 661n Morton, Peter J., 734n Most favored nation (MFN) status, 299 Multi-Fiber Arrangement, 262, 287, 293 Multinational corporations, 225–229 foreign direct investment decisions, 228–230 in foreign exchange markets, 384 in international capital markets, 647–648 in Ireland, 41 outsourcing by, 230–237 Mundell, Robert A., 693n, 700n N NAFTA See North American Free Trade Agreement (NAFTA) Nagel, Stefan, 405n National Bureau of Economic Research, 97f National disposable income, 353n National income, 352–353, 353n See also Gross national product (GNP) aggregate money demand and, 419, 420f determinants of, 488 identity for open economies, 355–356 National income accounting, 349–377 accounts in, 351–354 balance of payments accounts and, 362–373 for open economies, 354–361 National income identity, 355–356, 360 in developing countries, 731–732 National output accounts, 351 National procurement, 265 National saving, 358–359 National sovereignty, 31–32, 339 international financial regulation and, 667 National welfare arguments against free trade, 278 collective action and, 284, 286 domestic market failure, 279–282, 280f electoral competition and, 283–284, 283f, 285 terms of trade argument for a tariff, 278–279 Natural resources, in developing countries, 726 Negotiations See International negotiations; Trade policies Net export deficits, 584–587 Net export demand See Current account balance Net financial flows, 362 Net foreign debt, 370, 371t–372t Net foreign investment, 359 Net foreign wealth, 357–358, 357n, 358f, 369–370 795 Net international investment position (IIP), 358, 358f Net national product (NNP), 353 Netherlands foreign assets and liabilities of, 669, 669t inflation convergence in, 688f U.S trade with, 41, 42f New Zealand Asian financial crisis and, 747 borrowing by, 584–587 Newly industrializing economies (NIEs) economic growth of, advanced nations and, 164–166 income inequality and, 128–130 Niger, debt crisis in, 738 Nigeria, output per capita in, 723t Nissan, 383 Nixon, Richard, 607n Noko, Joseph, 438n Nominal and real effective exchange rate indexes, 616–617, 617f Nominal exchange rates, 470 in long-run equilibrium, 474–476, 476f Nominal interest rates liquidity trap and, 519–524 real interest parity and, 477–479 Nonbank financial institutions in foreign exchange markets, 384 in international capital markets, 648 Nontariff barriers, 244 See also Import quotas Nontradables, 192–194, 192t price levels in poorer countries and, 467–469, 468f purchasing power parity and, 461–462 real dollar/euro exchange rate and, 470–471 Nontrade, autarky, 64 Nontraded goods, 73 North, Douglass C., 757n North American Free Trade Agreement (NAFTA), 34, 43, 133 congressional votes on, 285 environmental issues and, 342 free trade area in, 299–301 intra-industry trade and, 214–215 North-South trade, income inequality and, 128–130, 143 Nurkse, Ragnar, 756 O Obama, Barack, 79n, 509 Obstfeld, Maurice, 575n, 632n, 665n, 673n, 703n, 733n Ocampo, Antonio, 727n OECD See Organization for Economic Cooperation and Development (OECD) “Of the Balance of Trade” (Hume), 29 Official foreign exchange intervention, 368–369 Official international reserves, 368–369 Official lending, 735 Official reserve transactions, 368–369 Official settlements balance, 369 Offshore banking, 648–649 Offshore currency markets, 389–390, 390f Offshore currency trading, 649 Offshoring, 230–237 definition of, 230 Ohlin, Bertil, 115 Oil exports capital paradoxes and, 755–757, 755f Oil prices, 166, 614–615 commodity price supercycle and, 728 Oilseeds, import quotas on, 258–261, 258f, 259f 796 Index Oligopoly, 179, 203 Olson, Mancur, 284 One-factor economies, 54–56 gains from trade and, 62–63 production possibilities in, 55–56 relative prices and supply in, 56–62 relative wages and, 63–65 trade between, 57–65 Onshore-offshore interest differentials, 671, 672f Open economies aggregate demand determinants in, 488–491 exchange rates and, 378 macroeconomic policy goals in, 579–588 monetary trilemma in, 588–589, 589f national income accounting for, 354–361 national saving in, 359 short-run equilibrium for, 502–504, 503f Opportunity cost, 53 production possibility frontier and, 56 relative prices and supply and, 56–57 Optimal portfolio diversification, 778–784 Optimum currency areas, 681–719 See also Euro banking union and, 700 benefits of, 693–695 costs of, 695–698 definition of, 699 economic policy and, 690–692 economic structure similarity and, 699–700 euro crisis and, 704–714 Europe as, 701–704, 714 evolution of the euro and, 683–690 fiscal federalism in, 700 theory of, 693–700 when to peg exchange rates in, 698–699 Optimum tariffs, 278–279, 279f, 308–310 Options, foreign exchange, 387–388 Orderly marketing agreements (OMAs), 