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International economics 7th global edition jame gerber International economics 7th global edition jame gerber International economics 7th global edition jame gerber International economics 7th global edition jame gerber International economics 7th global edition jame gerber International economics 7th global edition jame gerber International economics 7th global edition jame gerber International economics 7th global edition jame gerber International economics 7th global edition jame gerber International economics 7th global edition jame gerber
GLOBAL EDITION International Economics For these Global Editions, the editorial team at Pearson has collaborated with educators across the world to address a wide range of subjects and requirements, equipping students with the best possible learning tools This Global Edition preserves the cutting-edge approach and pedagogy of the original, but also features alterations, customization, and adaptation from the North American version GLOBAL EDITION International Economics SEVENTH EDITION James Gerber SEVENTH EDITION Gerber GLOBAL EDITION This is a special edition of an established title widely used by colleges and universities throughout the world Pearson published this exclusive edition for the benefit of students outside the United States and Canada If you purchased this book within the United States or Canada, you should be aware that it has been imported without the approval of the Publisher or Author Pearson Global Edition Gerber_07_1292214163_Final.indd 02/05/17 12:51 PM www.downloadslide.com International Economics SEVENTH EDITION GLOBAL EDITION A01_GERB4160_07_GE_FM.indd 6/17/17 12:04 PM www.downloadslide.com The Pearson Series in Economics Abel/Bernanke/Croushore Macroeconomics*† Cooter/Ulen Law & Economics Heyne/Boettke/Prychitko The Economic Way of Thinking Bade/Parkin Foundations of Economics*† Downs An Economic Theory of Democracy Hoffman/Averett Women and the Economy: Family, Work, and Pay Ehrenberg/Smith Modern Labor Economics Holt Markets, Games, & Strategic Behavior Berck/Helfand The Economics of the Environment Bierman/Fernandez Game Theory with Economic Applications Blanchard Macroeconomics*† Blau/Ferber/Winkler The Economics of Women, Men and Work Boardman/Greenberg/Vining/ Weimer Cost-Benefit Analysis Boyer Principles of Transportation Economics Branson Macroeconomic Theory and Policy Brock/Adams The Structure of American Industry Bruce Public Finance and the American Economy Carlton/Perloff Modern Industrial Organization† Farnham 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Macroeconomics† O’Sullivan/Sheffrin/Perez Economics: Principles, Applications and Tools*† *denotes MyLab Economics titles Log onto www.myeconlab.com to learn more †denotes the availability of a Global Edition A01_GERB4160_07_GE_FM.indd 6/17/17 12:04 PM www.downloadslide.com This page intentionally left blank A01_RAMA7654_08_SE_FM.indd 09/03/2017 17:58 www.downloadslide.com Contents International Economics James Gerber San Diego State University SEVENTH EDITION GLOBAL EDITION A01_GERB4160_07_GE_FM.indd 6/17/17 12:04 PM www.downloadslide.com For Monica and Elizabeth Vice President, Business Publishing: Donna Battista Director of Portfolio Management: Adrienne D’Ambrosio Director, Courseware Portfolio Management: Ashley Dodge Editorial Assistant: Michelle Zeng Senior Sponsoring Editor: Neeraj Bhalla Associate Acquisitions Editor, Global Edition: Ananya Srivastava Project Editor, Global Edition: Punita Mann Content Producer, Global Edition: Nikhil Rakshit Vice President, Product Marketing: Roxanne McCarley Director of Strategic Marketing: Brad Parkins Strategic Marketing Manager: Deborah Strickland Product Marketer: Tricia Murphy Field Marketing Manager: Ramona Elmer Product Marketing Assistant: Jessica Quazza Vice President, Production and Digital Studio, Arts and Business: Etain O’Dea Director of Production, Business: Jeff Holcomb Managing Producer, Business: Alison Kalil Operations Specialist: Carol Melville Senior Manufacturing Controller, Production, Global Edition: Trudy Kimber Creative Director: Blair Brown Manager, Learning Tools: Brian Surette Content Developer, Learning Tools: Lindsey Sloan Managing Producer, Digital Studio, Arts and Business: Diane Lombardo Digital Studio Producer: Melissa Honig Digital Studio Producer: Alana