"International Economics Sixth edition
Robert M. Dunn, Jr.
George Washington University
John H. Mutti
Grinnell College
First published 2004 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group
This edition published in the Taylor & Francis e-Library, 2004.
© 2004 Robert M. Dunn & John H. Mutti All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested
ISBN 0-203-46204-1 Master e-book ISBN
ISBN 0-203-33961-4 (Adobe eReader Format) ISBN 0–415–31153–5 (hbk) ISBN 0–415–31154–3 (pbk)
Contents
List of figures List of tables List of boxes List of exhibits Preface 1 Introduction Learning objectives 1 Why international economics is a separate field 7 The organization of this volume 8 Information about international economics 10 Summary of key concepts 12 Questions for study and review 13 Suggested further reading 13
PART ONE
xiii xvii xix xxi xxiii 1
International trade and trade policy
2 Patterns of trade and the gains from trade: insights from classical theory Learning objectives 17 Absolute advantage 17 Comparative advantage 19 Additional tools of analysis 22 International trade with constant costs 27 International trade with increasing costs 32 The effect of trade 35 The division of the gains from trade 36 Comparative advantage with many goods 41 Summary of key concepts 44 Questions for study and review 45 Suggested further reading 47 Appendix: the role of money prices 47 Notes 49
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vi Contents 3 Trade between dissimilar countries: insights from the factor proportions theory Learning objectives 51 Factor proportions as a determinant of trade 52 Implications of the factor proportions theory 55 Empirical verification in a world with many goods 68 Summary of key concepts 70 Questions for study and review 71 Suggested further reading 72 Appendix: a more formal presentation of the Heckscher–Ohlin model with two countries, two commodities, and two factors 73 Notes 80 4 Trade between similar countries: implications of decreasing costs and imperfect competition Learning objectives 82 External economies of scale 84 The product cycle 89 Preference similarities and intra-industry trade 91 Economies of scale and monopolistic competition 94 Trade with other forms of imperfect competition 97 Cartels 101 Further aspects of trade with imperfect competition 103 Summary of key concepts 104 Questions for study and review 105 Suggested further reading 106 Appendix: derivation of a reaction curve 106 Notes 107 5 The theory of protection: tariffs and other barriers to trade Learning objectives 109 Administrative issues in imposing tariffs 110 Tariffs in a partial equilibrium framework 111 Quotas and other nontariff trade barriers 116 Production subsidies 122 Tariffs in the large-country case 123 General equilibrium analysis 124 The effective rate of protection 127 Export subsidies 132 Export tariffs 134 Summary of key concepts 135 Questions for study and review 137 Suggested further reading 138 Notes 138 51
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Contents vii 6 Arguments for protection and the political economy of trade policy Learning objectives 140 Arguments for restricting imports 141 Dumping 154 Secondary arguments for protectionism 158 The political economy of trade policy 161 Summary of key concepts 163 Questions for study and review 164 Suggested further reading 165 Notes 165 7 Regional blocs: preferential trade liberalization Learning objectives 167 Alternative forms of regional liberalization 168 Efficiency gains and losses: the general case 168 Efficiency gains and losses with economies of scale 171 Dynamic effects and other sources of gain 172 The European Union 173 NAFTA 177 Other regional groups 181 Summary of key concepts 181 Questions for study and review 182 Suggested further reading 182 Notes 182 8 Commercial policy: history and recent controversies Learning objectives 184 British leadership in commercial policy 184 A US initiative: the Reciprocal Trade Agreements program 186 The shift to multilateralism under the GATT 187 The Kennedy Round 189 The Tokyo Round 190 The Uruguay Round 191 Intellectual property 197 The rocky road to further multilateral agreements 199 The Doha Development Agenda 200 Expanding the World Trade Organization 200 Summary of key concepts 202 Questions for study and review 202 Suggested further reading 203 Notes 203 9 International mobility of labor and capital Learning objectives 205 140