262 Organization for Economic Cooperation and Development (OECD), 294–295 FDI flows in, 225, 226f Mexico 31, 740n saving and investment rates, 670f Organization of Petroleum Exporting Countries (OPEC), 615 Original sin, 735–737, 745, 751 O’Rourke, Kevin Hjortshøj, 625n Orphanides, Athanasios, 607n Osterberg, William P., 557n Ostry, Jonathan D., 443, 752n Output aggregate demand determinants and, 488–491 aggregate demand equation and, 491–492 asset market equilibrium and, 499–501, 500f asset market equilibrium in the short run, 499–502 corruption and, 729–730, 729f current account balance in, 489 determination of in the short run, 493, 494f economies of scale and, 180–181, 180t excess demand for, money supply and, 435–436 exchange rate and in the short run, 487–533 factor supplies and, 767 gradual trade flow adjustments and, 515–519 growth rate in per capita, 723t interest rates and, 423, 424f intertemporal trade and consumption demand in, 529–530, 529f investment and, 354–355 liquidity trap and, 519–524 macroeconomic policies and, 513–515 market equilibrium in the short run, 494–499 market value of, 153 monetary approach to exchange rate and, 454–459 permanent fiscal/monetary policy shifts and, 509–513 real exchange rates and, 473, 475–476 resources and, 124–125 short-run equilibrium for open economies and, 499–504 temporary monetary/fiscal policy changes and, 504–508 trade elasticities and, 531–533 Outright Monetary Transactions (OMT), 683t, 713 Outsourcing, 230–237 consequences of, 236–237 vertical FDI and, 232 Outsourcing, service, 47 Ouyang, Alice Y., 442n Overshooting, exchange rate, 441 P Packer, Frank, 412n Pagano, Marco, 688n Pakistan, 313 import-substituting industrialization in, 318t Panagariya, Arvind, 323n “The Parable of the Chips” (Fallows), 333 Paraguay in Mercosur, 302–303 output per capita in, 723t Parity See also Purchasing power parity (PPP) covered interest, 411–413 interest parity condition, 396–397, 455–456 real interest, 477–479 Partial equilibrium analysis, 58–59, 244 Pass-through, 516–519 Pauper labor argument, 67 Pedersen, Lasse H., 405n Pele, 195 Performance, firms and, 215–220 Peri, Giovanni, 703n Perot, Ross, 67 Peru inflation targeting, 442 output per capita in, 723t Petroleum prices, 166, 614–615 commodity price supercycle and, 728 Pew Research Center Survey, 231n Philippines auto industry, 214–215 debt crisis in, 738 import-substituting industrialization in, 318t inflation targeting, 442 Pisani-Ferry, Jean, 385n Plaza Accord, 618 Poland Brexit and, 686 inflation targeting, 442 Swiss franc loans in, 554 Policy coordination, 631–632 Political argument for free trade, 277–278 Political economy case for free trade and, 275–278 electoral competition and, 283–284, 283f, 285 modeling the political process and, 286 of trade, 95–100 of trade policy, 274–310 U.S steel tariffs and, 296–297 Politics of trade, 79–80, 95–101 Pollution havens, 343–344 Pontzen, Martin, 606n Ponzi, Charles, 585n Ponzi schemes, 585n Portes, Richard, 385n Portfolio diversification, 645–646, 668–670, 669t, 778–784 Portfolio investment in ownership of firms, 735 Portugal competition with China, 704 productivity and competitiveness of, 65–67 Posen, Adam S., 385n Postel, Virginia, 216n Pound sterling, international currency and, 564 Powell, Asafa, 61 PPP See Purchasing power parity (PPP) Prasad, Eswar S., 753n Prebisch, Raúl, 728 Prebisch-Singer hypothesis, 728 Preferential trading agreements, 299–303 Mercosur, 302–303 Present discounted value of deficits, 585 Price level aggregate money demand and, 419 DD schedule shifts and, 496–499, 496f in developing countries, 467–469 flexible-price approach to, 484–486, 485f in the long run, 449–486 long-run equilibrium and, 430–434 purchasing parity power and, 459–461, 460f short-run rigidity vs long-run flexibility in, 434–438, 435f, 437f stability in and full employment, 581–582 Price setters, 200 Price stability See Internal balance Price takers, 199 Prices commodity, 727–728 consumption effects of changes in, 770–771, 770f domestic and foreign, exchange rates and, 379–381 equalization of factor, 135–136 equal-proportional changes in, 88, 88f equilibrium world, 246, 246f external, 166–167 factor, 121–124, 764–767 goods, 121–124 income distribution and, 89–91 internal, 166–167 labor allocation and, 85–89 law of one price on, 450–451 macroeconomics on, 350 marginal revenue and, 200–201, 242 monopolistic competition and, 204–206, 205f North-South trade and, 128–130 optimum tariffs and, 308, 309f production and, 119, 120f relative, 56–62 relative, changes in, 88, 88f relative, demand and, 153–157 in specific factors model, 85–89 sticky, 472 Price-specie-flow mechanism, 591–592 Pricing to market, 462–463 Primary income payments, 353n