Coles Digital Content Project Lead: Courtney Kamauf Media Production Manager, Global Edition: Vikram Kumar Full-Service Project Management and Composition: SPi Global Interior Design: SPi Global Cover Design: Lumina Datamatics, Inc Cover Art: Brian A Jackson/Shutterstock Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsonglobaleditions.com © Pearson Education Limited 2018 The rights of James Gerber to be identified as the authors of this work have been asserted by him in accordance with the Copyright, Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled International Economics, 7th edition, ISBN 978-0-13447209-6, by James Gerber, published by Pearson Education © 2018 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners ISBN 10: 1-292-21416-3 ISBN 13: 978-1-292-21416-0 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 14 13 12 11 10 Typeset in Times Ten LT Std by SPi Global Printed and bound by Vivar in Malaysia A01_GERB4160_07_GE_FM.indd 6/17/17 12:04 PM www.downloadslide.com Brief Contents Preface 17 part Introduction and Institutions 25 Chapter Chapter An Introduction to the World Economy International Economic Institutions Since World War II 26 41 Part International Trade 65 Chapter Chapter Chapter Chapter Chapter Chapter Comparative Advantage and the Gains from Trade Comparative Advantage and Factor Endowments Beyond Comparative Advantage The Theory of Tariffs and Quotas Commercial Policy International Trade and Labor and Environmental Standards 66 89 118 140 162 182 part International Finance 207 Chapter Chapter Chapter Chapter Trade and the Balance of Payments Exchange Rates and Exchange Rate Systems An Introduction to Open Economy Macroeconomics International Financial Crises 208 238 274 300 10 11 12 part 4 Regional Issues in the Global Economy Chapter Chapter Chapter Chapter Chapter 13 14 15 16 17 The United States in the World Economy The European Union: Many Markets into One Trade and Policy Reform in Latin America Export-Oriented Growth in East Asia China and India in the World Economy Glossary Index 331 332 358 389 416 445 471 483 Suggested Readings are available at www.pearsonglobaleditions.com/Gerber A01_GERB4160_07_GE_FM.indd 6/17/17 12:04 PM www.downloadslide.com This page intentionally left blank A01_RAMA7654_08_SE_FM.indd 09/03/2017 17:58 www.downloadslide.com CONTENTS Preface 17 PART Introduction and Institutions Chapter An Introduction to the 25 World Economy Introduction: International Economic Integration Elements of International Economic Integration The Growth of World Trade Capital and Labor Mobility Features of Contemporary International Economic Relations Trade and Economic Growth Twelve Themes in International Economics 26 26 Capital Flows and the Debt of Developing Countries (Chapters 2, 9, and 12) Latin America and the World Economy (Chapter 15) Export-Led Growth in East Asia (Chapter 16) China and India in the World Economy (Chapter 17) 38 38 38 39 Vocabulary 39 • Study Questions 39 27 28 30 32 34 35 The Gains from Trade and New Trade Theory (Chapters 3, 4, and 5) 35 Wages, Jobs, and Protection (Chapters 3, 6, 7, and 8) 35 Trade Deficits (Chapters 9, 11, and 12) 36 Regional Trade Agreements (Chapters 2, 13, and 14) 36 The Resolution of Trade Conflicts (Chapters 2, 7, and 8) 36 The Role of International Institutions (Chapters 2, 8, and 12) 37 Exchange Rates and the Macroeconomy (Chapters 10 and 11) 37 Financial Crises and Global Contagion (Chapter 12) 37 Chapter International Economic Institutions Since World War II Introduction: International Institutions and Issues Since World War II International Institutions A Taxonomy of International Economic Institutions The Imf, the World Bank, and the Wto The IMF and World Bank The GATT, the Uruguay Round, and the WTO CASE STUDY: The GATT Rounds Regional Trade Agreements Five Types of Regional Trade Agreements CASE STUDY: Prominent Regional Trade Agreements Regional Trade Agreements and the WTO For and Against RTAs 41 41 41 42 43 43 44 46 47 47 48 50 51 A01_GERB4160_07_GE_FM.indd 6/17/17 12:04 PM www.downloadslide.com 490 Index Expenditure switching policies, 293 Export pessimism, 393 Export processing zones (EPZs), 126 Export-oriented East Asian economies general characteristics of growth, 420–424 institutional environment, 424–432 population, 418, 419 rapid accumulation of physical and human capital, 421–422 rapid growth of manufactured