World Trade and Payments an Introduction 10-WTPfront.pi-xviii

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World Trade Trade and Payments

CAVE.6607.fm.pi-xviii CAVE.6607.fm.pi -xviii 6/7/06 9:38 AM Page ii

The Addison-Wesley Series in Economics Abel/Bernanke Macroeconomics Bade/Parkin Foundations of Economics Bierman/Fernandez Game Theory with Economic Applications Binger/Hoffman Microeconomics Microeconomi cs with Calculus Boyer Principles of Transportation Economics Branson Macroeconomic Theory and Policy Bruce Public Finance and the American Economy Byrns/Stone Economics Carlton/Perloff Modern Industrial Organization Caves/Frankel/Jones World Trade and Payments: An Introduction Chapman Environmental Economics: Theory,Application, and Policy Policy Cooter/Ulen Law and Economics Downs An Econ EconomicTheory omicTheory of Democ Democracy racy Ehrenberg/Smith Modern Labor Economics Ekelund/Ressler/Tollison Economics Fusfeld The Age of the Economist Gerber International Economics Ghiara Learning Economics Gordon Macroeconomics Gregory Essentials of Economics Gregory/Stuart Russian and Soviet Economic Performancee and Structure Performanc Hartwick/Olewiler The Economics of Natural Resource Use

Hoffman/Averett Women and the Economy: Family,, Work Family Work,, and Pay Pay Holt Markets Marke ts,, Games Games,, and Strategic Behavior Hubbard Money,, the Financial System, Money and the Economy Hughes/Cain American Economic History Husted/Melvin International Economics Jehle/Reny Advanced Microeconomic Theory Johnson-Lans A Health Economics Primer Klein Mathematical Methods for Economics Krugman/Obstfeld International Economics Laidler The Demand for Money Leeds/von Allmen The Economics of Sports Leeds/von Allmen/Schiming Economics Lipsey/Courant/Ragan Economics Melvin International Money and Finance Miller Economics Today Miller Understanding Modern Economics Miller/Benjamin The Economics of Macro Issues Miller/Benjamin/North The Economics of Public Issues Mills/Hamilton Urban Economics Mishkin The Economics of Money, Banking, and Financial Markets Markets Mishkin The Economics of Money, Banking, and Financial Markets, Markets, Alternate Edition

Murray Econometrics:A Modern Introduction Parkin Economics Perloff Microeconomics Perman/Common/McGilvray/Ma Natural Resources and Environmental Economics Phelps Health Economics Riddell/Shackelford/Stamos/ Schneider Economics:A Tool for Critically Understanding Society Ritter/Silber/Udell Principles of Money, Money, Banking, and Financial Markets Rohlf Introduction to Economic Reasoning Ruffin/Gregory Principles of Economics Sargent Rational Expectations and Inflation Scherer Industry Structure, Structure, Strategy, and Public Policy Stock/Watson Introduction to Econometrics Studenmund Using Econometrics Tietenberg Environmental and Natural Resource Economics Tietenberg Environmental Economics and Policy Todaro/Smith Economic Development Waldman Microeconomics Waldman/Jensen Industrial Organization: Theory and Practice Weil Economic Growth Williamson Macroeconomics

CAVE.6607.fm.pi-xviii CAVE.6607.fm .pi-xviii 6/7/06 6/ 7/06 9:38 AM Page iii

WORLD TRADE TRAD E AND PAYMENTS AN INTRODUCTION

TENTH EDITION RICHARD E. CAVES HARVARD UNIVERSITY

JEFFREY A. FRANKEL HARVARD UNIVERSITY

RONALD W. JONES NIVERSIT RSITY Y OF ROCHESTER UNIVE

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Publisher: Greg Tobin Tobin Editor in Chief: Chief: Denise Clinton Clinton Assistant Editor: Editor: Julia Boyles Boyles Managing Editor: Nancy Fenton Fenton Senior Production Supervisor: Supervisor: Kathryn Dinovo Senior Design Manager: Manager: Chuck Spaulding Spaulding Supplements Supervisor: Supervisor: Heather McNally Senior Marketing Manager: Manager: Roxanne Hoch Marketing Assistant: Kate MacLean Senior Manufacturing Manufacturing Buyer: Carol Melville Cover Designer: Designer: Leslie Haimes Haimes Text Design, Design, Production Coordination Coordination,, Composition Composition,, and Illustrations: Illustrations:Thomp Thompson son Steele, Steele, Inc. Cover Photo: Photo: ©Allan Baxter Baxter Library of Congress Cataloging-in-P Cataloging-in-Publication ublication Data

Caves, Richard E. Caves, World trade and payments : an introduction introduction / Richard E. Caves Caves,, Jeffre Jeffrey y A. Franke Frankel, l, Ronald W. W. Jones.—10th ed. p. cm. ISBN 0-321-22660-7 1. In Inte tern rnat atio iona nall trade trade.. 2. Ba Bala lanc nce e of payme payment ntss. 3. Co Comm mmer erci cial al poli policy cy.. I. Fra rank nkel el,, Jeff effrey rey A. II. Jone oness, Ron Ronald ald Wint inthro hrop, p, 193 1931– 1– III III.. Titl itle. e. HF1379.C38 2007 382—dc22 2006013259 Copyright © 2007 by Richard E. Caves Caves,, Jeffre Jeffrey y A. Frank Frankel, el, and Ronald W. Jones All rights reserved. reserved. No part of this publication publication may be reproduced, reproduced, stored in a retrieval system, system, or transmitted, transmitted, in any form or by any means, means, electronic, mechanical, photocopying photocopying,, recording, or otherwise, otherwise, without the prior written permission permission of the publisher. Printed in the United States of America. For information information on obtaining permission for use of material in this work, please submit a written request to Pearson Education, Education, Inc., Rights and Contracts Department, Department, 75 Arlington Street, Street, Suite 300, Boston, MA 02116, 02116, fax your request to 617-848-7047 617-848-7047,, or e-mail at http://www.pearsoned.com/legal/permissions.htm. 1 2 3 4 5 6 7 8 9 10—EB—10 09 08 07 06