Prisoner’s dilemma, 290, 639–641 Private saving, 359–360 Privatization, 735, 738, 741 Procurement, national, 265 Producer surplus, 250–251, 250f, 251f, 253 real exchange rates and, 473–474 Production abundance of factors of, 115 average cost of, 185, 185f, 201–202, 202f economies of scale and location of, 179–197 efficient, factor-proportions model on, 764–765, 765f international borrowing/lending and, 170–172 intertemporal, 169–170 marginal cost of, 201–202, 202f monopolistic pricing and, 200–201, 200f in one-factor economies, 55–56 performance differences in, 216–218 prices and, 119, 120f specific factors and, 81 standard model on, 153–155, 155f trading world economy equilibrium and, 768–770 vertical disintegration of, 46 Production distortion loss, 254 Production function, 81–82, 82f Production possibility frontiers, 55–56, 55f, 57–58, 58f biased expansion of, 124–125 budget constraints and, 93–94, 94f factor substitution and, 117–118, 117n, 118f intertemporal, 170–172, 170f relative supply and, 152–153 in specific factors model, 82–85 wages and, 65–66 Productivity competitiveness and, 65–67 in East Asian economies, 745 Profits, 202n economic vs accounting, 206n provisional tariffs, 253 Protectionism, 33–34, 79 See also Tariffs antidumping as, 222–224 effects of on world trade, 45–46, 45f in import-substituting industrialization, 314–315, 730 Plaza Accord and, 618 rent seeking and, 277 tariffs in, 247–249 welfare costs of, 287t who gets protected by, 286–287 Proximity-concentration trade-off for FDI, 229–230 Pseudoinfant industries, 313 Public good, 284, 286 Purchasing power parity (PPP), 449–469 absolute, 452–453 definition of, 449–450 departures from free competition and, 462–463 developing countries, global growth and, 724–725 empirical evidence on, 459–461, 460f explanations of problems with, 461–469 International Comparison Program (ICP), 463–466, 465f international interest rate differences, real exchange rate and, 476–477 law of one price and, 450–452 long-run exchange rate model based on, 453–459 national income and, 722n, 723t relative, 452–453 short run vs long run, 466–467 trade barriers and nontradables and, 461–462 Put options, 388 Q Quillin, Bryce, 466 Quota rents, 257–258 Quotas, 31–32 monopolies and, 270–273 Qureshi, Mahvash S., 752n R Radio Shack, 387 Rain forest destruction, 339 Index Rajan, Ramkishen S., 442 Random access memories (RAMs), 334 “Random walk” model, 675 Rao, Yao, 728n Rate of appreciation, 395 Rate of depreciation, 353, 392–394 Rate of return, 388–391 dollar, 389, 391 exchange rate changes and expected, 398–399, 398t, 399f exchange rates and asset returns, 392–394 expected, 388–389 expected, money demand and, 417–418 interest parity and, 396–397 interest rates and, 392, 393f real, 389–391 risk and liquidity and, 391–392, 395–396 simple rule on, 394–395 Raw materials prices, 436 Reagan, Ronald, 616, 618 Real appreciation, 471 Real depreciation, 470–471 Real effective exchange rates index, 616–617, 617f Real exchange rates, 469–477 aggregate demand and, 491–492 current account balance and, 490, 491f definition of, 469 demand and supply changes and, 471–474 international interest rate differences and, 476–477 in long-run equilibrium, 474–476, 476f trade elasticities and, 531–533 Real income aggregate demand and, 492, 492f price levels and, 467–469, 468f world trade equilibrium and, 769–770 Real interest parity, 477–479 Real interest rates, 170–172 definition of, 477 in the euro zone, 706–707, 708f parity and, 477–479 Real rate of return, 389–391 Fisher effect on, 456–459, 458n, 484–486 Rebelo, Sergio, 523 Redding, S J., 220t, 222n Red-tape barriers, 265 Regulation corruption and, 729–730, 729f in East Asian economies, 745–746 Eurocurrency trading and, 649 financial trilemma in, 658–659 of international banking, challenges of, 657–668 international cooperation since 2008 in, 665–667 international cooperation through 2007 in, 659–665 moral hazard/“too big to fail” and, 655–657 safeguards against financial instability, 653–655 Regulatory arbitrage, 658 Reinhart, Carmen M., 652n, 734n, 751n, 756n Reis, Jaime, 657n Relative demand curve, 59–60, 59f Relative prices, 56–57 budget constraints and, 93–94, 94f convergence in, 60–61, 62f, 126–127, 126f demand and, 153–157 determination of, 90f, 157–160 equilibrium, 60, 158, 159f exchange rates and, 381–382, 382t Fisher effect and, 456–459 income distribution and, 89–91 international borrowing/lending and, 169–172 797 international trade and, 91–92, 92f labor allocation and, 85–87 labor-capital ratios and, 124 North-South trade and, 129–130 patterns of trade and, 126–127 trade and, 58–62 Relative purchasing power parity, 452–453 Relative supply curve, 59–60, 59f production possibilities