It is our view that, at the beginning of the new millennium, every student must have a conscious awareness of "things international." Whether one is studying, for example, political science, sociology, chemistry, art, history, or economics, developments worldwide impinge upon the subject matter of the chosen discipline. Such developments may take the form of the discovery of a new compound in Germany, an unexpected election result in India, an archeological find in Cyprus, or a new awareness of AIDS in Sierra Leone. And, since information now gets transmitted instantaneously across continents and oceans, scientists, governments, firms, and households all react quickly to new information by altering behavior in laboratories, clinics, legislative processes, production and marketing strategies, consumption and travel decisions, and research projects. Without keeping track of international developments, today's student will be unable to understand the changing nature of the world and of the material that he or she is studying.
In addition to perceiving the need for international awareness on the part of students in general, we think it is absolutely mandatory that students with an interest in economics recognize that international economic events and the international dimensions of the subject surround us every day. As we prepared to launch this fourth edition of International Economics, we could not help noting how much had changed since we set out to write our first edition. The world has economically internationalized even faster than we anticipated 12 years ago, and the awareness of the role of international issues in our lives has increased substantially. Almost daily, headlines focus on developments such as the European Union and the increased economic integration efforts that have fostered monetary union and the euro, policy issues related to reducing trade barriers and the impacts of retaliatory actions such as the United States has experienced in the "banana war" with Europe, the spread of the "Asian crisis," increased integration efforts such as NAFTA in the Western hemisphere, and the tensions accompanying growth, structural change, and globalization which surfaced in Seattle, Washington, D.C., and Canada at meetings of key international agencies. Beyond these broad issues, headlines also trumpet news of the U.S. trade deficit, rising (or falling) gasoline prices, Chinese clothing, Japanese automobiles, and Cuban baseball players.
The growing awareness of the importance of international issues is also in evidence in increased student interest in such issues, particularly those related to employment, international working conditions, and equity. These interests have manifested themselves both in larger class sizes and more frequent student protests. It is thus increasingly important that individuals have a practical working knowledge of the economic fundamentals underlying international actions in order to find their way through the myriad of arguments, emotions, and statistics that bombard them almost daily. Young, budding economists need to be equipped with the framework, the tools, and the basic institutional knowledge that will permit them to make sense of the increasingly interdependent economic environment. Further, there will be few jobs which they will later pursue that will not have an international dimension, whether it be ordering components from a Brazilian firm, traveling to a trade show in Malaysia, making a loan for the transport of Caspian Sea oil, or working in an embassy in Quito or in a medical mission in Burundi.
Thus our motive for writing this edition is much the same as in earlier editions: to provide a clear and comprehensive text that will help students move beyond simple recognition and interest in international issues and toward a level of understanding of current and future international issues which will be of use to them in analyzing the problem at hand and selecting a policy position. In other words, we seek to help these scholars acquire the necessary human capital for dealing with important questions, for satisfying their intellectual curiosity, and for providing a foundation for future on-the-job decisions.
We have been very flattered by the favorable response to the first three editions of our book. In this fourth edition we continue to build upon the well-received features to develop a text that is even more attuned to our objectives. We have also, in a number of instances, attempted to simplify our presentation of some of the more difficult concepts and models in order to be more student-friendly. Material has been added relating to newer approaches to trade theory, and we have expanded our treatment of contemporary developments such as NAFTA and the controversy surrounding the WTO. In addition, we have enhanced our coverage of strategic trade policy by including government social welfare objectives more explicitly. Further, a discussion of the instability generated by the Asian financial crisis of 1997-1998 has been included, along with an updated treatment of the attempt for greater economic stability in Europe by means of monetary union. In the monetary material, as with the first three editions, we have maintained our reliance on the IS/LM/BP framework for analyzing macroeconomic policy, because we believe that the framework is effective in facilitating student understanding and because that material was favorably received by users of the earlier editions. We also continue to incorporate key aspects of the monetary and portfolio approaches into the model.
In addition, throughout the text, we have updated information and retained features that make the book user-friendly. As in previous editions, chapter introductions contain a "roadmap" to indicate more thoroughly the topics of the chapter and to motivate student interest. Further, effective case studies from earlier editions have been updated, and a number of new cases have been introduced in both the trade and the monetary sections. As previously, we have attempted to keep the book at a manageable length by deleting outdated and extraneous material.
