International Economics 12th Edition - Thomas A. Pugel.doc - International Economics Twelfth Edition Thomas A Pugel Netu York University Me Graw Hill

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Unformatted text preview: International Economics Twelfth Edition Thomas A. Pugel Netu York University Me Graw Hill Irwi n Boston Burr Ridge, IL Dubuque, IA Madison, Wl New York San Francisco St. Louis Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto Preface With this twelfth edition I am honored to take over the stewardship of the book. I joined Peter Lindert as co-author for the tenth edition, and he has now passed the book to my care, just as Charles Kindleberger, the original author of the book, did when Peter succeeded him as the book's author. We are all very happy that the book reaches its golden anniversary with this edition. I also enjoy the mirth of a literary improbability—I am the author of a book that was first published in the year I was born. I maintain the characteristics and objectives of the book that have guided all its editions. The book • combines rigorous economic analysis with attention to the issues of economic policy that are alive and important today • is written to be concise and readable • uses economic terminology when it enhances the economic logic of the analy sis, but avoids jargon for jargon's sake. I follow these principles when I teach international economics to undergraduates and masters students:'I believe that the book benefits as I incorporate what I learn from the classroom into it. The world is now deeply into the second great wave of globalization, in which product, capital, and labor markets are becoming more and more integrated across countries. This second wave, which began in about 1950, has now lasted about as long as the first, which began in about 1870 and ended with World War I (or perhaps with the onset oflhe Depression in 1930). As indicators of the cur rent process of globalization, we see that international trade, foreign direct investments, cross-border lending, and international portfolio investments are growing faster than world production. Information and data now spread around the world instantly through the Internet and other global electronic media. As the world becomes more integrated, countries become more interdependent. Increasingly, events and policy changes in one country affect many other countries. Also increasingly, companies make decisions about production and product develop ment based on global markets. CURRENT EVENTS AND NEW EXAMPLES The global economy is an exciting place. It is a joy and a challenge for me to incorporate the events and policy changes that continue to transform it, and to find the new examples that show the effects of globalization (both its upside and iv Preface its downside). Here are some of the current and recent events that are included in this edition to provide new examples that show the practical use of our economic analysis: • President Bush imposed new tariffs on steel imports into the United States in March 2002 • the euro completely replaced the separate national currencies of twelve mem ber countries of the European Union in early 2002 • the rise of electronic brokering is changing how the foreign exchange markets work • China and Taiwan joined the World Trade Organization in 2001 • the members of the World Trade Organization launched a new round of multi lateral trade negotiations (the Doha round) in 2001 • the long recession in Argentina turned into a financial and economic meltdown in early 2002, with the Argentinean peso plummeting after the country's gov ernment abandoned the fixed exchange rate of one peso equal to one U.S. dollar • Cemex, a multinational enterprise based in Mexico, has risen rapidly to become the third largest cement producer in the world • the European Union is preparing to expand by adding up to a dozen countries as new members, perhaps as early as 2004 • Ecuador adopted the U.S. dollar as its own currency, in place of its sucre, in 2000 • the Japanese government has repeatedly intervened in the foreign exchange market to prevent the yen from appreciating against the U.S. dollar • The International Monetary Fund provided a huge loan to Turkey in 2000, to try to prevent Turkey's financial crisis from deepening IMPROVING THE BOOK: ORGANIZATION AND TOPICS In this edition I introduce a number of improvements to the pedagogical structure of the book. • The shaded boxes that contain material separate from the text are now labeled by type: Focus on Labor, Case Study, and Extension. This will make it easier for instructors and students to see what kind of material is in the box, and how it relates to what is presented in the text of the chapter. In addition, I have added many new boxes, especially case studies. • The order of Chapter 5 and 6 has been reversed from the eleventh edition. With this change all of the essentials of trade theories (productivity differ ences, factor endowments and factor proportions, product differentiation