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Contents Preface CHAPTER

1

xv

Introduction

1

1.1

The Sub Subjec jectt of of Inte Interna rnatio tional nal Eco Econom nomics ics

1.2 1. 2

Patt Pa tter erns ns of Int Inter erna nati tion onal al Tra Trade de

5

1.3 1. 3

The Th e Org Organ aniz izat atio ion n of of Thi Thiss Boo Book k

8

PAR T I

CHAPTER

2

2

COMPAR COMP ARA ATI TIVE VE AD ADV VAN ANT TAG AGE E AN AND D THE TH E BASI BASIC C MOD MODEL EL OF OF INTE INTERN RNA ATI TION ONAL AL TRA TRADE DE The Gains from Trade

13

2.1 2. 1

Back Ba ckgr grou ound nd Be Beha havi vior or:: Dem Deman and d

2.2 2. 2

Back Ba ckgr grou ound nd Be Beha havi vior or:: Sup Suppl ply y

2.3

Gains Gai ns from from Trad Trade e and Free Free-T -Trad rade e Equili Equilibri brium um

2.4

Winner Win nerss and and Lose Losers: rs: Aut Autark arky y to Fre Free e Trad Trade e

2.5

Summary

14 17 27

30

APPE AP PEND NDIX IX A: Th The e Box Box Di Diag agra ram m

31

APPEND APP ENDIX IX B: Su Subst bstitu itutio tion n and and Inc Income ome Ef Effec fects ts APPE AP PEND NDIX IX C: C: The The Offe Offerr Curv Curve e Diag Diagra ram m

3

20

29

CHAPTER PR PROBLEMS

CHAPTER

11

32

34

Applications of of th the Basic Mo Model

37

3.1

Distur Dis turban bances ces from from Abroa Abroad d and the the Term Termss of Trad Trade e

3.2

Protec Pro tectin ting g the the Impor Import-C t-Comp ompeti eting ng Comm Commodi odity ty

3.3 3. 3

Grow Gr owth th and and Int Inter erna nati tion onal al Tra Trade de

3.4 3. 4

The Th e Tra Trans nsfe ferr Pro Probl blem em

3.5

Wider Wid er Inter Interpre pretat tation ionss of the the Basic Basic Trad Trade e Model Model

3.6 3. 6

Tra rade de an and d Mar Marke kett Str Struc uctu ture re

3.7

Summary

38

40

42

43 47

51

51

CHAPTER PR PROBLEMS

52

SUGG SU GGES ESTI TION ONS S FOR FOR FU FURT RTHE HER R REA READI DING NG APPE AP PEND NDIX IX:: Th The e St Stab abil ilit ity y Is Issu sue e

53

53 v

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Contents

PAR T II

CHAPTER

4

GLOBAL GLOB ALIZ IZA ATI TION ON:: TR TRAD ADE E PATT TTER ERNS NS AND INCOME DISTRIBUTION 57 Tec echn hnol olog ogy y and and In Inte terna rnati tion onal al Inco In come me Di Dist stri ribu buti tion on:: Th The e Ri Rica card rdia ian n Mo Mode dell

4.1 4. 1

The Th e Ric Ricar ardi dian an Se Sett ttin ing g

4.2 4. 2

Free Fr ee-T -Tra rade de Eq Equi uili libr briu ium m

4.3

Intern Int ernati ationa onall Wage Compa Comparis risons ons and and Product Productivi ivitie tiess

4.4

A ManyMany-Com Commod modity ity and Man Many-C y-Coun ountry try Wo World rld

4.5

Winner Win nerss and and Loser Loserss from from Prod Product uctivi ivity ty Shoc Shocks ks

4.6 4. 6

Nont No ntra rade ded d Comm Commod odit itie iess

4 .7

Summary

60 61 68 69

72

76

SUGG SU GGES ESTI TION ONS S FOR FOR FU FURT RTHE HER R REA READI DING NG APPEND APP ENDIX: IX: Tran ransit sition ional al Une Unempl mploym oymen entt

5

64

75

CHAPTER PR PROBLEMS

CHAPTER

59

77 77

Facto Fact or End Endow owme ment ntss an and Tra rade de I: Th The e Spe Speci cifi ficc Fac Facto tors rs Mo Mode dell

79

5.1

Dimini Dim inishi shing ng Ret Return urnss and and Fac Factor tor Hir Hires es

5.2

Output Out putss and Inco Income me Distr Distribu ibutio tion n in the Clos Closed ed Econo Economy my

5.3

Output Out putss and Inc Income ome Dis Distri tribut bution ion with with Free Free Trad Trade e

