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summary international economics theory and policy. 1. Introduction Throughout the study of international economics seven themes recur: (1) the gafrom trade, (2) the pattern of trade, (3) protectionism, (4) the balance of paymenexchange rate determination, (6) international policy coordination, and (7) the international capital market. International economics consists of two broad subfields: international trade andinternational money. While the first focuses on the transactions that involve a physical movement of goods, the latter focuses on the financial transactions. This book introduces the main concepts and methods of international economics. Much of the book is devoted to old ideas that are still valid as ever, such as the Ricardian model and David Hume’s monetary analysis. Due to the fact that many new challenges have been thrown up, some of these important concepts are rethought and updated. Finally, new approaches have emerged to old questions, such as the impacts of changes in monetary and fiscal policy. The study of international economics has never been as important as it is now. Nations are more closely linked through trade and investment in each other’s economies than ever. Both policy makers and business leaders must pay attention to the rapidly changing economic fortunes. A look at basic trade statistics shows that international trade has roughly tripled in importance compared with the economy as a whole. Moreover, both imports and exports have increased in the United States, backed up by money from foreign investments in the U.S. economy. Due to the economic crisis these imports and exports took a plunge around 2009, which clearly reflects the linkages between world trade and the world economy. 1.1. What Is International Economics About? Throughout the study of international economics seven themes recur: (1) the gafrom trade, (2) the pattern of trade, (3) protectionism, (4) the balance of paymenexchange rate determination, (6) international policy coordination, and (7) the international capital market. International economics uses the same fundamental methods of analysis as other branches of economics, because the motives and behavior of individuals are the same in international trade as they are in domestic transactions. However, international economics involves new and different concerns such as trade quotas or currency fluctuations, because these trades and investments occur between independent nations. Distributing prohibited | Downloaded by Filip Semrad () lOMoARcPSD| © StuD 15 The subject matter of international economics thus consists of issues raised by the special problems of economic interaction between sovereign states. Throughout the study of international economics seven themes recur: (1) the gains from trade, (2) the pattern of trade, (3) protectionism, (4) the balance of payments, (5) exchange rate determination, (6) international policy coordination, and (7) the international capital market. 1.1.1. The Gains from Trade The most important single insight in all of international economics is that there are gains from trade – or, when countries sell goods and services to each other there is almost always a mutual benefit. It is a common misconception that trade is harmful if there are large disparities between countries in productivity or wages. On the one hand, less technologically advanced countries worry that they won’t be able to compete in international trade. On the other hand, technologically advanced nations worry that lower-wage countries will drag their standard of living down. This book’s first model (Chapter 3) will demonstrate that two countries can trade to their mutual benefit despite any disparity. Chapter 5 will show that trade provides benefits by allowing countries to balance their import and export goods. The benefits of international trade are not limited to trade in tangible goods as international migration and borrowing and lending are also forms of mutually beneficial trade. Chapter 4 will deal with trade of labor for goods and services, while trade of current goods for the promise of future goods will be discussed in Chapter 6. Chapter 21 will show that the exchange of risky assets can benefit all countries by allowing them to diversify its wealth and reduce the variability of its income. Although countries generally benefit from international trade, it is possible that trade may hurt groups within nations through a strong effect on the distribution of income. Theorists point out that international trade can adversely affect owners of resources that are specific to industries that compete with imports. Chapters 4 through 6 will deal with the problem that the real wages of less-skilled workers have been declining in particular countries. 1.1.2. The Pattern of Trade Because economists cannot discuss the effects of international trade with any confidence unless they know their theory is good enough to explain the international Distributing prohibited | Downloaded by Filip Semrad () lOMoARcPSD| © StuD 16 trade that is actually observed, the pattern of international trade has been a major preoccupation of international economists. Some aspects of the pattern of trade, such as climate and resources, are easy to understand. Chapter 3 will show a powerful explanation of the pattern of trade in terms of international differences in labor productivity. Chapter 5 presents alternative explanations, such as the influential theory that links trade patterns to an interaction between the relative supplies of national resources such as capital and labor on one side and the relative use of these factors in the production of different goods on the other. Theories that suggest a substantial random component in the pattern of trade will be presented in Chapters 7 and 8. 