Chapter 1
Introduction
Chapter Organization
What Is International Economics About?
The Gains from Trade
The Pattern of Trade
How Much Trade?
Balance of Payments
Exchange Rate Determination
International Policy Coordination
The International Capital Market
International Economics: Trade and Money
Chapter Overview
The intent of this chapter is to provide both an overview of the subject matter of international
economics and to provide a guide to the organization of the text. It is relatively easy for an
instructor to motivate the study of international trade and finance. The front pages of newspapers,
the covers of magazines, and
the lead reports on television news broadcasts herald the interdependence of the U.S. economy
with the rest of the world. This interdependence may also be recognized by students through their
purchases of imports of all sorts of goods, their personal observations of the effects of
dislocations due to international competition, and their experience through travel abroad.
The study of the theory of international economics generates an understanding of many key
events that shape our domestic and international environment. In recent history, these events
include the causes and consequences of the large current account deficits of the United States; the
dramatic appreciation of the dollar during the first half of the 1980s followed by its rapid
depreciation in the second half of the 1980s; the Latin American debt crisis of the 1980s and the
Mexican crisis in late 1994; and the increased pressures for industry protection against foreign
competition broadly voiced in the late 1980s and more vocally espoused in the first half of the
1990s. The financial crisis that began in East Asia in 1997 and spread to many countries around
,the globe and the Economic and Monetary Union in Europe highlight the way in which various
national economies are linked and how important it is for us to understand these connections. These
global linkages have been highlighted yet again with how a bust in the American housing market
rapidly spread throughout the world, turning into a global financial crisis through linkages across
international capital markets. At the same time, protests at global economic meetings and a rising
wave of protectionist rhetoric have highlighted opposition to globalization. The text material will
enable students to understand the economic context in which such events occur.
,Chapter 1 of the text presents data demonstrating the growth in trade and the increasing
importance of international economics. This chapter also highlights and briefly discusses seven
themes that arise throughout the book. These themes are (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. Students will recognize
that many of the central policy debates occurring today come under the rubric of one of these
themes. Indeed, it is often a fruitful heuristic to use current events to illustrate the force of the key
themes and arguments that are presented throughout the text.
, Chapter 2
World Trade: An Overview
Chapter Organization
Who Trades with Whom?
Size Matters: The Gravity Model
Using the Gravity Model: Looking for Anomalies
Impediments to Trade: Distance, Barriers, and Borders
The Changing Pattern of World Trade
Has the World Gotten Smaller?
What Do We Trade?
Service Offshoring
Do Old Rules Still Apply?
Summary
Chapter Overview
Before entering into a series of theoretical models that explain why countries trade across borders
and the benefits of this trade (Chapters 3–11), Chapter 2 considers the pattern of world trade that we
observe today. The core idea of the chapter is the empirical model known as the gravity model. The
gravity model is based on the observations that (1) countries tend to trade with nearby economies
and (2) trade is proportional to country size. The model is called the gravity model, as it is similar
in form to the physics equation that describes the pull of one body on another as proportional to
their size and distance.
Introduction
Chapter Organization
What Is International Economics About?
The Gains from Trade
The Pattern of Trade
How Much Trade?
Balance of Payments
Exchange Rate Determination
International Policy Coordination
The International Capital Market
International Economics: Trade and Money
Chapter Overview
The intent of this chapter is to provide both an overview of the subject matter of international
economics and to provide a guide to the organization of the text. It is relatively easy for an
instructor to motivate the study of international trade and finance. The front pages of newspapers,
the covers of magazines, and
the lead reports on television news broadcasts herald the interdependence of the U.S. economy
with the rest of the world. This interdependence may also be recognized by students through their
purchases of imports of all sorts of goods, their personal observations of the effects of
dislocations due to international competition, and their experience through travel abroad.
The study of the theory of international economics generates an understanding of many key
events that shape our domestic and international environment. In recent history, these events
include the causes and consequences of the large current account deficits of the United States; the
dramatic appreciation of the dollar during the first half of the 1980s followed by its rapid
depreciation in the second half of the 1980s; the Latin American debt crisis of the 1980s and the
Mexican crisis in late 1994; and the increased pressures for industry protection against foreign
competition broadly voiced in the late 1980s and more vocally espoused in the first half of the
1990s. The financial crisis that began in East Asia in 1997 and spread to many countries around
,the globe and the Economic and Monetary Union in Europe highlight the way in which various
national economies are linked and how important it is for us to understand these connections. These
global linkages have been highlighted yet again with how a bust in the American housing market
rapidly spread throughout the world, turning into a global financial crisis through linkages across
international capital markets. At the same time, protests at global economic meetings and a rising
wave of protectionist rhetoric have highlighted opposition to globalization. The text material will
enable students to understand the economic context in which such events occur.
,Chapter 1 of the text presents data demonstrating the growth in trade and the increasing
importance of international economics. This chapter also highlights and briefly discusses seven
themes that arise throughout the book. These themes are (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. Students will recognize
that many of the central policy debates occurring today come under the rubric of one of these
themes. Indeed, it is often a fruitful heuristic to use current events to illustrate the force of the key
themes and arguments that are presented throughout the text.
, Chapter 2
World Trade: An Overview
Chapter Organization
Who Trades with Whom?
Size Matters: The Gravity Model
Using the Gravity Model: Looking for Anomalies
Impediments to Trade: Distance, Barriers, and Borders
The Changing Pattern of World Trade
Has the World Gotten Smaller?
What Do We Trade?
Service Offshoring
Do Old Rules Still Apply?
Summary
Chapter Overview
Before entering into a series of theoretical models that explain why countries trade across borders
and the benefits of this trade (Chapters 3–11), Chapter 2 considers the pattern of world trade that we
observe today. The core idea of the chapter is the empirical model known as the gravity model. The
gravity model is based on the observations that (1) countries tend to trade with nearby economies
and (2) trade is proportional to country size. The model is called the gravity model, as it is similar
in form to the physics equation that describes the pull of one body on another as proportional to
their size and distance.