5.4 5. 4

Grow Gr owth th in Fa Fact ctor or En Endo dowm wmen ents ts

5.5

Conseq Con sequen uences ces for Pol Politi itical cal Eco Econom nomy y

5.6 5. 6

The Th e Pat Patte tern rn of Tra rade de

5.7

Alternative Altern ative Inter Interpreta pretations tions:: Specif Specific ic Capita Capitall or or Specif Specific ic Labor Labor

5 .8

Dutch Disease

5 .9

Summary

82

84 85

86

90 92

SUGG SU GGES ESTI TION ONS S FOR FOR FU FURT RTHE HER R REA READI DING NG APPEND APP ENDIX: IX: The Tran ransfo sforma rmatio tion n Sch Schedu edule le

6

80

88

CHAPTER PR PROBLEMS

CHAPTER

79

93 93

Facto Fact or End Endow owme ment ntss an and Tra rade de II II:: The The Hec Hecks ksch cher er-O -Ohl hlin in Mod Model el

95

6.1 6. 1

If Tec echn hnol olog ogy y Is Is Rig Rigid id

6.2 6. 2

Flex Fl exib ible le Tec echn hnol olog ogy y

6.3

Possib Pos sible le Trad Trade e Patter Patterns ns and the the Distri Distribut bution ion of of Income Income

96 99 102

87

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Contents

6.4

Intern Int ernati ationa onall Trad Trade e with with Many Many Comm Commodi oditie tiess

6.5 6. 5

How Ho w Conc Concen entr trat ated ed Is Is Prod Produc ucti tion on? ?

6.6

Changi Cha nging ng Compar Comparati ative ve Advant Advantage age with with Econom Economic ic Growth Growth

6.7

Hecksc Hec kscher her-Oh -Ohlin lin Theo Theory ry and and Empiri Empirical cal Evid Evidenc ence e

6.8

Summary

APPE AP PEND NDIX IX:: The The Pr Prod oduc ucti tion on Bo Box x

110

117 11 7

118 11 8

Imperf Impe rfec ectt Co Comp mpet etit itio ion, n, Incr In crea easi sing ng Re Retu turns rns,, an and d Pr Prod oduc uctt Var arie iety ty

121 12 1

7.1

The Pre Preval valenc ence e of Int Intrara-Ind Indust ustry ry Trad Trade e

7.2

Consum Con sumer er Behav Behavior ior and and the the Demand Demand for for Produ Product ct Vari Variety ety

7.3 7. 3

Incre In creas asin ing g Retu Return rnss in Pro Produ ducti ction on

7.4

Summary

123

125

132 13 2

SUGG SU GGES ESTI TION ONS S FOR FOR FURT FURTHE HER R READ READIN ING G

8

122

131

CHAP APTE TER R PR PRO OBLE LEMS MS

CHAPTER

109

116 11 6


7

108

114


CHAPTER

106

132 13 2

Resour Reso urce ce Tra Trade de,, Outs Outsou ourc rcin ing, g, and an d Pr Prod oduc uctt Fr Frag agme ment nta ati tion on 133

8.1

Given Giv en Resou Resource rcess and Foot Footloo loose se Produ Producti ction on Proce Processe ssess

8.2 8. 2

Footlo Foot loos ose e Inpu Inputs ts:: The The Join Jointt Role Role of of Comparative and Absolute Advantage

134

137

8.3

Outsourcing Outsou rcing and the Intern Internation ational al Fragm Fragmentat entation ion of Produc Production tion

8.4

Outsou Out sourci rcing ng and and Adva Advance nced d Count Country ry Wage Wage Rat Rates es

8.5

Summary

148 14 8


9

144

147


CHAPTER

141

148 14 8

Intter In erna nattio iona nall Fac Facto torr Mov Movem emen ents ts:: Lab Labor or an and d Cap Capit ital al

9.1

Factor Fac tor Move Movemen ments, ts, Effi Efficie ciency ncy,, and We Welfa lfare re

9.2

Intern Int ernati ationa onall Capital Capital Movem Movement ents: s: Selec Selected ted Issue Issuess

9.3

Multin Mul tinati ationa onals ls and and Forei Foreign gn Direc Directt Invest Investmen mentt

9.4

Summary

164


165 16 5


166 16 6

151 154 158

151 15 1

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Contents

PART III CHAPTER

10

THE TH THEORY AN AND PR PRACTICE OF OF CO COMMERCIAL PO POLICY Protection and the National Welfare

10.1 10 .1

Prot Pr otec ecti tion on by a Sma Small ll Co Coun untr try y

170

10.2 10 .2

Prot Pr otec ecti tion on by a Lar Large ge Co Coun untr try y

177

10.3 10. 3

Taxi axing ng Trad rade: e: Dom Domest estic ic We Welfa lfare re

10.4 10. 4

Taxi axing ng Trad rade: e: Wo World rld We Welfa lfare re

10.5

Summary

169

178 179

181

CHA HAPT PTER ER PROBL BLEM EMS S

181

SUGG SU GGES ESTI TION ONS S FOR FOR FURT FURTHE HER R REA READI DING NG

182 18 2

APPEND APP ENDIX: IX: Tari ariffs ffs and the Of Offer fer Cu Curve rve

182

11

The Political Economy of Protection

11.1 11. 1

Protec Pro tectio tion n as a Devic Device e for for Raisi Raising ng Reve Revenue nue

187

11.2 11. 2

Commer Com mercia ciall Polic Policy y as a Secon Second-B d-Best est Dev Device ice

189

11.3 11. 3

Protec Pro tectio tion n and and Ren Rent-S t-Seek eeking ing Act Activi ivitie tiess