and Preface v monopolistic competition, oligopoly, and agglomeration based on external economies) are presented in consecutive chapters. The new Chapter 6 then can use these concepts and tools to examine issues of sectoral changes, trade, innovation, and growth. Several key strengths of Part II (trade policy) are further enhanced. The discussion of nontariff barriers to trade in Chapter 8 has been sharpened. Chapter 10 now focuses completely on, allegedly unfair trade (dumping and subsidies) and administered protection through antidumping and countervailing actions. A new box presents the examples of chicken, supercomputers and steel. In Chapter 12 the environmental effects of the Uruguay Round agreements are examined, adding strength to the book's unique and powerful treatment of trade and the environment. The discussion of the political economy of import barriers is now included in Chapter 9 as the capstone of the discussion of arguments for and against protection. A new box presents a case study of sugar as an example of the interplay between politics and economics. The twelfth edition has a single chapter that examines international resource movements, focusing on multinational enterprises and labor migration. This is now in Part II of the book, because of its link to government policy issues, rather than at the end of the book as it was in the previous edition. The book weaves discussion of labor issues into a number of chapters in Parts I and II. This topic is of great interest to students (and almost everybody else). The tour begins in Chapter 1, with a discussion of labor standards and conditions, issues prominent in the Seattle protests against the WTO and the ongoing protests against globalization. It continues through boxes that Focus on Labor in Chapters 3,4, 6, and 9. Labor issues are also prominent in the discussion of the winners and losers from free trade in Chapters 4 and 5, trade adjustment assistance in Chapter 9, and labor migration in Chapter 14. The discussion of the determinants of exchange rates is now collected into a single chapter. Chapter 18 begins with an analysis of exchange rates in the short run, drawing on concepts like uncovered interest parity that were just presented in Chapter 17. Chapter 18 then examines exchange rates in the long run (purchasing power parity and the monetary approach). It concludes with a discussion of overshooting as a rather odd way that we may get from the short run to the long run. The chapter on international financial crises, which had been at the end of the book, is now included in Part III. This placement emphasizes the links of these crises to international financial flows and exchange rate policies. A new appendix presents the aggregate demand-aggregate supply framework as an approach to open-economy macroeconomics. This provides flexibility for instructors who would like to include this approach in their course. vi Preface FORMAT AND STYLE 1 have been careful to retain the goals of clarity and honesty that have made International Economics an extraordinary success in classrooms and courses around the world. There are plenty of quick road signs at the start of and within chapters. The summaries at the end of the chapters offer an integration of what has been discussed. Students get the signs, "Here's where we are going, here's where we have just been." I have added more bullet-point and numbered lists, to add to the visual appeal of the text and to emphasize sets of determinants or effects. I am candid about ranking some tools or facts ahead of others. The undeniable power of some of the economist's tools is applied repeatedly to events and issues without apology. Theories and concepts that fail to improve on common sense are not oversold. The format of the book is fine-tuned for better learning. Most exam-worthy terms appear in boldface in the text, with their definitions usually contiguous. Words and phrases that deserve special emphasis are in italics. Each chapter (except for the short introductory chapter) has at least ten questions and problems. The answers to all odd-numbered questions and problems are included in the material at the end of the book. As a reminder, these oddnumbered questions are marked with a +. Shaded boxes appear in different type with a different right-edge format and two columns per page, in contrast to the style of main text. As noted above, the boxes provide discussions of labor issues, case studies, and extensions of the concepts presented in the text. SUPPLEMENTS Power Point Slides New to this edition, the PowerPoint Slides will be available on the Instructor's CD-ROM and via the course website. These presentations include slides with figures and graphs to make teaching and learning more accessible. Test Bank For the first time ever, the twelfth edition of International Economics has an accompanying test bank. Prepared by Andrew Hill and Scott Klokis of the University of Delaware, the 500-question bank offers a plethora of testing options for the