and, 152–153 Relative wages, 63–65 determination of, 70–71, 71f with many goods, 68–72, 69t, 71f Renminbi Case See Chinese yuan Rent seeking, 277 Repurchase agreements, 651 Reserve currencies, 558–559 asymmetric position of reserve center with, 559 definition of, 558 mechanics of, 558–559 Reserve requirements, 653, 658 Resources, 33, 115–150 export of natural resources in developing countries, 726 gains from trade and, 32–33 in interregional trade, 193 output and, 124–125 Ricardian model on, 73 Restructuring, government-organized, 654 Returns See also Rate of return effects of changing rates, portfolio diversification and, 781–784 excess, 330 Fisher effect on real rate of, 456–459, 458n, 484–486 in foreign exchange market, 395–396 Revaluation, 546–547 Reverse engineering, 184 Rey, Hélène, 385n Ricardian model, 52–76, 151 biased growth and, 160 definition of, 54 empirical evidence on, 73–76 labor in, 85 with many goods, 68–72 nontraded goods in, 73 production possibility frontier in, 55–56, 55f relative prices and supply in, 56–57 transport costs in, 72–73 Ricardo, David, 30, 33, 49, 451 on comparative advantage, 54 Rice imports policy, Japan, 80, 286–287 Richard, Dobbs, 564n Richardson, J David, 462n Risk, 391 allocation of in international financial markets, 667–675 carry trade and, 403–406 in foreign exchange market, 395–396 individual demand for money and, 418 measures to reduce, 752–753 portfolio diversification and, 645–646, 778–784 Risk aversion, 645, 778–784 portfolio diversification and, 645–646, 778–784 Risk neutral investors, 779, 784 Risk premiums, 555, 674 Robinson, James, 758–759 Rockoff, Hugh, 594n Rodriguez, Francisco, 319n Rodrik, Dani, 319n, 323n, 751, 759n Rogers, John, 702 Rogoff, Kenneth S., 319n, 632n, 674n, 675, 688n, 734n, 756n Romalis, John, 140 See also Heckscher-Ohlin model 798 Index Romania, inflation targeting, 442 Romer, Christina D., 598n Rose, Andrew K., 467n, 701, 701n Roses, production of, 53–54, 54t Rossi-Hansberg, Esteban, 234n Rothfeder, Jeffrey, 98n Roxburgh, Charles, 564n Russia default on debts by, 620–621 foreign direct investment in, 226 international reserves in, 743f, 744 Rybczynski, T M., 124n S Sachs, Jeffrey D., 129n, 734n, 759n Safe haven currencies, 552 Safety nets, 95 Salop, Stephen, 203n Samarina, Anna, 442n Samsung, 231 Samuelson, Paul, 52, 80, 94n, 124n, 467–469, 467n, 477–479 Sandal, Knut, 657n Sarno, Lucio, 674n, 675n Saving capital paradoxes and, 756 consumption demand and, 529–530, 529f current account balance and, 358–360 to developing countries, 731 in East Asian miracle, 746 government, 359–360 international rates of, 670f macroeconomics on, 350 national, 354, 358–359 private, 359–360 Scandinavia, duty-free shop sticky prices in, 472 Scharfstein, David S., 412n Schellekens, Philip, 466 Schnabl, Philipp, 661n Schobert, Franziska, 606n Schoenmaker, Drik, 659n Schott, P K., 220t Schott, Peter K., 142n, 222n Second best, theory of the, 280–281, 282, 302 Secondary income payments, 353n Sector-switching costs, 80 Securitization, 660–665 Seigniorage, 726 Self-fulfilling currency crises, 550 Self-fulfilling government default, 710–712 Semiconductor industry, 182–183, 333–334 Senegal income growth in, 724 output per capita in, 723t Serbia inflation in, 581–582 inflation targeting, 442 Service offshoring, 47–49 Services employment levels in, 48–49, 49f nontraded goods, 73 in world trade, 46–47, 46f Services, trade in, 643–645, 644f SGP See Stability and Growth Pact (SGP) Shadow banking system, 649–650 Shambaugh, Jay C., 665n Shatz, Howard, 129n Shipbreaking, 343–344 Shleifer, Andrei, 759n Short run, 424–430 asset market equilibrium in, 499–502 definition of, 424 output and exchange rates in, 487–533 output determination in, 493, 494f output equilibrium for open economies, 502–504 output market equilibrium in, 494–499 purchasing power parity in, 466–467 Short-term foreign debt, 733 Sign test, 138–139 Signaling effect of foreign exchange intervention, 557 Silgoner, Maria Antoinette, 702n Silicon Valley, 182–183, 184–185 Silver movement, 594–595 Singapore Asian financial crisis and, 747 in Asian takeoff, 321–323 economic miracle in, 742 education in, 746 income growth in, 724 output per capita in, 723t Singer, Hans, 728 Single European Act of 2,014, 702 Single Resolution Mechanism (SRM), 683t, 713 Single Supervisory Mechanism (SRM), 683t, 712–713 Skiba, Jakub, 648n Skill-biased technological change, 130–135, 141–142, 141f Skilling, David, 564n Slaughter, Matthew J., 95n, 99n, 129n Smith, Adam, 29, 722 Smoot-Hawley Act of 1,958, 290, 596 Soccer industry, 194–195 Social gains, 250–251 Sokoloff, Kenneth D., 757n solar dispute, 253 Solar panels Chinese subsidies for, 169 Chinese voluntary export restraint on, 263 Solnik, Bruno, 