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viii Contents Arbitrage in labor and capital markets 206 Additional issues raised by labor mobility 210 Multinational corporations 212 Summary of key concepts 220 Questions for study and review 221 Suggested further reading 221 Notes 221 10 Trade and growth Learning objectives 223 The effects of economic growth on trade 224 Trade policies in developing countries 231 Primary-product exporters 233 Deteriorating terms of trade 235 Alternative trade policies for developing countries 236 Summary of key concepts 239 Questions for study and review 240 Suggested further reading 241 Notes 241 11 Issues of international public economics Learning objectives 242 Environmental externalities 244 The tragedy of the commons 249 Taxation in an open economy 251 Summary of key concepts 259 Questions for study and review 260 Suggested further reading 261 Notes 261
PART TWO
223
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International finance and open economy macroeconomics
12 Balance-of-payments accounting Learning objectives 267 Distinguishing debits and credits in the accounts 268 Analogy to a family’s cash-flow accounts 271 Calculation of errors and omissions 273 Organizing the accounts for a country with a fixed exchange rate 274 Balance-of-payments accounting with flexible exchange rates 280 The international investment position table 281 Trade account imbalances through stages of development 285 Intertemporal trade 288 Summary of key concepts 290
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Contents ix Questions for study and review 291 Suggested further reading 291 Notes 292 13 Markets for foreign exchange Learning objectives 293 Supply and demand for foreign exchange 294 Exchange market intervention regimes 295 Exchange market institutions 300 Alternative definitions of exchange rates 302 Alternative views of equilibrium nominal exchange rates 307 Summary of key concepts 308 Questions for study and review 309 Suggested further reading 309 Notes 310 14 International derivatives: foreign exchange forwards, futures, and options Learning objectives 312 Forward exchange markets 312 Foreign exchange options 321 Other international derivatives 325 Summary of key concepts 326 Questions for study and review 327 Suggested further reading 328 Notes 328 15 Alternative models of balance-of-payments or exchange-rate determination Learning objectives 329 Why the balance of payments (or the exchange rate) matters 331 Alternative views of balance-of-payments (or exchange rate) determination 334 Exchange rates and the balance of payments: theory versus reality 348 Summary of key concepts 349 Questions for study and review 350 Suggested further reading 350 Notes 351 16 Payments adjustment with fixed exchange rates Learning objectives 352 David Hume’s specie flow mechanism 352 The Bretton Woods adjustment mechanism: Fiscal and monetary policies 364 The policy assignment model: one last hope for fixed exchange rates 369 Macroeconomic policy coordination 373 Summary of key concepts 374 Questions for study and review 375 293
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x Contents Suggested further reading 375 Notes 376 17 Balance-of-payments adjustment through exchange rate changes Learning objectives 377 A return to supply and demand 377 Requirements for a successful devaluation 379 Effects of the exchange rate on the capital account 391 Capital losses and other undesirable effects of a devaluation 392 A brief consideration of revaluations 396 The Meade cases again 396 Summary of key concepts 399 Questions for study and review 399 Suggested further reading 400 Notes 401 18 Open economy macroeconomics with fixed exchange rates Learning objectives 403 The Keynesian model in a closed economy 404 An open economy 410 The international transmission of business cycles 415 Foreign repercussions 416 Some qualifications 417 Capital flows, monetary policy, and fiscal policy 418 Domestic macroeconomic impacts of foreign shocks 425 Domestic impacts of monetary policy shifts abroad 426 Conclusion 427 Summary of key concepts 427 Questions for study and review 428 Suggested further reading 428 Notes 429 19 The theory of flexible exchange rates Learning objectives 430 Clean versus managed floating exchange rates 431 The stability of the exchange market 432 Impacts of flexible exchange rates on international transactions 433 Open economy macroeconomics with a floating exchange rate 434 The domestic impacts of foreign monetary and fiscal policy shifts with flexible exchange rates 447 Mercantilism and flexible exchange rates 449 Purchasing power parity and flexible exchange rates 451 Summary of key concepts 452 Questions for study and review 453 377
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Contents xi Suggested further reading 453 Notes 454 20 The international monetary system: history and current controversies Learning objectives 455 Events before 1973 456 The Eurocurrency market 459 Floating exchange rates 465 Alternatives to flexible exchange rates 471 The European Monetary Union 473 Changes in the role of the SDR 478 Two decades of developing country debt crises 478 The new financial architecture 486 Sovereign bankruptcy for heavily indebted crisis countries 488 Prospective issues in international economic policy in the next decade 489 Summary of key concepts 491 Questions for study and review 492 Suggested further reading 493 Notes 494 Glossary Index 455