exports, 422, 423 role of industrial policies, 433–437 shared growth, 420–421 Exports China, 462 China to United States, 104–105 East Asia, growth connection, 437–439 HPAE vs Latin American economies, 432 investing versus, 106 labels for, 198–199 manufacturing, HPAE, 422–423 production of, 437–439 promotion model, 439 External debt, 229 External economies of scale defined, 120 geography and, 127–128 trade and, 128–129 Externalities concept of, 130 as controversial, 130 infant industry argument, 171–172 market failure and, 130–132 F Factor abundance, 90 Factor endowments comparative advantage and, 89–117 theory of trade based on, 101 Factor scarcity, 90 Factors defined, 90 demand-pull, 110 relative abundance of, 90 supply-push, 110 Fair value, 175 FDI See Foreign direct investment (FDI) Financial account Asian Crisis of 1997–1998, 316 Z02_GERB4160_07_GE_IDX.indd 490 components of, 216 credit and debit tabulation, 214 defined, 212 interdependency, 214 in relation to current account, 213, 214 transactions, 214–215 U.S., 220 Financial crises, 300 See also International financial crises Financial flows availability of, 226 limits on, 218–220 patterns, 218 types of, 212–217 Financial products, innovations in, 323 Financial sector regulation, 311 Fiscal policy contractionary, 280 current account and, 289 for current account imbalance elimination, 286 definition, 280 exchange rate effects, 289 expansionary, 280 Great Depression, 281 interest rates and, 289 long-run effects, 290 main effects of, 290 medium-run effects, 289 short-run effects, 289 summary, 297–298 Fixed exchange rate systems, 256 See also Exchange rates Bretton Woods, 259 changes in demand and, 258 defined, 256 gold standards, 257 national supply and demand for foreign currencies, 257 pegged exchange rates, 259, 263 supply and demand with, 257 Flexible exchange rates, 239 See also Exchange rates alternatives to, 256–260 Mexico, 263, 264 supply and demand with, 260 systems, 260 Foreign affiliates, 107 Foreign direct investment (FDI), 215 defined, 30 HPAE policies encouraging, 438 Foreign exchange market, 239 6/14/17 3:19 PM www.downloadslide.com Index Foreign exchange reserves, 43 Foreign exchange transactions, 31 Foreign investment, foreign trade versus, 105–107 Foreign producers, effect of profits on, 154–156 Foreign trading corporations (FTC), 451–452 Formal institution, 42 Forward exchange rate, 242, 243–244 Forward markets, 242 Four freedoms, 368 Four Tigers, 417, 422 Free riding, 53 Free trade agreements (FTAs) East Asia, 440 exports and imports by country, 337 TPP, 348 Free Trade Area of the Americas (FTAA), 401 Free-trade areas, 49, 50 FTC (Foreign trading corporations), 451–452 G Gains from trade absolute productivity advantage and, 68–70 comparative productivity advantage and, 71–77 concept of, 66 defined, 66 dynamic, 70 example of, 74–76 in HO model, 91–94 intraindustry, 122–123 introduction to, 66–70 nineteenth-century Japan, 70–71 with no absolute advantage, 78–79 static, 70 GATT See General Agreement on Tariffs and Trade (GATT) GDP See Gross domestic product (GDP) General Agreement on Tariffs and Trade (GATT), 33 agriculture language, 167–168 China and, 452 creation of, 41 defined, 45 Doha Round, 45 membership, 336 national treatment and nondiscrimination, 45 new agreements, 135 rounds case study, 46–47 Tokyo Round, 46–47 trade rounds, 45 Uruguay Round, 45 Z02_GERB4160_07_GE_IDX.indd 491 491 Generalized System of Preferences (GSP), 354 Geography external economies of scale, 127–128 internal economies of scale, 125–126 Mexico’s manufacturing case study, 126–127 trade and, 125–129 trade and external economies, 128–129 transportation costs, 125–126 Germany, reunification, 365 GHG (greenhouse gases), 201, 202 Global climate change, 201–202 Global crisis of 2,031 case studies, 323–326 current account deficits and, 325 from economic imbalances, 304, 325 euro and, 325, 378–381 financial innovation and, 325 policy implications, 326 securitization, 324 subprime crisis, 323 Global economy See World economy Global financial crises See International financial crises Global savings imbalances, 325 Gold standard Bretton Woods system, 257 central banks and, 285 countries leaving, 285–286 fixing currency unit value and, 257 gold as reserve, 257 money proportion to gold, 257 rarity, 259 rules for maintaining, 257 Goods and services, 209 Goods arbitrage, 247 Governments