668 South Africa foreign direct investment in, 226 inflation targeting in, 442 South Korea advanced-country status of, 311 in Asian takeoff, 321–323, 321f automobile industry in, 313 current account of, 745t economic miracle in, 742 financial crisis in, 747–748 income growth in, 724 inflation targeting, 442 output per capita in, 723t productivity and wages in, 66 RAM production in, 334 wage rates in, 136t Sovereign default, 705–706, 734 Sovereignty, 31–32, 339 international financial regulation and, 667 Soviet bloc, 620 Soviet Union, 316 Spain autarky in, 64 euro crisis and, 712 gold standard in, 596 output per capita in, 723t wage rates in, 136t Spanish Miracle, 64 Special-interest politics, free trade and, 277, 285 Specialized suppliers, 182–183, 194 Specific factors model, 80–92, 151 assumption in, 81–82 definition of, 80–81 gains from trade and, 92–95 international labor mobility and, 101–106 international trade in, 91–92 politics of trade and, 95–101 prices, wages, and labor allocation in, 85–89 production possibilities in, 82–85 relative prices and income distribution in, 89–91 Specific tariffs, 243 Speculative attacks, 550, 575–578, 632 Speculative capital flows, 600–601 Spencer, Barbara, 330 Spot exchange rates, 386–387, 386f Srinivasan, T N., 734n Stability and Growth Pact (SGP), 683t, 691 Stagflation, 615–616 Standard trade model, 151–178 economic growth in, 160–162 on international borrowing and lending, 169–172 production possibilities and relative supply in, 152–153 relative price determination in, 157–160 relative prices and demand in, 153–156 tariffs and export subsidies in, 166–169 welfare effect of terms of trade in, 156–157 world relative supply and terms of trade in, 162–163 Statistical discrepancy, 367–368 Steel tariffs, 296–297 Steffen, Sascha, 705t Stein, Jeremy C., 412n Sterilized foreign exchange intervention, 539, 540t, 551–557 evidence on effects of, 557 gold standard and, 591 imperfect asset substitutability and, 555–557, 556f risk premiums and, 674 signaling effect of, 557 Sticky prices, 472 Stiefel, Dieter, 648n Stiglitz, Joseph, 751 Stocks, 417n Stolper, Wolfgang, 124n Stolper-Samuelson effect, 124n, 283 Store of value, money as, 416 Strategic trade policy, 326 imperfect competition and, 330–334 Stress tests, 653 Subaru, 253 Subprime mortgages, 661–663 See also Global financial crisis of 2008–2009 Subramanian, Arvind, 323n, 759n Subsidiary banks, 648 Subsidies, 166–169, 167–168, 255–257 cotton, 297, 298 export credit, 265–266, 266t for high-tech industries, 327–330, 329f implications of, 168–169 Substitutability, imperfect asset, 555–557, 572–574 Substitution effects, 155 portfolio diversification and, 782–784 world trade economy equilibrium and, 770–771, 770f Sudden stop, 583, 733 Sugar industry, 95, 100 Suppliers, specialized, 182–183 Supply See also Money supply commodity price cycles and, 728 long-run real exchange rate and, 471–474 in one-factor economies, 56–57 optimum tariffs and, 308 real exchange rates and, 475–476 relative, 59–60 relative, production possibilities and, 152–153 relative price and, 153–154, 154f trading world economy equilibrium and, 768–775 world relative, terms of trade and, 162–163, 162f Supply curves, export, 244–245, 245f Surplus consumer, 249–251, 249f, 250f producer, 250–251, 250f, 251f Sveikauskas, Leo, 138 Svensson, Lars E O., 632n Swap lines, 663–665, 664f Swaps, foreign exchange, 387 Sweden banking fragility in, 749 Maastricht Treaty and, 690n output per capita in, 723t reducing insolvencies, 656 Swiss National Bank, 665 Switzerland foreign banks, 648 franc, 552–554 inflation rates in, 627f Swoboda, Alexander, 700n T Taiwan in Asian takeoff, 321–323 current account of, 745t economic miracle in, 742 income growth in, 724 output per capita in, 723t Tanzi, Vito, 729n Targeting, inflation, 441–443 Tariff escalation, 258 Tariff-rate quotas, 277 on oilseeds, 258–261 Tariffs, 166–169 ad valorem, 243 amount of protection from, 247–249, 247f basic analysis of, 243–249 binding, 291 carbon, 326, 344–345 costs and benefits of, 249–254 demand and, 308 in developing countries, 319f domestic market failures argument for, 279–282, 280f effects of, 246–247, 247f, 265–266, 266t efficiency case for free trade and, 275, 275f implications of, 168–169 monopolies and, 270–273 optimum, 278–279, 279f, 308–310 political competition and, 283–284, 283f prices and, 308, 309f punitive, 79 rates of, 288, 288f rent seeking and, 277 specific, 243 supply, demand, and trade in a single industry and, 244–246 supply and, 308 terms of trade argument for, 278–279 welfare effects of optimum, 309–310, 309f world trade economy equilibrium and, 774–775 Taxes See also Fiscal policy DD schedule shifts and, 496f, 498 problems in policy