11.4 11 .4

Grow Gr owth th,, Prote Protect ctio ion, n, and and Welf Welfar are e

11.5 11 .5

Prot Pr otec ecti tion on and and Une Unemp mplo loym ymen entt

11.6

Summary

CHAPTER

192

197 200

201


12

187

200


CHAPTER

201 20 1

Trade Po Policy an and Im Imperfect Co Competition

203

12.1 12. 1

Monopo Mon opoly ly and the Gai Gains ns fro from m Trad Trade e

12.2

Cartels Carte ls and and the the Interest Interestss of Produ Producing cing and Consu Consuming ming Count Countries ries

12.3

Monopoly Monop oly and Polic Policies ies of Export Exporting ing and Impor Importing ting Coun Countries tries

12.4 12 .4

Inte In tell llec ectu tual al Pro Prope pert rty y Righ Rights ts

12.5

Summary

203

218

220


221


222 22 2

APPEND APP ENDIX: IX: Inter Interna natio tional nal Duop Duopoly oly and and Nation National al Strate Strategy gy CHAPTER

13

167

Trade Controls in Practice

13.1 13 .1

Tar arif iffs: fs: Le Leve vels ls and and Tre Trend ndss

13.2 13 .2

Mult Mu ltil ilat ater eral al Tar Tarif ifff Reduc Reducti tion on

13.3 13 .3

Devi De vice cess for for Spec Specia iall Prot Protec ecti tion on

227

227 229 233

223 22 3

207 209

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Contents

13.4 13 .4

Spec Sp ecia iall Pro Prote tect ctio ion n in Ac Acti tion on

13.5 13 .5

Pros Pr ospe pects cts for for Spec Specia iall Prote Protect ctio ion n

13.6

Summary

236 241

242


243 24 3

SUGG SU GGES ESTI TION ONS S FOR FOR FURT FURTHE HER R READ READIN ING G CHAPTER

244 24 4

14 Pref Prefer eren enti tial al Ar Arra rang ngem emen ents ts and an d Reg Regio iona nall Iss Issue uess in in Tra Trade de Po Poli licy cy

245 24 5

14.1 14. 1

Region Reg ional al Pref Prefere erence ncess and and Regio Regional nal Trad rade e

14.2 14. 2

Welfa We lfare re Effe Effects cts of Trad Trade e Prefe Preferen rences ces

14.3 14. 3

Prefer Pre ferent ential ial Arr Arrang angeme ements nts in Pra Practi ctice ce

14.4 14. 4

Trad rade e Proble Problems ms of the the Econom Economies ies in in Tran Transit sition ion

14.5 14. 5

Trad rade e and and Growt Growth: h: Chin China a and and the the Asian Asian NICs NICs

260

14.6 14. 6

Prefer Pre ferent ential ial Arra Arrange ngemen ments: ts: New New Poli Policy cy Issue Issuess

264

14.7

Summary

15

251

269 26 9

MON ONEY EY,, IN INC COM OME, E, AND TH THE E BA BALA LANC NCE E OF PAYM YMEN ENTS TS The Balance of Payments Accounts

15.1 15 .1

Brea Br eakd kdow own n of th the e Ac Acco coun unts ts

15.2 15. 2

How Ind Indivi ividua duall Tran Transac sactio tions ns Are Are Recor Recorded ded

15.3 15 .3

Doub Do uble le-E -Ent ntry ry Bo Book okke keep epin ing g

15.4

The Balances

15.5 15. 5

Statis Sta tistic tical al Erro Errors rs in the Pay Paymen ments ts Accou Accounts nts

15.6

Summary

271 27 1

273

275 278

280

282 286

288

CHAP APTE TER R PR PRO OBLE LEMS MS CHAPTER

257

269 26 9


CHAPTER

247

267


PART IV

245

288 28 8

16 Th The e Fo Forrei eign gn Ex Exch chan ange ge Ma Mark rket et an and d Tra rade de El Elas asti tici citi ties es

16.1 16. 1

The Flow Flow of of Supply Supply and and Deman Demand d for Forei Foreign gn Excha Exchange nge

16.2

Empirical Empi rical Effe Effects cts of of Devaluat Devaluation ion on the the Trade Trade Balan Balance ce

16.3

Summary

300


301 30 1


303 30 3

APPEND APP ENDIX: IX: Stab Stabili ility ty of the the Foreig Foreign n Exchan Exchange ge Marke Markett

303

291 297

291 29 1

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CHAPTER

17

National In Income an and th the Tr Trade Balance

307

17.1 17. 1

The Sma Smallll-Cou Countr ntry y Key Keynes nesian ian Mod Model el

17.2 17. 2

The Nat Nation ional al Savi Savingng-Inv Invest estmen mentt Ident Identity ity

17.3

Multipliers

17.4 17 .4

The Th e Tra Trans nsfe ferr Pro Probl blem em

17.5

For a Large Large Country Country:: The The Two-Co Two-Country untry Keyne Keynesian sian Model

17.6

Summary

307 309

310 314

321


322


324 32 4

APPEND APP ENDIX: IX: The The Two Two-Co -Coun untry try Mode Modell in Graph Graphica icall Form Form CHAPTER

18 Spen Spendi ding ng an and d the the Ex Exch chan ange ge Rate Ra te in th the e Ke Keyn ynes esia ian n Mod odel el

324

327

18.1 18 .1

Tra rans nsmi miss ssio ion n of Distu Disturb rban ance cess

18.2

Expenditu Expe nditure-Sw re-Switchi itching ng and Expe Expenditu nditure-Re re-Reducin ducing g Poli Policies cies