1.1.3. How Much Trade? Since the emergence of modern nation-states, governments have worried about the effect of international competition on the prosperity of domestic industries and have often placed limits on imports. The single most consistent mission of international economics has been to analyze the effects of these so-called protectionist policies, and usually to show the advantages of freer international trade. In the 1990s this debate took a new direction when a broad policy of removing barriers to international trade was pursued that reflected the view that free trade was a force for promoting world peace. Major trade agreements such as the North American Free Trade Agreement (NAFTA) and the World Trade Organization were negotiated. Since that time, however, an international political movement that opposes ‘globalization’ has grown significantly. This movement has forced advocates of free trade to seek new ways to explain their views. Over the years, economists have developed an analytical framework for determining the effects of government policies that affect international trade. This framework, presented in Chapters 9 and 10, helps predicting the effects of trade policies while also allowing for cost-benefit analysis. Although governments do not necessarily do what the cost-benefit analysis of economists tells them they should, economic analysis can help make sense by showing who benefits and who loses from policies such as quotas and subsidies. The key insight of this analysis is that conflicts of interest within nations are usually more important in determining trade policy than conflicts of interest between nations. Chapters 4 and 5 shows that trade has strong effects on income distribution within countries, while Chapters 10 through 12 reveal that the relative power of different interest groups within countries often determines policies towards international trade. Distributing prohibited | Downloaded by Filip Semrad () lOMoARcPSD| © StuD 17 1.1.4. Balance of Payments A key difference between international economics and other areas of economics is that countries usually have their own currencies, whose relative values can change over time. Due to the fact that exchange rates were fixed by government action for a long time, the study of exchange rate determination is a relatively new part of international economics. Fixed-rate systems will be discussed in Chapter 18, Chapter 19 is devoted to the historical performance of alternative exchange-rate systems, and Chapter 20 to the economics of currency areas such as the EU. Chapters 14 through 17 focus on the modern theory of floating exchange rates. 1.1.5. Exchange Rate Determination A key difference between international economics and other areas of economics is that countries usually have their own currencies, whose relative values can change over time. Due to the fact that exchange rates were fixed by government action for a long time, the study of exchange rate determination is a relatively new part of international economics. Fixed-rate systems will be discussed in Chapter 18, Chapter 19 is devoted to the historical performance of alternative exchange-rate systems, and Chapter 20 to the economics of currency areas such as the EU. Chapters 14 through 17 focus on the modern theory of floating exchange rates. 1.1.6. International Policy Coordination Although all nations are free to choose their own economic policies, one country’s economic policies usually affect other countries as well. Differences in goals or a failure to coordinate policies may lead to losses and conflicts of interest. A fundamental problem in international economics is determining how to produce an acceptable degree of harmony among the international trade and monetary policies of different countries in the absence of a world government. Chapter 9 discusses the rationale for the World Trade Organization system. Chapter 19 is devoted to the theory of international macroeconomic coordination and the developing experience. 1.1.7. The International Capital Market In any sophisticated economy there is an extensive capital market: a set of arrangements by which individuals and firms exchange money now for promises to pay in the future. The growing importance of international trade has been accompanied by a growth in the international capital market. International capital markets differ from domestic capital markets as they must cope with special regulations that many countries impose on foreign investment. Special risks that are associated with international capital markets include the risk of currency fluctuations Distributing prohibited | Downloaded by Filip Semrad () lOMoARcPSD| © StuD 18 and national default. This book discusses the functioning of global asset markets (Chapter 21) and foreign borrowing by developing countries (Chapter 22). 1.2. International Economics: Trade and Money International economics consists of two broad subfields: international trade andinternational money. While the first focuses on the transactions that involve a physical movement of goods, the latter focuses on the financial transactions. The economics of the international economy can be divided into two broad subfields: the study of international trade and the study of international money. International trade analysis focuses primarily on those transactions that involve a physical movement of goods or a tangible commitment of economic resources. International monetary analysis focuses on the financial transactions such as foreign purchases of U.S. dollars. An example of an international trade issue is the conflict between the United States and Europe over Europe’s subsidized exports of agricultural products. In reality however, there is no simple dividing line between trade and monetary issues as most international trade involves monetary transactions. The first half of this book covers international trade issues. Part One develops the analytical theory of international trade, while Part Two applies trade theory to the analysis of government policies. The second half of the book is devoted to international monetary issues: Part Three develops international monetary theory, and Part Four applies this.