business enterprises versus, 82 “do nothing” approach, 83 industrial policy tools, 132 loser compensation, 83 Great Depression budget balancing and, 284 definition, 283 fiscal policy during, 281 GDP growth during, 284 isolation and, 34 lender of last resort and, 54 monetary policy during, 285 movement of people during, 30 subprime mortgage crisis and, 26 6/14/17 3:19 PM www.downloadslide.com 492 Index Greece, as-euro-crisis country, 376 Greenhouse gases (GHG), 201, 202 Gross domestic product (GDP) AD shift and, 278 aggregate supply curve and, 276 Asian Crisis of 1998–1999, 316 capital flows and, 31 China, 447 defined, 28 equilibrium level, 279 during Great Depression, 284 HPAE, 418 India, 447 Latin America, 390–391 measure, 221 movement to higher level, 278 NAFTA region, 339 U.S., 333 Gross national product (GNP) defined, 221–222 formula, 222 as value of income received, 223 Growth economics, 381 GSP (Generalized System of Preferences), 354 H Hard pegs, 256 Harmonization of standards defined, 183 differences between countries and, 184 as SEA implementation problem, 369 Heavy and Chemical Industries (HCI), 433 in Korea (case study), 436–437 Heavy Industries Corporation of Malaysia (HICOM), 433 Heckscher-Ohlin (HO) trade model defined, 90 extension of, 101–111 gains and losses analysis, 94 gains from trade illustration, 93 gains from trade in, 91–94 inputs, 91 specific factors model, 97–98 summary, 114 tests of, 101 theory, 91 Hedging, 243 Heterodox model, 406 Z02_GERB4160_07_GE_IDX.indd 492 HICOM (Heavy Industries Corporation of Malaysia), 433 High-income countries, 185 Highly Indebted Poor Countries (HIPC) in debt problem, 230 defined, 38 High-performance Asian economies (HPAE) Asian trade blocs (case study), 440–441 connections between growth and exports, 437–439 debt management, 423 definition, 416–417 doing business in (case study), 427–428 ease of doing business index rankings, 428 economic policy as interventionist, 429 educational policy, 421 enforceability role, 430 export promotion model, 439 export targets, 434 fiscal discipline and business government relations, 427, 429 GDP, 418 government policies in, 430 HCI in Korea, 436–437 imports/exports as share of GDP, 422 industrial policies role, 433–436 institutional environment, 424 in Korea (case study), 436–437 map, 417 openness of economies (case study), 431–432 political and civil liberty support and, 441 rapid growth of manufactured exports, 422–423 role of industrial policies, 433–436 savings flows, 424 savings rates, 421 shared growth, 420–421 stable macroeconomic environments, 427 summary, 443 targeted industrial policy, 433–434 total factor productivity (TFP), 442 unanswered questions, 418 HIPC See Highly Indebted Poor Countries (HIPC) Home country standards, 199–200 Hong Kong GDP, 418, 419 as one of Four Tigers, 422 Rule of 96, 418 separation from China, 420 Housing market, 324 6/14/17 3:19 PM www.downloadslide.com Index I Ideology, international economic institution, 58–59 IFS (International Financial Statistics), 236 ILO See International Labour Organization (ILO) IMF See International Monetary Fund (IMF) Immigration characteristics of, 34 as NAFTA issue, 344 Spain switch from emigration to, 383–384 Implementation costs, international economic institutions, 59 Import licensing requirement, 154 Import substitution industrialization (ISI) criticisms of, 395–396 definition, 342, 392 as form of industrial policy, 393 goals, 392–394 Latin America, 392–398 market failures and, 395 in Mexico, 396–398 origin, 392–394 overvalued exchange rates and, 395 policy weaknesses, 342 rent seeking and, 396 Imports See also Quotas HPAE versus Latin American economies, 432 tariffs, 32 Income in China, 447 definitions, 185 East Asia, 419–420 EU membership, 360, 361 in India, 447 investment, 209–210 Latin America, 390–392 monetary policy impact on, 289 standards and, 182–183 by World Bank Categories, 185 Income distribution effect of tariffs on, 144–146 trade and, 94–98 India business services, 462 comparative advantages, 453–454 computer and information services, 462 current account balances, 459–461 demographic and economic characteristics, 447–454 economic reform, 450–451, 452–453 education, 461 Z02_GERB4160_07_GE_IDX.indd 493 493 foreign direct investment, 461 GDP, 447 industrial revolution, 448 integration into world economy, 39 Manmohan Singh, 452 population and income, 