18. 8.3 3

Mone Mo neta tary ry Fac Facto tors rs

18.4

Summary

327 330

337

343


344


346 34 6

APPEND APP ENDIX IX A: The The Laurs Laursen en-Me -Metzl tzlerer-Har Harber berge gerr Effect Effect APPE AP PEND NDIX IX B: B: The The Assi Assign gnme ment nt Pro Probl blem em CHAPTER

316

346

350 35 0

19 The The Mone Money y Supp Supply ly,, the the Pric Price e Leve Level, l, and an d th the e Ba Bala lanc nce e of Pa Paym ymen ents ts 35 353 3

19.1 19 .1

The Th e Nonst Nonster eril iliz izat atio ion n Assump Assumpti tion on

19.2 19. 2

The Pur Purcha chasin sing g Powe Powerr Pari Parity ty Ass Assump umptio tion n

19.3 19. 3

Purcha Pur chasin sing g Power Power Par Parity ity in a Hype Hyperin rinfla flatio tion n

19.4 19. 4

PPP in the the Mode Modell of the Bal Balanc ance e of Pay Paymen ments ts

19.5

Summary

353 358 369 372

374


375

SUGG SU GGES ESTI TION ONS S FOR FOR FURT FURTHE HER R REA READI DING NG APPE AP PEND NDIX IX A: Th The e Gol Gold d St Stan anda dard rd

377 37 7

378 37 8

APPENDIX APPE NDIX B: Reserv Reserve e Flows Flows After After Spend Spending ing Incre Increase ase and and Deval Devaluatio uation n APPENDIX C: The Determination of the Balance of Paym Pa ymen ents ts in in the the Mo Mone neta tari rist st Mod Model el 38 384 4

382

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CHAPTER

20 Deve Develo lopi ping ng Cou Count ntri ries es and and Othe Otherr Small Small Open Op en Ec Econ onom omie iess wit with h Non Nontr trad aded ed Go Good odss

391 39 1

20. 0.1 1

Nont No ntra rade ded d Go Good odss

20.2 20. 2

Expend Exp enditu iture re and the the Relati Relative ve Price Price of Nontr Nontrade aded d Goods Goods

20.3 20. 3

The Mon Moneta etary ry Appr Approac oach h with with Nontr Nontrade aded d Goods Goods

20.4

Summary

392

407 40 7


CHAPTER

21

408 40 8

INTERN INTE RNA ATI TION ONAL AL FI FINA NANC NCIA IAL L MA MARK RKET ETS S AND AN D TH THEI EIR R MA MACR CROE OECO CONO NOMI MIC C IM IMPL PLIC ICA ATI TION ONS S The Gl Globalization of of Fi Financial Ma Markets

21.1 21. 1

The Pos Postwa twarr Finan Financia ciall Syste System m (1944 (1944–19 –1973) 73)

21.2 21 .2

The Th e For Forei eign gn Ex Exch chan ange ge Ma Mark rket et

21. 1.3 3

Lib ibe era rali liza zati tion on

21.4

Innovation

21.5 21. 5

Advant Adv antage agess of of Fin Financ ancial ial Int Integr egrati ation on

21.6

Summary

412

414

426 435

439 439 43 9


440 44 0

APPENDIX: The Effect of a Budget Deficit Unde Un derr Inter Interte temp mpor oral al Opti Optimi miza zati tion on

441 44 1

22 The The Mun Munde dell ll-F -Fle lemi ming ng Mo Mode dell wit with h Part Pa rtia iall Inte Intern rnat atio iona nall Capi Capita tall Mobi Mobili lity ty

22.1

The Model

22.2 22 .2

Fiscal Fisc al Pol Polic icy y and and the the Degr Degree ee of of Capital Mobility Under Fixed Rates

450

Moneta Mone tary ry Pol Polic icy y and and the the Degr Degree ee of of Capital Mobility Under Fixed Rates

452

22.3 22 .3

411

419


CHAPTER

401

407


PAR T V

395

445 44 5

447

22.4 22. 4

When Whe n Mone Money y Flow Flowss Are Are Not Ste Steril rilize ized d

22.5 22. 5

Other Oth er Auto Automat matic ic Mech Mechani anisms sms of Adju Adjustm stment ent

22.6 22. 6

The Pur Pursui suitt of Inte Interna rnall and and Exter External nal Bal Balanc ance e

22.7

Summary

460

454 456 457

409 40 9

xi

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461


461 46 1

APPEND APP ENDIX: IX: Zon Zones es of of Intern Internal al and and Exte Externa rnall Balan Balance ce CHAPTER

23 Fisc Fiscal al an and d Mone Moneta tary ry Pol Polic icy y Unde Underr Mode Mo dern rn Fi Fina nanc ncia iall Mar Marke kett Con Condi diti tion onss

23.1 23 .1 23.2 23 .2

Fiscall Poli Fisca Policy cy Und Under er Flo Float atin ing: g: An Effect Mitigated by Capital Mobility

468

Moneta Mone tary ry Poli Policy cy Unde Underr Float Floatin ing: g: An Effect Enhanced by Capital Mobility

474

23.3 23. 3

Policy Pol icy Und Under er Per Perfec fectt Capi Capital tal Mob Mobili ility ty