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macroecono 101
summary international economics theory and policy
international economics theory and policy
summary international economics theory
summary international economics policy

Voorbeeld van de inhoud

lOMoARcPSD|2257127

Summary
International Economics:
Theory and Policy
Krugman. Paul R, Obstfield, Maurice

9th Edition

, lOMoARcPSD|2257127

Contents

1. Introduction ..................................................................................................................................... 14
1.1. What Is International Economics About?............................................................................. 14
1.1.1. The Gains from Trade...................................................................................................... 15
1.1.2. The Pattern of Trade........................................................................................................ 15
1.1.3. How Much Trade? ............................................................................................................ 16
1.1.4. Balance of Payments........................................................................................................ 17
1.1.5. Exchange Rate Determination........................................................................................ 17
1.1.6. International Policy Coordination .................................................................................. 17
1.1.7. The International Capital Market ................................................................................... 17
1.2. International Economics: Trade and Money........................................................................ 18
2. World Trade: An Overview............................................................................................................ 19
2.1. Who Trades with Whom? ...................................................................................................... 19
2.1.1. Size Matters: The Gravity Model.................................................................................... 19
2.1.2. Using the Gravity Model: Looking for Anomalies........................................................ 20
2.1.3. Impediments to Trade: Distance, Barriers, and Borders
.............................................. 21
2.2. The Changing Pattern of World Trade................................................................................. 21
2.2.1. Has the World Gotten Smaller?...................................................................................... 21
2.2.2. What Do We Trade? ........................................................................................................ 22
2.2.3. Service Offshoring ............................................................................................................ 22
2.3. Do Old Rules Still Apply?........................................................................................................ 22
3. Labour Productivity and Comparative Advantage: The Ricardian Model............................... 24
3.1. The Concept of Comparative Advantage............................................................................. 24
3.2. A One-Factor Economy.......................................................................................................... 25
3.2.1. Production Possibilities.................................................................................................... 25
3.2.2. Relative Prices and Supply.............................................................................................. 26
3.3. Trade in a One-Factor World ................................................................................................. 27
3.3.1. Determining the Relative Price After Trade ................................................................. 28
3.3.2. The Gains from Trade...................................................................................................... 30
3.3.3. A Note on Relative Wages.............................................................................................. 31
3.4. Misconceptions About Comparative Advantage ................................................................. 31
3.4.1. Productivity and Competitiveness ................................................................................. 32
3.4.2. The Pauper Labor Argument........................................................................................... 32
3.4.3. Exploitation ....................................................................................................................... 32