formulation on, 509 Taylor, Alan M., 665n Taylor, John B., 442 Tchatchouang, Jean-Claude, 692 Technology activist trade policies and, 327–330 barriers to trade and, 44–46 factor content of trade and, 138–139, 140 information, service offshoring and, 47–49 Index skill-biased technological change and, 130–135 Technology-skill complementarity, 130–135 Temin, Peter, 597n Terms of trade, 152 implications of effects of, 168–169 international effects of, 163–166 tariffs/subsidies and, 166–169 between U.S and Mexico, 164–166, 165f welfare effect of changes in, 156–157 world relative supply and, 162–163 Terms of trade argument for a tariff, 278–279 Terms of trade gain, 252, 254f for optimum tariffs, 308–310 Terpstra, Mirre, 442n Textiles, 287, 287t, 293 See also Cloth Uruguay Round on, 296 Thailand auto industry, 214–215 current account of, 745t economic miracle in, 742 as emerging market, 659 financial crisis in, 747–748 inflation targeting, 442 output per capita in, 723t Theory of the second best, 280–281, 282, 302 Third world, 47 agricultural subsidies and, 298 Thought experiments, 64 Tobin, Jamesa, 645 Tokyo Round, 292 “Too big to fail,” 655–657, 666, 667 Toyota, 229 Track-and-field experts, comparative advantage in, 61 Tradable industries, 48–49, 49f, 192–194, 192t Trade See also International trade; World trade barriers to, 42–44 consumption possibilities expanded by, 60–61, 62f factor content of, 136–140 gains from, 62–63, 92–95, 642–647 gravity model of, 38, 39–44 impediments to, 42–44 intertemporal, 169–172, 176–178 money and, 36–37 in one-factor world, 57–65 politics of, 79–80, 95–100 Trade agreements, 42 See also specific agreements Trade balance deficits, 584–587 Trade creation, 302 Trade diversion, 169, 302–303 Trade elasticities, 531–533 Trade flows equilibrium relative price and, 158, 159f gradual adjustments of and current account dynamics, 515–519 Trade imbalances, macroeconomics on, 350 Trade policies, 243–273, 326–348 arguments for activist, 327–334 collective action and, 284, 286 community effects from, 345–346 controversies in, 326–348 in developing countries, 311–325 effects of, 265–266, 266t end of trade agreements and, 297–304 environmental issues and, 326, 341–345 export subsidies and, 255–257 globalization and low-wage labor and, 335–341 imperfect competition and, 330–334 import quotas, 257–261 income distribution and, 282–287 international coordination of, 35–36 799 international negotiations and, 288–297 local content requirements, 263–265 monopolies and, 270–273 national welfare arguments against free trade and, 278–282 political economy of, 274–310 second-best, 280–281, 282 strategic, 326 tariff analysis and, 243–249 tariff costs and benefits, 249–254 voluntary export restraints, 262–263 Trade rounds, 291–292 Doha Round, 292, 297–299 Trade shocks, 345–346 Trade wars, 289–290, 289t Trade-Related Aspects of Intellectual Property (TRIPS), 294 Trading world economy, 768–775 Transfer payments, 355 Trans-Pacific Partnership (TPP), 303–304 Transparency, 752 Transparency International, 729, 729f, 730n Transport costs, comparative advantage and, 72–73 Transportation, barriers to trade and, 44–46 The Trap (Goldsmith), 67 Treaty of Rome, 683, 689 Trebbi, Francesco, 759n Trefler, Daniel, 138–139, 216 Triffin, Robert, 606 Troika, 710 Trump, Donald, 98n, 105 Tsiakas, Ilias, 675n Tuna, tariff-rate quota on, 277 Turkey currency reform in, 431 inflation in, 434 inflation targeting, 442 Tvaronavičiene M., 316n U Uganda, inflation targeting, 442 Umemoto, Masaru, 214n Underwriting, 648 Unemployment deflation and, 626–629 European Union labor mobility and, 702–703, 703t international policy coordination failures and, 639–641 macroeconomics on, 350 political economy of trade and, 95–100 rates in 1,991–2,043, 615t UniCredit, 705t Unilateral transfers, 353 in current account balance, 356n Unit isoquant, 764 Unit labor requirement, 54–55, 69–70, 69t Unit of account, money as, 415–416 United Kingdom See also European Union (EU) British exit from the EU and, 301–302, 346, 625–626, 684–686 current account under the gold standard, 590 euro opt out by, 690n external economies in, 182 financial crisis, 657 foreign assets and liabilities of, 669, 669t gold standard in, 595–596 inflation rates in, 607t labor mobility in, 704t labor productivity in, 73–75 manufactured goods trade in, 47, 47t 800 Index United Nations Development Program (UNDP), 464, 465 United Nations Educational, Scientific and Cultural Organization (UNESCO),as, 465 United States balance of payments, 370, 371t–372t balance of payments accounts, 365t barriers to trade with, 42–44, 43t, 44f in Bretton Woods system, 605–608 campaign finance laws, 285 convertible currency in, 599–600 corruption level in, 729n