DESCRIPTION OF TEXT
Our book follows the traditional division of international economics into the trade and monetary sides of the subject. Although the primary audience for the book will be students in upper-level economics courses, we think that the material can effectively reach a broad, diversified group of students—including those in political science, international studies, history, and business who may have fewer economics courses in their background. Having taught international economics ourselves in specific nonmajors' sections and Master's of Business Administration sections as well as in the traditional economics department setting, we are confident that the material is accessible to both noneconomics and economics students. This broad audience will be assisted in its learning through the fact that we have included separate, extensive review chapters of microeconomic (Chapter 5) and macroeconomic (Chapter 25) tools.
International Economics presents international trade theory and policy first. Introductory material and data are found in Chapter 1, and Chapters 2 through 4 present the Classical model of trade, including a treatment of pre-Classical Mercantilism. A unique feature is the devotion of an entire chapter to extensions of the Classical model to include more than two countries, more than two goods, money wages and prices, exchange rates, and transportation costs. The analysis is brought forward through the modern Dornbusch-Fischer-
Samuelson model including a treatment of the impact of productivity improvements in one country on the trading partner. Chapter 5 provides an extensive review of microeconomic tools used in international trade, and can be thought of as a "short course" in intermediate micro. Chapters 6 through 9 present the workhorse neoclassical and Heckscher-Ohlin trade theory, including an examination of the assumptions of the model. Chapter 6 focuses on the traditional production possibilities-indifference curve exposition. We are unabashed fans of the offer curve because of the nice general equilibrium properties of the device and because of its usefulness in analyzing trade policy and in interpreting economic events, and Chapter 7 extensively develops this concept. Chapter 8 explores Heckscher-Ohlin in a theoretical context, and Chapter 9 is unique in its focus on testing the factor endowments approach, including empirical work on the trade-income inequality debate in the context of Heckscher-Ohlin. This chapter has been simplified in this new edition.
Continuing with theory, Chapters 10 through 12 treat extensions of the traditional material. Chapter 10 discusses various post-Heckscher-Ohlin trade theories that relax standard assumptions such as international factor immobility, homogeneous products, constant returns to scale, and perfect competition. An important focus here is upon imperfect competition and intra-industry trade. In this edition, treatments of the reciprocal dumping model and the gravity model have been introduced. Chapter 11 explores the comparative statics of economic growth and the relative importance of trade, and it includes material on endogenous growth models and on the effects of growth on the offer curve. Chapter 12 examines causes and consequences of international factor movements, including both capital movements and labor flows. We have included material on the economic impact of immigration, focusing on the United States, and have also added a discussion of the "brain drain" from developing countries.
Chapters 13 through 18 are devoted to trade policy. Chapter 13 is exclusively devoted to presentation of the various instruments of trade policy. Chapter 14 then explores the welfare effects of the instruments, including discussion of such effects in a "small-country" as well as a "large-country" setting. The chapter's treatment of the large-country case has been simplified, with the more difficult material having been shifted to an appendix. Chapters 15 and 16 subsequently work systematically through various arguments for protection. The presence of externalities as a potential reason for protection is now considered in Chapter 15, and a new feature of Chapter 16 is that it includes discussion of tariff reaction functions of governments. This two-chapter treatment of the arguments for protection (one for traditional arguments and one for newer approaches) is more extensive than the coverage in many competing texts. Chapter 17 begins with a discussion of the political economy of trade policy, followed by a review of various trade policy actions involving the United States as well as issues currently confronting the WTO. Chapter 18—unlike the treatment in some texts—is a distinct, separate chapter on economic integration. We have updated the discussion of the transition economies, the European Union, and the North American Free Trade Agreement. The trade part of the book concludes with Chapter 19, which provides an overview of how international trade influences growth and change in the developing countries.
The international monetary material begins with Chapter 20, which introduces balance-of-payments accounting. In contrast to the approach in some texts, balance-of-payments accounting is discussed prior to the foreign exchange market, which is considered in Chapter 21. We think this sequence makes more sense than the reverse, since the demand and supply curves of foreign exchange reflect the debit and credit items, respectively, in the balance of payments. A differentiating feature of the presentation of the foreign exchange market is the extensive development of various exchange rate measures, for example, nominal, real, and effective exchange rates. Chapter 22 then describes characteristics of "real-world" international financial markets in detail, and discusses a (we hope not too-bewildering) variety of
international financial derivative instruments. Chapter 23 presents in considerable detail the monetary and portfolio balance (or asset market) approaches to the balance of payments and to exchange rate determination. We have shifted the difficult discussion of empirical testing of these approaches to an appendix. The chapter concludes with an examination of the phenomenon of exchange rate overshooting. In Chapters 24 and 25, our attention turns to the more traditional price and income adjustment mechanisms. In Chapter 24, we have included a greater discussion of the "pass-through" of exchange rate changes than appeared in previous editions. Chapter 25 is in effect a review of basic Keynesian macroeconomic analysis.