instructor, and will include such types of questions as multiple-choice, fill-inthe-blank, matching, true/false, and short-answer. Preface vii Instructor's Manual Written by the author, the Instructor's Manual contains chapter overviews, teaching tips, and suggested answers to the even-numbered questions and problems that are contained in the textbook. Study Guide Written by Kerry Odell of Scripps College, the same author as the previous editions, the Study Guide is similar in format and quality to lie. Each chapter is broken down into six sections—Objectives of the Chapter, Key Terms, Warm-Up Questions, Multiple-Choice Questions, Problems, and Discussion Topics—and is available to enhance student performance at minimal cost. Instructor's CD-ROM New to this edition, electronic versions of all instructor supplements (including the PowerPoint presentation, Instructor's Manual, and 500-question Test Bank) may be conveniently accessed on an Instructor's CD. This makes it easy for instructors to use the various supplements designed to enhance the professor's teaching experience. COURSE WEBSITE The website to accompany Pugel's twelfth edition provides the most complete content for any international text of its kind. Organized into separate sections for the instructor and the student, this much enhanced website provides a wide variety of learning devices geared specifically for either group. For the student: • • • • • • • • interactive graphing exercises free study guide samples downloadable PowerPoints learning tips for students book-level glossary an outline a list of chapter-specific key terms a set of testing components including multiple choice, essay, fill-in-the-blank, true/false and matching questions For the instructor: • • • • • downloadable Instructor Manual downloadable PowerPoints group learning exercises online resource links for additional economic information links to professional resources Acknowledgments I offer my deepest thanks to the many people whose advice helped me to improve International Economics in its twelfth edition. My first thanks are to Peter H. Lindert, my co-author on the previous several editions. I was most happy to join Peter as co-author, and I have learned much from him about the art of writing for the community of students who want to deepen their knowledge and understanding of the global economy. I love teaching international economics, and I am grateful to my students for the many suggestions and insights that I have received from them. I especially thank my colleagues Richard Levich, Jianping Mei, Roy Smith, Paul Wachtel, and Harvey Poniachek for information and suggestions. I thank Professor Rachel McCulloch of Brandeis University and Professor Michel-Henry Bouchet of CERAM Sophia Antipolis (France) for comments on the previous edition. I am indebted to Professor Stephen S. Golub of Swarthmore College for providing an update of his results on productivity and wages (used in the box "Absolute Advantage Does Matter" in Chapter 3). I am grateful to Professor Li Kening of Beijing Materials College, who both translated the eleventh edition into Chinese, and pointed out passages in the book that could be improved or corrected. I also thank my brother, Michael Pugel, who shared with me his knowledge of technology issues from his perspective as an electrical engineer. In addition, I thank Gloria Asuncion and Janine Alberti, who provided help with the preparation of the manuscript. I express my gratitude to the reviewers whose detailed and thoughtful comments and critiques provided guidance as I wrote the twelfth edition: viii Trisha Bezmen Old Dominion University Manjira Datta Arizona State University Frank Biggs Principia College Eric Drabkin Hawaii Pacific University James Butkiewicz University of Delaware Amy Glass Texas A&M University Debasish Chakraborty Central Michigan University Stefan Norrbin Florida State University Jamshid Damooei California Lutheran University Rose Marie Payan California Polytechnic University Acknowledgments Kamal Saggi Southern Methodist University John Stiver University of Connecticut Andreas Savvides Oklahoma State University Jiawen Yang George Washington University ix My final acknowledgment and thanks are to Charles P. Kindleberger, who was one of my teachers during my graduate studies. He started this book 50 years ago, and I strive to meet the standards of excellence and relevance that he set for ♦ the book. Thomas A. Pugel Brief Contents Preface iii About the Author xx 1 International Economics Is Different 1 PART ONE The Theory of International Trade 15 2 The Basic Theory Using Demand and Supply 17 3 Why Everybody Trades: Comparative Advantage and Factor Proportions 35 4 Who Gains and Who Loses from Trade? 