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3.5. Comparative Advantage with Many Goods......................................................................... 33
3.5.1. Setting Up the Model ....................................................................................................... 33
3.5.2. Relative Wages and Specialization................................................................................. 33
3.5.3. Determining the Relative Wage in the Multigood Model ........................................... 34
3.6. Adding Transport Costs and Nontraded Goods.................................................................. 34
3.7. Empirical Evidence on the Ricardian Model......................................................................... 35
4. Specific Factors and Income Distribution.................................................................................... 37
4.1. The Specific Factors Model.................................................................................................... 50
4.1.1. Assumptions of the Model .............................................................................................. 50
4.1.2. Production Possibilities.................................................................................................... 50
4.1.3. Prices, Wages, and Labor Allocation.............................................................................. 51
4.1.4. Relative Prices and the Distribution of Income............................................................ 52
4.2. International Trade in the Specific Factors Model.............................................................. 53
4.3. Income Distribution and the Gains from Trade................................................................... 54
4.4. The Political Economy of Trade: A Preliminary View......................................................... 55
4.4.1. Income Distribution and Trade Politics ......................................................................... 55
4.5. International Labor Mobility ................................................................................................... 56
5. Resources and Trade: The Heckscher-Ohlin Model................................................................... 58
5.1. A Model of a Two-Factor Economy ...................................................................................... 59
5.1.1. Prices and Production...................................................................................................... 60
5.1.2. Choosing the Mix of Inputs ............................................................................................. 61
5.1.3. Factor Prices and Goods Prices...................................................................................... 62
5.1.4. Resources and Output..................................................................................................... 62
5.2. Effects of International Trade Between Two-Factor Economies...................................... 63
5.2.1. Relative Prices and the Pattern of Trade....................................................................... 64
5.2.2. Trade and the Distribution of Income ........................................................................... 64
5.2.3. Factor-Price Equalization................................................................................................ 65
5.3. Empirical Evidence on the Heckscher-Ohlin Model........................................................... 66
5.3.1. Trade in Goods as a Substitute for Trade in Factors................................................... 66
5.3.2. Patterns of Exports Between Developed and Developing Countries....................... 67
5.3.3. Implications of the Tests ................................................................................................. 67
6. The Standard Trade Model............................................................................................................ 68
6.1. A Standard Model of a Trading Economy............................................................................ 70
6.1.1. Production Possibilities and Relative Supply................................................................ 70
6.1.2. Relative Prices and Demand........................................................................................... 71

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6.1.3. The Welfare Effect of Changes in the Terms of Trade............................................... 71
6.1.4. Determining Relative Prices............................................................................................ 72
6.1.5. Economic Growth: A Shift of the RS curve................................................................... 72
6.1.6. Growth and the Production Possibility Frontier .......................................................... 72
6.1.7. World Relative Supply and the Terms of Trade........................................................... 73
6.1.8. International Effects of Growth...................................................................................... 73
6.2. Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD
...................................... 74
6.2.1. Relative Demand and Supply Effects of a Tariff.......................................................... 74
6.2.2. Effects of an Export Subsidy........................................................................................... 75
6.2.3. Implications of Terms of Trade Effects: Who Gains and Who Loses?
...................... 75
6.3. International Borrowing and Lending ................................................................................... 75
6.3.1. Intertemporal Production Possbilities and Trade......................................................... 76
6.3.2. The Real Interest Rate..................................................................................................... 76
6.3.3. Intertemporal Comparative Advantage......................................................................... 77
7. External Economies of Scale and the International Location of Production........................... 78
7.1. Economies of Scale and International Trade: An Overview............................................... 78
7.2. Economies of Scale and Market Structure........................................................................... 79
7.3. The Theory of External Economies....................................................................................... 79
7.3.1. Specialized Suppliers........................................................................................................ 80
7.3.2. Labor Market Pooling ...................................................................................................... 80
7.3.3. Knowledge Spillovers....................................................................................................... 80
7.3.4. External Economies and Market Equilibrium................................................................ 81
7.4. External Economies and International Trade....................................................................... 81
7.4.1. External Economies, Output, and Prices....................................................................... 81
7.4.2. External Economies and the Pattern of Trade.............................................................. 82
7.4.3. Trade and Welfare with External Economies............................................................... 82
7.4.4. Dynamic Increasing Returns........................................................................................... 82
7.5. Interregional Trade and Economic Geography.................................................................... 83
8. Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises
............................................................................................................................................................... 84
8.1. The Theory of Imperfect Competition .................................................................................. 85
8.1.1. Monopoly: A Brief Review .............................................................................................. 86
8.1.2. Monopolistic Competition ............................................................................................... 87
8.2. Monopolistic Competition and Trade ................................................................................... 89
8.2.1. The Effects of Increased Market Size............................................................................ 90

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