23.4

Summary

477

486


24

Crises in Emerging Markets

487 48 7

489

24.1 24 .1

Infl In flow owss to to Eme Emerg rgin ing g Mar Marke kets ts

24.2 24 .2

Mana Ma nagi ging ng Ou Outf tflo lows ws

24.3 24 .3

Spec Sp ecul ulat ativ ive e Att Attac acks ks

24.4

Contagion

24.5 24 .5

IMF IM F Cou Count ntry ry Pr Prog ogra rams ms

24.6 24. 6

Contra Con tracti ctiona onary ry Eff Effect ectss of of Deva Devalua luatio tion n

24. 4.7 7

Capi Ca pita tall Con Contr trol olss

24.8 24. 8

Reform Ref orm of of Interna Internatio tional nal Fina Financi ncial al Archi Architec tectur ture e

24.9

Summary

489

498 499

504 506

515 518

521


25

510

520


CHAPTER

467 46 7

486


CHAPTER

461

522 52 2

Inte In terrde depe pend nden ence ce and Po Poli liccy Co Coor ordi dina nati tion on

525 52 5

25.1 25. 1

Internati Intern ationa onall Tran Transmi smissi ssion on of Dist Disturb urbanc ances es Under Floating Exchange Rates 525

25.2

Econometri Econo metricc Models Models of the the Inter Interdepen dependent dent Worl World d Econom Economy y

25.3 25. 3

Intern Int ernati ationa onall Macroeco Macroeconom nomic ic Policy Policy Coordi Coordinat nation ion

25.4

Summary

540


540


541 54 1

535

530

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Contents

CHAPTER

26

Supply and Inflation

543

26.1 26. 1

The Agg Aggreg regate ate Sup Supply ply Rel Relati ations onship hip

26.2 26. 2

Supply Sup ply Rel Relati ations onship hip wit with h Index Indexed ed Wage Wagess

26.3

Inflation

26.4 26. 4

Altern Alt ernati ative ve Anch Anchors ors for a Cou Countr ntry’ y’ss Money Money

26.5 26 .5

The Th e Choi Choice ce of Exc Excha hang nge e Rate Rate Reg Regim ime e

26.6

Summary

556

559

567 568 56 8


CHAPTER

551

554


PAR T VI

543

568 56 8

THE DET THE DETER ERMI MINA NATI TION ON OF EX EXCH CHAN ANGE GE RATE RA TES S IN IN INTE TERN RNA ATI TION ONAL AL AS ASSE SET T MA MARK RKET ETS S

27 Expe Expect ctat atio ions ns,, Mon Money ey,, and and th the e Dete De term rmin inat atio ion n of of the the Ex Exch chan ange ge Ra Rate te

571 57 1

573 57 3

27.1 27 .1

Inte In tere rest st Rat Rate e Pari Parity ty Con Condi diti tion onss

27.2

The Monet Monetary ary Mode Modell of Exch Exchange ange Rates with Flex Flexible ible Price Pricess

27.3 27. 3

Two Examp Examples les of of the Impor Importan tance ce of Expec Expectat tation ionss

27.4 27. 4

Oversh Ove rshoot ooting ing and the Rea Reall Excha Exchange nge Rat Rate e

27.5 27. 5

Two More More Examp Examples les of the the Import Importanc ance e of Expect Expectati ations ons

27.6

Summary

573

588

605 60 5

Exchange Rate Forecasting and Risk

28.1 28. 1

Foreca For ecasti sting ng the Spo Spott Exch Exchang ange e Rat Rate e

28.2 28 .2

The Th e Ro Role le of Ex Exch chan ange ge Ri Risk sk

28.3 28. 3

Portfo Por tfolio lio Bala Balance nce Eff Effect ectss on the the Excha Exchange nge Rate Rate

28.4

Summary

607

607

612 616

620


621 62 1


PART VII

599

604 60 4


28

585

603


CHAPTER

575

622 62 2

SUPPLEMENTS FOR SELECTED CHAPTERS

S-1

SUPPLE SUP PLEMEN MENT T TO CHAPTE CHAPTER R 2: The Equa Equatio tions ns of Excha Exchang nge e Equili Equilibri brium um SUPPLEMENT TO CHAPTER CHAPTER 3: Stability and Comparative Comparative Statics in th the e Bas Basic ic Tra rade de Mo Mode dell SS-10 10

S-3

xiii

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Contents

SUPPLE SUP PLEMEN MENT T TO CHAPTE CHAPTER R 5: Th The e Specifi Specific-F c-Fact actors ors Model Model of of Product Production ion SUPPLEME SUPP LEMENT NT TO CHAP CHAPTER TER 6: The Twowo-Secto Sectorr Hecksc Heckscher her-Ohl -Ohlin in Mod Model el SUPPLE SUP PLEMEN MENT T TO CHAPT CHAPTER ER 10: 10: Rea Reall Income Incomes, s, Prices Prices,, and the the Tari Tariff ff SUPPLE SUP PLEMEN MENT T TO CHAP CHAPTER TER 11: Tari ariffs ffs,, Growth Growth,, and and Welf Welfare are SUPPLEMENT TO CHAPTER CHAPTER 12: Imperfect Competition, Competition, Tra rade de Res Restr tric icti tion ons, s, and and Wel Welfa fare re SUPPLE SUP PLEMEN MENT T TO CHAP CHAPTER TER 16: Imp Import ort and and Expo Export rt Elast Elastici icitie tiess