69 5 Alternative Theories of Trade 91 6 Growth and Trade 111 PART TWO Trade Policy 131 .7 Analysis of a Tariff 133 8 Nontariff Barriers to Imports 153 9 Arguments for and against Protection 185 10 Pushing Exports 217 11 Trade Blocs and Trade Blocks 247 12 Trade and the Environment 273 13 Trade Policies for Developing and Transition Countries 309 14 Multinationals and Migration: International Factor Movements 339 PART THREE Understanding Foreign Exchange 375 15 Payments among Nations 377 16 The Foreign Exchange Market 399 17 Forward Exchange and International Financial Investment 417 18 What Determines Exchange Rates? 445 19 Government Policies toward the Foreign Exchange Market 479 20 International Lending and Financial Crises 517 PART FOUR Macro Policies for Open Economies 551 21 How Does the Open Macroeconomy Work? 553 22 Internal and External Balance with Fixed Exchange Rates 581 23 Floating Exchange Rates and Internal Balance 621 24 National and Global Choices: Floating Rates and the Alternatives 643 Brief Contents xi APPENDIX A The Web and the Library: International Numbers and Other Information 673 B C Deriving ProductionPossibility Curves 679 Offer Curves 685 D The Nationally Optimal Tarriff 689 E Many Parities at Once 695 F Aggregate Demand and Aggregate Supply in the Open Economy 699 G Devaluation and the Current Account Balance 711 SUGGESTE D ANSWERSQUESTION S AND PROBLEMS 717 REFER ENCES 747 INDEX 761 Contents Preface iii Effects in the Exporting Country 30 Which Country Gains More? 30 About the Author xx Summary: Early Answers to the Four Trade Questions 31 Suggested Reading 31 Questions and Problems 31 Chapter One International Economics Is Different 1 Four Events 1 Steel I Poor Workers in Poor Countries 4 The Euro 7 Argentina: From Darling to Delinquent 8 Different Moneys 11 Different Fiscal Policies 12 Factor Mobility 12 The Ricardo's Theory of Comparative Advantage 39 Ricardo's Constant Costs and the ProductionPossibility Curve 43 Scheme of This Book 13 Focus on Labor Absolute Advantage Docs Matter 44 Extension What If Trade Doesn't Balance? 47 PART ONE OF INTERNATIONAL TRADE Chapter Two The Basic Theory Using Demand and Supply 17 Four Questions about Trade 18 A Look Ahead 18 Demand and Supply 19 Demand 19 Consumer Surplus 21 Supply 22 Producer Surplus 23 A National Market with No Trade 24 Two National Markets and the Opening of Trade 24 Free-Trade Equilibrium 25 Effects in the Importing Country 27 Adam Smith's Theory of Absolute Advantage 36 Case Study Mercantilism: Older than Smith— and Alive Today 37 Economics and the Nation-State 11 THE THEORY Chapter Three Why Everybody Trades: Comparative Advantage and Factor Proportions 35 15 Increasing Marginal Costs 48 What's Behind the Bowed-Out ProductionPossibility Curve? 50 What Production Combination Is Actually Chosen? 50 Community Indifference Curves 52 Production and Consumption Together 54 Without Trade 54 With Trade 54 Demand and Supply Curves Again 57 Case Study The Opening of Trade and China's Shift Out of Agriculture 58 The Gains from Trade 58 Trade Affects Production and Consumption 60 What Determines the Trade Pattern? 61 The Heckscher-Ohlin (H-O) Theory: Factor Proportions Are Key 62 XII Summary 63 Suggested Reading 64 Questions and Problems 64 Chapter Four Oligopoly and International Trade 102 External Scale Economies and Trade 104 Summary: How Does Trade Really Work? 106 Suggested Reading 109 Questions and Problems 109 Who Gains and Who Loses from Trade? 69 Chapter Six Growth and Trade Who Gains and Who Loses Within a Country 69 Balanced Versus Biased Growth 112 Growth in Only One Factor 114 Changes in the Country's Willingness to Trade 115 Short-Run Effects of Opening Trade 70 The Long-Run Factor-Price Response 70 Three Implications of the H-0 Theory 72 Extension A Factor-Ratio Paradox 73 The Stolper-Samuelson Theorem 74 The Specialized-Factor Pattern 75 The Factor-Price Equalization Theorem 76 Does Heckscher-Ohlin Explain Actual Trade Patterns? 77 Factor Endowments 77 Case Study The Leon tie/Paradox 78 International Trade 79 What Are the Export-Oriented and ImportCompeting Factors? 82 The U.S. Pattern 82 Focus on Labor U.S. Jobs and Foreign Trade 83 The Canadian Pattern 84 Patterns in Other Countries 84 Do Factor Prices Equalize Internationally? 85 Summary: Fuller Answers to the Four Trade Questions 86 Suggested Reading 87 Questions and Problems 87 Chapter Five Alternative Theories of Trade 91 Trade Facts in Search of Better Theory 91 The Rise of Intra-lndustry Trade 92 Global Industries Dominated by a Few Large Firms 94 Economies of Scale 95 Monopolistic Competition and Trade 96 Opening to Trade 98 Basis for Trade 100 Gains from Trade 101 111 Case Study The Dutch Disease and Deindustrialization 116 Effects on the Country's Terms of Trade 118 Small Country 118 Large Country 118 Immiserizing Growth 119 Technology and Trade 121 Individual Products and the Product Cycle 123 Openness to Trade Affects Growth 124 Focus on Labor Trade, Technology, and U.S. Wages 125 Summary 126 Suggested Reading 127 Questions and Problems 128 PART TWO TRADE POLICY 131 Chapter Seven Analysis of a Tariff 133 A Preview of Conclusions 134 The Effect of a Tariff on Producers 134 The Effect of a Tariff on Consumers 137 The Tariff as Governme...
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