496 510
Figures
1.1 1.2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8
Trade goods as a share of GDP in the United Kingdom 1850–1990 The role of foreign direct investment in the world economy (FDI stock as a percentage of GDP) Germany’s production-possibility curve Consumer indifference curves Equilibrium in a closed economy Equilibrium with foreign trade France: equilibrium before and after trade Increasing costs: equilibrium in a closed economy Equilibrium trade in a two-country case (increasing costs) Equilibrium price determination Derivation of Country A’s offer curve Offer curves for Countries A and B with the equilibrium barter ratio and trade volumes The elasticity of Country A’s offer curve An empirical demonstration of the relationship between relative labor productivities and trade Production with different factor intensities Patterns of trade given by the factor proportions theory Growth in the labour force Isoquants for wheat production Comparison of factor intensity in cheese and wheat Box diagrams for Country A. Production-possibility curve for Country A Influence of factor endowments on the production-possibility curves Factor price equalization The Rybczynski theorem Equilibrium in a closed economy with decreasing opportunity cost Equilibrium with foreign trade and decreasing opportunity cost The advantage of a long-established industry where scale economies are important The product cycle Production under monopolistic competition The impact of free trade on prices: increased competitiveness despite economies of scale Reaction curves and duopoly trade Nominal and real prices of crude petroleum, 1973–2001 (dollars per barrel)
3 4 23 25 28 29 31 33 34 36 38 39 40 43 53 55 58 73 74 76 78 79 80 86 87 88 90 95 97 99 102
xiv Figures 4.9 4.10 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 6.1 6.2 6.3 6.4 6.5 7.1 9.1 10.1 10.2 10.3 10.4 11.1 11.2 11.3 11.4 13.1 13.2 14.1 14.2 14.3 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 16.10 16.11 16.12 16.13 16.14 16.15 16.16 17.1 A possible decline in welfare from trade with domestic monopoly Isoprofit curves and the derivation of a reaction curve The effects of a tariff: partial equilibrium, small-country case The effect of an import quota The effect of a subsidy: partial equilibrium, small-country case The effect of a tariff: partial equilibrium, large-country case The effects of a tariff: general equilibrium, small-country case The effects of a tariff: general equilibrium, large-country case The effect of an export subsidy The effect of an export tax An optimum tariff in a partial equilibrium model An optimum tariff with offer curves Subsidization of an oligopoly producer Dumping can increase profits – an example of price discrimination Use of a tariff to correct a domestic distortion Effects of a customs union between France and Germany Effects of US capital flow to Canada Neutral growth in a small country Effect of demand conditions on the volume of trade Effect of growth on the terms of trade The case of immiserizing growth Marginal benefits and marginal costs of pollution abatement The pollution-income relationship Tax collections and the terms of trade A tax on capital in a small country Supply and demand in the market for foreign exchange Nominal effective exchange rate for the dollar (1970–2003) The determination of the forward discount on sterling Profits and losses from a put option on sterling Profits and losses from a call option on sterling Equilibrium in the savings/investment relationship Equilibrium in the market for money Equilibrium in the real and monetary sectors Impacts of fiscal expansion Impacts of an expansion of the money supply Equilibrium in the balance of payments Domestic and international equilibrium Domestic equilibrium with a balance-of-payments deficit Balance-of-payments adjustment under specie flow Payments adjustment through monetary policy Payments adjustment through a tightening of fiscal policy Comparing the effects of fiscal and monetary policies Adjustment of a payments deficit through expansionary fiscal policy Internal and external balance Balance-of-payments adjustment through policy assignment Balance-of-payments adjustments through policy assignment in the deficit recession case The market for foreign exchange with a balance-of-payments deficit 103 106 112 118 122 124 125 127 133 135 145 147 151 155 160 169 208 225 226 230 231 244 245 253 255 295 304 318 323 324 358 359 360 360 361 362 363 363 364 365 366 366 367 370 371 372 378