S-17 S-1 7 S-22

S-27 S-2 7

S-33 S-3 3 S-39 S39 S-43 S-4 3

SUPPLEMENT TO CHAPTER 19: The Monetarist Two-Country Two-Country Model of th the e Bal Balan ance ce of Pa Paym ymen ents ts SS-44 44 SUPP SU PPLE LEME MENT NT TO TO CHAP CHAPTE TER R 24: 24: De Debt bt Dyn Dynam amic icss

S-47 S47

SUPPLE SUP PLEMEN MENT T TO TO CHAP CHAPTER TER 25: The Loc Locomo omotiv tive e The Theory ory SUPPLE SUP PLEMEN MENT T TO TO CHAP CHAPTER TER 26: Rea Reall Wag Wage e Ind Indexa exatio tion n

S-48 S-4 8 S-50 S-5 0

SUPPLE SUP PLEMEN MENT T TO CHAPT CHAPTER ER 27: 27: The Mone Monetar tary y Model Model of the the Exchan Exchange ge Rate Rate SUPPLE SUP PLEMEN MENT T TO CHAPT CHAPTER ER 28: 28: The Opti Optimal mally ly Diver Diversif sified ied Port Portfol folio io

Index

I -1

S-55 S-5 5

S-51 S-5 1

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Preface

T

Trade and Payments arrives at a time when major new he Tenth Tenth Edition Editi on of World Trade issues confront the international economy. economy. The economy of China has blossomed swiftly,, its growth heavily dependent on large volumes of exports of simple manswiftly ufactures.. Competing firms in North America ufactures America and Western Western Europe find their businesses unprofitable unprofitable and reduce reduce their outputs outputs.. But they do not go quietly quietly,, instead beseeching their governments governments to restrict imports from China. The United States frets over its huge excess of imports over exports. The trade deficit can persist only because because the rest of the world is willing to hold huge volumes of U.S. U.S. debt. Yet the U.S. U.S. creditors become less complaisant complaisant as the dollars pile up. Across the Atlantic Atlantic the European Union continues to reap the benefits of reduced trade barriers among its members. members. It is in the process of absorbing a large bloc of Eastern European nations. nations. Their trade is being redirected from the former Soviet Union’s bloc and toward the industrial nations of Western Europe. Although it is easy to dramatize these fresh events, international economists economists know that they all have their historical antecedents. antecedents. China enters onto a path of development previously traveled traveled by Japan, Japan, then by the the “Asian “Asian tigers”: tigers”: Taiwan, Kore Korea, a, Hong Kong, Kong, and Singapore. Singapore. The U.S. U.S. trade imbalance and the dollar glut also have have their historical parallels—once parallels—onc e upon a time, time, there was a dollar shortage. shortage. Fort Fortunately unately,, economic analyanalysis shows clearly how to conceptualize conceptualize these recurring issues. issues. For example, example, the U.S. U.S. trade deficit bears a fundamental relationship relationship to saving and investment decisions made by both American households (who save little) and governments (the U.S. U.S. government spends much more than than its revenue—it dissaves). dissaves). Other major issues issues of policy and behavior in the international economy also enjoy rigorous links to important components of theoretical international economics. We can cannot not cla claim im cla clairv irvoya oyance nce abo about ut how the cur curren rentt maj major or iss issues ues of int intern ernati ationa onall econom eco nomics ics wil willl be res resolv olved ed ove overr tim time.We e.We do bel believ ieve e tha thatt int intern ernati ationa onall eco econom nomics ics pro pro-vide vi dess th the e in inte tell llec ectu tual al st stru ruct ctur ure e th that at th the e st stud uden entt ne need edss to in inte terp rpre rett th the e ev evol olvi ving ng ev even ents ts and an d is issu sues es th that at ma make ke up th the e cu curr rren entt ne news ws ab abou outt th the e in inte tern rnat atio iona nall ec econ onom omy y. We ha have ve trie tr ied d to pr pres esen entt a cl clea earr an and d ri rigo goro rous us fr fram amew ewor ork k fo forr th the e st stud uden ent, t, al alon ong g wi with th ap appl plic icaation ti onss to co cont ntem empo pora rary ry is issu sues es su such ch as th thos ose e ju just st li list sted ed (p (plu luss th the e od odd d an anti tiqu que e is issu sue e, or perspective). International economics shares with other branches of economics a basic dedication to the objective of maximum economic welfare. welfare. That goal can be made conceptually rigorous, rigorous, but it does does prod us to recognize recognize some some complicating complicating factors. factors. Whose welfare? The United United States, States, or the world? Are they in conflict and, if so, when? What What about the distribution of income among individuals? Many international economic disturbances and policy changes that raise national (aggregate) welfare leave some folk worse off. off. In fact the real wages of unskilled labor have have been declining, while suppliers xv

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Preface

of skilled labor and capital have gained. This pattern appears in the United States but also in other nations. Does this redistribution result from increased exports of simple manufactures from developing countries, countries, produced by their abundant low-skill labor? Does it result from immigration to the industrial countries of workers with low skill levels? Or does it stem from causes independent of international trade? A prime suspect is changes in technology and demand that favor sophisticated goods (and services), shifting the demand for for labor toward those workers workers with more education and higher skill levels.This issue of income distribution arises at several points in the book, because of the several explanations offered for it.