447, 450 services, 463 services economy, 462 services trade, 462 state capitalism, 466–467 study questions, 469–470 summary, 468–469 tariffs and protection, 458–459 telecommunications revolution, 462 trade patterns, 457–458 traditional knowledge, 174 vocabulary, 469 world economy, 448, 456–468 world trading system, 446 Indonesia, comparative advantage and, 81 Industrial policies, 129–137 aircraft industry, 129–130 as controversial, 130 defined, 129–130 industry target problem, 135 market failure and, 130–132 problems with, 134–135 R&D spending problem, 135 rent seeking problem, 135 tools for, 132 WTO rules against, 135–137 Infant industry argument, 171 Inflation, Latin America, 405–407 Informal economy, 190 Informal institutions, 42 Inputs availability of, 90 Heckscher-Ohlin (HO) trade model, 91 intermediate, 275 Institutions See also International economic institutions defined, 42 exchange rate, 241 formal, 42 informal, 42 as “rules of the game”, 61 Intellectual property rights, 157 Intellectual property, traditional knowledge and, 173–174 6/14/17 3:19 PM www.downloadslide.com 494 Index Interest parity, 249 Interest rate arbitrage, 240 Interest rates fiscal policy and, 289 foreign currency supply and, 297 home, effects of increase in, 250 Interindustry trade, 119 benefits of, 123 Intermediate inputs, 275 Intermediation, 301 Internal economies of scale defined, 120 geography and, 125–126 market implications, 120 monopolistic competition, 121 presence of, 121 International Bank for Reconstruction and Development (IBRD) See World Bank International debt See Debt International economic institutions Bretton Woods (case study), 55–56 criticism of, 57–59 GATT, 44–46 GATT rounds case study, 46–47 governments versus, 52–53 ideology, 58–59 IMF and World Bank, 43–44 implementation and adjustment costs, 59 importance of, 41 order maintenance function, 53–55 overview of, 41–42 regional trade agreements, 47–52 role of, 52–55 sovereignty and transparency, 57–58 study questions, 63 summary, 61–62 taxonomy of, 42 uncertainty reduction function, 53–55 Uruguay Round, 44–46 vocabulary, 62 WTO, 44–46 International economic integration benefits, 26–27 capital and labor mobility, 30–32 capital flows, 38 debt of developing countries, 38 deep, 32 defined, 27 East Asian environment, 424–432 Z02_GERB4160_07_GE_IDX.indd 494 elements of, 27–35 exchange rates and macroeconomy, 37 export-led growth in East Asia, 38–39 features of contemporary relations, 32–34 financial crises and global contagion, 37–38 introduction to, 26–27 Latin America and world economy, 38 measures for degree of, 28 multilateral organizations, 33 regional trade agreements, 33–34, 36 resolution of trade conflicts, 36–37 role of international institutions, 37 shallow, 32 trade and economic growth, 34–35 world trade growth, 28–30 International economic issues gains from trade, 35 New Trade Theory, 35 trade deficits, 36 wages, jobs, and protection, 35–36 International finance See Balance of payments International financial architecture, 301 conditionality and, 321 lender of last resort and, 320–321 reform of, 301, 319 reform urgency, 322 International financial crises Asian Crisis of 1997–1998, 314–318 avoidance, domestic issues, 310–313 balance of payments and, 219–220 banking, 301–302 capital controls, 312–313 caused by economic imbalances, 303 contagion effects, 301 definition, 301–303 destruction of, 301 domestic policies for crisis management, 318–319 euro and, 376 exchange rate policy and, 312 frequency of, 319 global crisis of 2007 (case study), 323–326 as international economic issue, 37–38 introduction to, 300–301 from macroeconomic imbalances, 318 moral hazard and financial sector regulation, 311 reform of international financial architecture, 319 sources of, 304 study questions, 328–329 summary, 327–328 6/14/17 3:19 PM www.downloadslide.com Index vocabulary, 328 from volatile capital flows, 305–306 International Financial Statistics (IFS), 236 International investment position defined, 232 measuring, 235–236 overview of, 232–233 International Labour Organization (ILO) basic rights, 350 case study, 192–193 child labor standards, 188 complaints handled by, 193 core labor standards, 193 Declaration on Fundamental Principles and Rights at Work, 349 defined, 187 goals, 192 in labor policy assessment, 200 reluctance to use power, 193 standards, 187 tools, 192 International Monetary