Figures xv 17.2 17.3 17.4 17.5 17.6 17.7 17.8 17.9 18.1 18.2 18.3 18.4 18.5 18.6 18.7 18.8 18.9 18.10 18.11 18.12 18.13 19.1 19.2 19.3 19.4 19.5 19.6 The market for foreign exchange when the local currency is devalued The Marshall–Lerner case The Marshall–Lerner case where a devaluations succeeds The Marshall–Lerner case where a devaluation fails The small-country case The larger-country case The effects of a successful devaluation The Swann diagram Equilibrium in a closed economy The multiplier in a closed economy The propensity to import and the marginal propensity to import The trade balance as income rises Domestic savings, investment, and the S – 1 line Savings minus investment and the trade balance with both at equilibrium The impact of an increase in domestic investment The impact of a decline in exports Impacts of a decline in exports and an increase in domestic investment Effects of an expansionary monetary policy with fixed exchange rates Effects of fiscal policy expansion with perfect capital mobility Effects of fiscal policy expansion when BP is flatter than LM Effects of fiscal policy expansion when BP is steeper than LM Effects of an expansionary monetary policy with fixed exchange rates Effects of an expansionary monetary policy with a floating exchange rate Exchange rate overshooting after a monetary expansion Effects of fiscal policy expansion with perfect capital mobility Effects of fiscal policy expansion when BP is flatter than LM Effects of fiscal policy expansion when BP is steeper than LM 379 380 381 381 383 384 389 398 406 409 412 412 412 413 413 415 416 420 423 424 424 439 440 441 445 445 446
Tables
1.1 1.2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3.1 3.2 4.1 5.1 5.2 5.3 5.4 5.5 6.1 7.1 7.2 7.3 7.4 8.1 8.2 8.3 9.1 9.2 10.1 10.2 10.3 11.1 11.2 11.3 15.1 15.2
Exports plus imports of goods and services as a share of GNP International capital flows and trade An example of absolute advantage The gain on output from trade with an absolute advantage An example of comparative advantage The gain in output from trade with comparative advantage Domestic exchange ratios in Portugal and England German production of wheat and steel German production and consumption The gain from trade Differences in factor endowments by country Differences in factor input requirements by industry Average intra-industry trade in manufactured products Employment in the steel industry The US market for steel mill products The Japanese price gap Tariff escalation in the textile and leather sector The economics of Indonesian bicycle assembly Dumping cases in the United States and European Community, 1979–89 European Union trade, 1988 and 1994 Projected gains from completion of the internal market EU operational budgetary balance, 2000 US trade and employment by SIC industries Average tariff rates in selected economies Tariff bindings and applied tariffs Cases brought for WTO dispute resolution in 2002 The role of immigrants as a share of the population or work force The top 25 global corporations Leading Malaysian exports, 1965 and 1995 Trade of developing countries Concentration of merchandise exports for least developed countries Tax revenue as a percentage of GDP, 2000 Corporate income tax rates on US manufacturing affiliates Taxes on corporate income as a percentage of GDP, 1965–2000 Impact on the domestic money supply of a balance-of-payments deficit The sterilization of effects of a payments deficit
2 6 18 19 20 20 21 23 30 32 56 60 93 115 116 121 128 131 157 175 176 177 180 191 193 196 206 214 228 232 234 251 257 257 332 332
xviii Tables 19.1 Strength of fiscal policy in affecting GNP under alternative exchange rate regimes 19.2 Summary of open economy macroeconomics conclusions 20.1 The creation of a Eurodollar deposit 20.2 A Eurodollar redeposit 20.3 Exchange rate regimes of IMF members as of 31 December 2001 446 451 460 461 466
Boxes
2.1 3.1 3.2 3.3 3.4 4.1 4.2 5.1 5.2 5.3 5.4 5.5 5.6 6.1 6.2 6.3 7.1 7.2 8.1 8.2 8.3 8.4 9.1 10.1 10.2 10.3 10.4 10.5 11.1 11.2 12.1 13.1 15.1 15.2 16.1
Offer curves How different are factor endowments? How different are factor intensities? The widening income gap: is trade to blame? An intermediate case: a specific factors model Intra-industry trade: how general is it? Further reasons for economies of scale: the learning curve How do economists measure welfare changes? World steel trade – a case of permanent intervention? Super sleuths: assessing the protectiveness of Japanese NTBS Tariff escalation and other complications Effective rates of protection and the Indonesian bicycle boom EU sugar subsidies and export displacement Optimum tariffs: did Britain give a gift to the world? Another view of the optimum tariff: offer curve analysis Semiconductors and strategic trade policy Fortress Europe? A NAFTA scorecard Tariff bindings and applied tariffs WTO dispute resolution and the banana war Pharmaceutical flip flops and the TRIPS agreement Who’s afraid of China? Mergers, acquisitions and takeovers: hold the phone M..."
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