What’s New in This Edition Through this and previous editions of World Trade and Payments we have sought to combine clear exposition of the proven and long-lasting basic theories and analytical constructs of international trade and finance with applications that illustrate their uses. We have incorporated new theoretical developments as they have come on stream, adjusting the emphasis given to those—new or old—that seem particularly helpful to the student seeking to understand the currently high-profile issues. issues. At the same time we have kept a place for analyses focused on issues currently shaded from popular attention, but likely to blossom in future public discourse. discourse. This general objective guides the changes that were made in this tenth edition. Parts I and II, dealing with the theory theory of international international trade, trade, have undergone undergone a good deal of reorganization. reorganization. Part I has been streamlined streamlined from three three to two chapters, chapters, to use the “basic model” model” of trade to illustrate the gains from taking part in international trade, trade, and some of the consequences of taking part in a globalized trading world when shocks occur within your own country or abroad. Part II turns to the important competitive trade models: Ricardo Ricardo,, Specific Factors Factors,, and Heckscher-Ohlin, Heckscher-Ohlin, followed by a new new chapter integrating material on more recent models that emphasize increasing returns and imperfect competition. competition. Emphasis is on both both explaining trade patterns patterns and showing showing how price and technology changes affect the distribution of real incomes among and within countries. countries. A new chapter (Chapter 8) emphasizes the causes and consequences of “outsourcing” “outsourcing” and fragmentation of production networks because of returns to scale and high technological technological improvements in service activities activities.. Chapter 9 now deals with the effects of international international factor movements, movements, particularly the relatively relatively empirical issues concerning international movements of capital. In Part III, dealing with issues issues of international international trade policy policy, Chapters 12 through through 14 have been extensively rewritten to reflect the turnover of public issues. issues. In Chapter 12 we include a case study of international competition in commercial aircraft— Boeing versus Airbus Airbus.. Their rivalry rivalry,, not new, new, has recently rekindled the policy issues issues that they raise. Changes in Chapter 13 reflect governments’ governments’ shifting away from traditional tariffs to controlling controlling trade through anti-dumping anti-dumping regulations. regulations. Anti-dumping raises interesting issues of strategic interactions between international oligopolists. Chapter 14 on regional preferences contains much new material on the expansion of the European Union and the effects of the North American Free Trade Area. It also includes a study of trade’s role in China’s rapid development. development.

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An important addition in the chapters on macroeconomics and financial markets is a section on the question whether China should abandon the effective pegging of its currency to the U.S. U.S. dollar. A new section deals with debt dynamics—the dynamics—the conditions under which a growing international debt (such as that of the United States) is sustainable over time. The innovative Chapter Chapter 24 on crises in emerging markets is significantly updated.

Adapting the Course styles. Some chapters are World Trade and Payments is adaptable to various tracking styles. followed by one or more appendixes that explain specialized points or analytical constructions that some instructors instructors might favor but others prefer prefer to avoid. Omitting any appendix will not lessen comprehension of the chapter. For instructors instructors wanting a more advanced approach approach we have retained, at the back of the text, the mathematical mathematical supplements present in previous editions. The book covers a conventional full line of topics and with some additional material can serve as the basis for a full-year course at the undergraduate level or for separate semester (quarter) courses on the real and financial aspects of international trade. trade. We have paid special special attention, attention, however, to the needs of one-semester courses courses.. The chapters in Part I and Chapters Chapters 16, 17, 23, and part of 19 provide the nucleus of a onesemester course that covers both the core of the real theory (with applications) and elements of open-economy macroeconomics and balance-of-payments adjustment. Many of the chapters outside this core are at least somewhat independent of one another, so that instructors can round out the course with selections selections from them (examples are Chapters 9 and 14). A course in international macroeconomics macroeconomics might add Chapte Cha pters rs 15, 19 (es (espec pecial ially ly Sec Sectio tion n 19.2 19.2), ), 22, 23, 25, 26, and 27. It mig might ht the then n also also employ Chapters Chapters 20 and 24 if the orientation orientation is toward developing developing countries, countries, or Chapters 21 and 28 if the orientation is toward finance.

Acknowledgments As authors of a textbook in its tenth edition, we have acquired debts to colleagues, colleagues, students,, and various dents various helpers helpers that stretch the bounds bounds of memory memory,, let alone alone explicit explicit acknowledgment. acknowledgm ent. We confine ourselves to recognizing those who helped with the tenth editio edi tion. n. Than hanks ks go to Steph Stephen en Golub Golub,, Swa Swarth rthmor more e College College;; Gö Gökçe kçe Soyde Soydemir mir,, Universi Univ ersity ty of Texas exas,, Pan Amer American ican;; Kevi Kevin n Zhang, Zhang, Illin Illinois ois State State Univ Universit ersity; y; Fra Frank nk Weiss eiss,, Jo Johns hns Hopk Hopkins ins Univ Universit ersity; y; Rodn Rodney ey Swan Swanson, son, Univ Universit ersity y of Cali Californ fornia, ia, Los Angele Ang eles; s; Car Carste sten n Kow owalc alczyk zyk,, Tuft uftss Uni Univer versit sity; y; Ma Maria ria Muniag Muniagurr urria, ia, Uni Univer versit sity y of Wisc iscons onsin, in, Ma Madis dison; on; Per Pershi shing ng J. Hil Hill, l, Uni Univer versit sity y of of Ala Alaska ska,, Anc Anchor horage age;; and Th Theo eo Eicher, University of Washington. Washington. RICHARD E. CAVES JEFFREY A. FRANKEL RONALD W. JONES

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World Trade and Payments an Introduction 10-WTPfront.pi-xviii

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