current account and net international investment position of, 358, 358n dairy industry, 284 economic growth of Mexico and, 164–166 economic integration with Canada, 216 external economies in, 182 factor content of trade, 137–138, 137t financial account of, 367 fiscal stimulus package of, 625 foreign assets and liabilities of, 669, 669t gasoline dispute with Venezuela, 295, 341 gross national product of, 352f immigration to and economy of, 104–106 income inequality in, 128 inflation rates in, 607t, 627f labor mobility in, 704t labor productivity in, 73–75 liquidity trap in, 521–522 Madrid treaty, 64 manufactured goods trade in, 47, 47t monetary standards of 1890s in, 593–595 non-production–production employment in, 132–133, 132f official reserve transactions, 365t, 369 output per capita in, 723t permanent money supply changes and, 438–440, 439f relative wages in, 63 reserve requirement, 653 semiconductor industry, 333–334 service outsourcing in, 48–49 steel tariff by, 296–297 sugar industry, 95, 100 technology industries, 327–330, 329f, 332 trade deficit with China, 231–232 trade statistics, 29, 30f trading partners of, 38–39, 39f Trans-Pacific Partnership and, 303–304 wage rates in, 136t Upper middle-income economies, 721, 722t Urbanization, 730 Uruguay debt crisis in, 738 in Mercosur, 302–303 Uruguay Round, 34, 287, 292–294 costs and benefits of, 294–296 Uruguay’s Round Agreement on Agriculture (URAA), 259 U.S Bureau of Labor Statistics, 96 U.S Buy American Act, 264 U.S Department of Commerce, Bureau of Economic Analysis, 352f, 362n, 365t on balance of payments, 370, 371t–372t U.S International Trade Commission, 277, 287t U.S Trade Adjustment Assistance program, 99 Utility, 769–770 expected, 778, 781, 781f marginal, 778–779 portfolio diversification and, 778–784 V Valencia, Fabián, 654n Valério, Nuno, 648n Vallée, Shahin, 713n Value, money as a store of, 416 Value date, 386 Value effect, 490 trade elasticities and, 532 Vehicle currencies, 385 Venezuela debt crisis in, 738 gasoline dispute with the U.S., 295, 341 oil exports, 166 output per capita in, 723t Verdelhan, Adrien, 674n Vertical disintegration of production, 46 Vertical FDI, 229, 230 outsourcing and, 232 Vertical integration, 232 Vietnam War, 607 Vihriälä, Vesa, 657n Viner, Jacob, 467n Volatility, tests for excessive, 674–675 Volcker, Paul A., 616 Volkswagen, 463 Volosovych, Vadym, 756n Volume effect of consumer spending, 490 trade elasticities and, 532 Voluntary export restraints (VER), 262–263 effects of, 265–266, 266t Voluntary restraint agreements (VRAs), 262 Von Peter, Götz, 665n W Wachovia, 662 Wages comparative international, 136t convergence of in EU, 102–104 effects of immigration on, 105 exploitation and, 67–68 labor allocation and, 85–89 North-South inequality in, 128–130 pauper labor argument on, 67 productivity and competitiveness and, 65–67 relative, 63–65 skill-biased technological change and, 130–135 in specific factors model, 85–89 sticky, 472 trade globalization and, 336–337, 336t trade policies, globalization, and, 335–341 Walters, Alan, 706n Wandschneider, Kirsten, 596 Wang, F., 262 Washington Mutual Bank, 662 Wealth income gap and, 722–725 net foreign, 357–358, 357n, 358f, 369–370 Wealth of Nations (Smith), 722 The Wealth of Nations (Smith), 29 Weinstein, Austin, 105, 164n Weinstein, David, 139 Welfare effects, 156–157 costs of U.S protection, 287t of export subsidies, 255, 255f from full liberalization, 297–298, 298t of intermediate goods, 264 international portfolio diversification and, 669–670, 670f of optimum tariffs, 309–310 Wells Fargo Bank, 662 Werning, Iván, 700n Wessel, David, 663n Wheat imports, 300–301 Whitaker, Erin M., 362n Wolfe, Tom, 184n The Wonderful Wizard of Oz (Baum), 594 Wood, Adrian, 129n Woodford, Michael, 435n Work force See Labor Working conditions, 338, 340 World Bank, 291, 598n on Bangladesh incomes, 340 debt crisis of the 1980s and, 737 defaults and, 734 on East Asian miracle, 746 on import-substituting industrialization, 318 on Mercosur, 303 national income data by, 722n official lending from, 735 on welfare gains from liberalization, 297–298, 298t World oilseed tariff rates, 260 World trade, 38–51 anomalies in, 41 changing rules in, 49–50 composition of, 46–47 gravity model of, 38, 39–44 patterns of, 44–46 service offshoring in, 47–49 trading partners, 38–44 World Trade Organization (WTO), 35–36 Brexit and, 685 China in, 98 creation of, 293–294 dispute resolution in, 294, 295 environmental issues and, 341 established, 34, 291 Lithuania, 316 national independence and, 339, 341 origins of, 598n trade rounds, 291–292 Ukraine, 294 U.S steel tariff and, 296–297 World War I, 45–46 defaults on debts from, 732 gold standard and, 591, 595–596 international economic