Chapters 26 through 28 are concerned with macroeconomic policy under different exchange rate regimes. As noted earlier, we continue to utilize the IS/LM/BP Mundell-Flem-ing approach rather than employ exclusively the asset market approach. The value of the IS/LM/BP model is that it can embrace both the current and the capital/financial accounts in an understandable and perhaps familiar framework for many undergraduates. This model is presented in Chapter 26 in a manner that does not require previous acquaintance with it but does constitute review material for most students who have previously taken an intermediate macroeconomic theory course. The chapter concludes with an analysis of monetary and fiscal policy in a fixed exchange rate environment. These policies are then examined in a flexible exchange rate environment in Chapter 27, and the analysis is broadened to the aggregate demand—aggregate supply framework in Chapter 28.
The concluding chapters, Chapters 29 and 30, focus on particular topics of global concern. Chapter 29 considers various issues related to the choice between fixed and flexible exchange rates. Chapter 30 then traces the historical development of the international monetary system from Bretton Woods onward and examines proposals for reform such as target zone proposals. In this new edition, we have updated our discussion of the Economic and Monetary Union (EMU) in Europe and have also addressed the Asian financial crisis of 1997-1998. This final chapter concludes with an overview of the external debt problems of developing countries.
Because of the length and comprehensiveness of the International Economics text, it is not wise to attempt to cover all of it in a one-semester course. For such a course, we recommend that material be selected from Chapters 1 to 3, 5 to 8, 10, 13 to 15, 20 and 21, 23 to 27, and 30. If more emphasis on international trade is desired, additional material from Chapters 16 to 18 can be included. For more emphasis on international monetary economics, we suggest the addition of selected material from Chapters 22, 28, and 29. For a two-semester course, the entire International Economics book can be covered. Whatever the course, occasional outside reading assignments from academic journals, current popular periodicals, and a readings book can further help to bring the material to life. The "References for Further Reading" section at the end of the book, which is organized by chapter, can hopefully give some guidance. If library resources are limited, the text contains, both in the main body and in case studies, summaries of some noteworthy contributions.
To assist the student in learning the material, we have included a variety of pedagogical devices. We like to think of course that the major device in this edition is again clear exposition. Although every author stresses clarity of exposition as a strong point, we continue to be pleased that many reviewers praised this feature. Beyond this general feature, more specific devices are described below.
Boxes that are analytical in nature (14 in total) further explore some difficult concepts or relationships for the interested student. We also have included several biographical boxes. These short sketches of well-known economists add a personal dimension to the work being studied, and they discuss not only the professional interests and concerns of the individuals but also some of their less well-known "human" characteristics.
There are 94 case studies contained in International Economics. These case studies serve to illuminate concepts and analyses under discussion, and they give the student an opportunity to see the relevance of the material to events going on in practice. The cases also provide a break from the sometimes heavy dose of theory which permeates this (and virtually any other) international economics text. We have particularly beefed up the number of cases in the policy chapters since those chapters are where we especially want students to see that theory can be very helpful in understanding current events.
These are short "stopping points" at various intervals within chapters (about two per chapter). The concept checks pose questions that are designed to see if basic points made in the text have been grasped by the student.
End-of-Chapter Questions and Problems
These are standard fare in all texts. The questions and problems are broader and more comprehensive than the questions contained in the concept checks.
Lists of Key Terms
The major terms in each chapter are boldfaced in the chapters themselves and then are brought together at the end of the chapter in list form. A review of each list can serve as a quick review of the chapter.
References for Further Reading
These lists occur at the end of the book, organized by chapter. We have provided bibliographic sources that we have found useful in our own work as well as entries that are relatively accessible and offer further theoretical and empirical exploration opportunities for interested students.
This companion publication offers instructors assistance in preparing for and teaching the course. We have included suggestions for presenting the material as well as answers to the end-of-chapter questions and problems. In addition, sample examination questions are provided, including some of the hundreds of multiple-choice questions and problems that we have used for examining our own students.