disintegration after, 596–597 World War II foreign banks in Switzerland, 648 international borrowing/lending after, 731 international monetary system after, 579, 598–609 multilateral negotiations after, 291 Wright, Greg C., 234n WTO See World Trade Organization (WTO) Wynne, Mark A., 435n X Xi Jinping, 566n Xiaoqiang Cheng, 389n Y Yen, Japanese in carry trade, 403–406, 404f dollar exchange rate with, 434, 435f international reserves and, 566–567, 566n international reserves in, 744 yen/dollar PPP, 460, 460f Yuan, Chinese, 389–390, 390f floating exchange rates and, 631 international reserves and, 744 Yuskavage, Robert E., 362n Z Zero lower bound (ZLB), 519–520 Zero-profit number of firms, 206 Zimbabwe hyperinflation in, 436–438, 437f, 581–582 output per capita in, 723t CREDITS PHOTOS Chapter p 61, AP Photo; p 64, North Wind Picture Archives Chapter p 214, Carlos Osorio/AP Photo; p 223, Si Wei/Color China Photo/AP Images; p. 231, Courtesy of IHS Markit http://news.ihsmarkit com/sites/ihs.newshq.businesswire.com/files/ Exploded_View_Apple_iPhone_7.jpg Marshall, Principles of Economics, 8th ed (London: Macmillan and Co., 1920) From Book IV, Chapter X, Section [First edition: 1890.]; p 184, Annalee Saxenian Regional Advantage Cambridge: Harvard University Press, 1994 Chapter p 224, “Wielding a Heavy Weapon Against China,” Business Week June 21, 2004 Chapter 10 p 277, U.S International Trade Commission; p 260, Compiled from official statistics of the U.S Department of Commerce; p. 304, Michaely, Michael, Trade Preferential Agreements in Latin America: An Ex-Ante Assessment (March 1996) World Bank Policy Research Working Paper No 1583 Available at SSRN: https://ssrn.com/abstract=620535 Chapter 12 p 338, Kimberly Ann Elliott Can Labor Standards Improve Under Globalization? Washington, D.C.: Institute for International Economics, 2001 A survey of the issues by an economist sympathetic to the cause of the activists; p 343, Energy Information Agency Chapter p 253, crystal51/Shutterstock; p 256, AP Photo/Jockel Finck; p 261, Trevor Reeves/Shutterstock; p 236, Celso Diniz/ Shutterstock Chapter 14 p 403, AP Photo/Ahn Young-joon Chapter 16 p 463, imageBROKER/Superstock Chapter 18 p 566, tab62 Shutterstock Chapter 19 p 593, Pictorial Press Ltd/Alamy Stock Photo; p 597, National Archives and Records Administration/Franklin D Roosevelt Library; p 614, str/AP Photo Chapter 20 p 662, Richard Drew/AP Images Chapter 21 p 701, Domenico Stinellis/AP Images; p. 709, Dimitri Messinis/AP Images Chapter 13 p 365, U.S Department of Commerce, Bureau of Economic Analysis, June 16, 2016 Chapter 22 p 746, De Visu/Shutterstock Chapter 14 p 386, Datastream; p 390, Data from the Bloomberg Markets https://www.bloomberg com/quote/USDCNH:CUR; https://www bloomberg.com/quote/USDCNY:CUR; p 365, Datastream; p 380, Jonathan Fuerbringer “Dollar’s Strength a Surprise,” New York Times August 7,1989 Chapter 15 p 435, Price levels from International Monetary Fund, International Financial Statistics Exchange rate from Global Financial Data; p 441, “Inflation Drives Canadian Dollar Higher.” Financial Times May 23, 2007; p 446, Juan-Antonio Morales, “Inflation Stabilization in Bolivia,” in Michael Bruno et al., eds., Inflation Stabilization: The Experience of Argentina, Brazil, Bolivia, and Mexico Cambridge, MA: MIT Press, 1988, table 7A-1 Money supply is M1 Chapter 16 p 468, Penn World Table, version 9.0 Chapter 19 p 594, Bryan, William Jennings Democratic Party Convention 1896 Chapter 20 p 659, Basel Committee Charter, at http:// www.bis.org/bcbs/charter.htm Chapter 21 p 711, International Monetary Fund, World Economic Outlook database TEXT Chapter p 45, Keynes, John, The Economic Consequences of the Peace 1919 New York Harcourt, Brace and Howe Inc.; p. 48, Blinder, Alan Offshoring: The Next Industrial Revolution? Foreign Affairs March/ April 2006 Chapter p 74, G D A MacDougall “British and American Exports: A Study Suggested by the Theory of Comparative Costs.” Economic Journal 61 (December 1951), pp 725–752; 62 (September 1952), pp 515–549 Chapter p 99, Pearson Education, Upper Saddle River; p 103, The Conference Board International Labor Comparisons, 2015; and Orley Ashenfelter, “Comparing Real Wage Rates.” American Economic Review 102 (2012), pp 645–70; p 104, U.S Census Bureau; p 106, U.S Census Bureau Chapter pp 182–183, Annalee Saxenian Regional Advantage Cambridge: Harvard University Press, 1994; p 184, Annalee Saxenian Regional Advantage Cambridge: Harvard University Press, 1994; p 184, Alfred C-1 TQUU0CVKQPCN2TQFWEVRGT%CRKVC KPFQNNCTU )4''0.#0& +%'.#0& 0149#; 75 + # 59'&'0 (+0.#0& '5610+# % # #& # #68+# &'0/#47- 0'6* +4'.#0& +6*7#0+# )'4/#0; $'.)+7/ 7: (4#0%' 52#+0 21467)# + ' & 6# 6' $'.#475 21.#0& %