Fund (IMF), 33, 41, 301 Asian Crisis of 1997–1998, 317 creation of, 43 criticism of, 57–59 lender of last resort, 320–321 policies, 43 quotas, 43 resources, 44 special drawing rights, 43–44 voting structures, 58 withdrawal of credit, 52 International Monetary Fund (IMF) conditionality, 44, 321 International Trade Administration (ITA), 177 International Trade Organization (ITO), 44 Intrafirm trade, 105 Intraindustry trade, 119–123 characteristics of, 120–122 defined, 119–124 empirical measures, 120 gains from, 122–123 Investment income, components, 209, 210 Investor-state disputes, 344 Investor-state relations, 351–352 iPhone 3G case study, 113–114 Ireland, as-euro-crisis country, 376 ISI See Import substitution industrialization (ISI) IT services, 463 Z02_GERB4160_07_GE_IDX.indd 495 495 ITA (International Trade Administration), 177 Italy, as-euro-crisis country, 376 J Japan deliberation councils, 429 gains from trade (nineteenth-century), 70–71 industrial policies, 135 opportunity costs, 78 targeted industrial policy, 433 trade-to-GDP ratio, 29 yen exchange rate, 239 J-curve, 294 Jobs gains/losses due to NAFTA, 352–354 as international economic issues, 35–36 lost due to trade, 352, 353 trade impact on, 111–112 K Korea comparative advantage, 79–80 HCI (case study), 436–437 industrial policies, 135 targeted industrial policy, 433 Kuznets’s curve, 420 L Labeling, 198–199 Labor advantages of external economies of scale, 128 China endowment of, 104 conditions for adopting single currencies, 268 income distribution effects of trade on, 98 migration of, 109–111 NAFTA and, 349–351 policy assessment, 200 Labor argument, 170–171 Labor productivity, 68 Labor standards See also Standards child, 188–189 core, 193 daily work hours, 187 defining, 187 effectiveness, 190 health and safety issues, 187 ILO, 187 lack of agreement on, 191 6/14/17 3:19 PM www.downloadslide.com 496 Index Labor standards (Contd.) low, as predatory practice, 191–192 minimum wage, 187 protectionism and, 190–191 specific content of, 191 summary, 203 trade and, 190–191 United States in world economy, 349–351 Large country case tariffs, 149–150 Latin America, 389–415 Chilean model (case study), 411–412 conditional cash transfers (CCT), 411 debt crisis (1980s), 26, 391 Economic Commission on, 393 economic growth, 390–392 economy definition, 389–390 export pessimism, 393 GDP, 390–391 heterodox model, 406 import substitution industrialization (ISI), 390 imports/exports as share of GDP, 432 income, 390–392 inflation rates (1982–1992), 406 Lost Decade, 38, 391 macroeconomic instability, 399–400 map, 394 neoliberal policy reform, 405–408 next generation of reforms, 410–411 orthodox model, 406 population, 390–392 price decline of exports, 393 regional trade blocs (case study), 408–409 stabilization policies to control inflation, 405 structural reform and open trade, 408–409 study questions, 414–415 summary, 413–414 tariff rates, 408 trade and policy reform, 389–415 unequal distribution of income, 410 vocabulary, 414 Washington Consensus, 405 world economy and, 38, 390, 407 Latin American Debt Crisis of 1982–113, 26 Lender of last resort definition, 320 Great Depression and, 54 IMF, 320 need for, 301 Less-developed countries (LDCs), 112 Z02_GERB4160_07_GE_IDX.indd 496 Long run effects of fiscal and monetary policy, 290 exchange rates, 244–247 purchasing power parity, 245 Lost Decade, 342, 401 Lower-middle-income countries, 185 Low-income countries, 185 M Maastricht Treaty, 374 Macroeconomics, 274–297 aggregate demand and aggregate supply, 275–280 Argentina and the limits of macroeconomic policy (case study), 291–292 current account and, 220–229, 293–294 for current account balances, 286–290 economic agents in, 275 fiscal policy, 280–281 in global setting, 274–275 instability, Latin America, 398–401 as international economic issues, 37 monetary policy, 281–286 overview of, 37 policy coordination in developed countries, 296–297 stable, HPAE, 427 study questions, 299 summary, 297–298 vocabulary, 298 Magnification effect, 96 Malaysia, targeted industrial policy, 433 Manufacturing in China, 464 HPAE exports, 422–423 transportation costs, 125 U.S (case study), 335–336 Maquiladora industry, 126 Market failure defined, 130 externalities, 130, 131 import substitution industrialization (ISI), 395 industrial policies and, 130–132 rules for analyzing, 131 Medium run effects of fiscal and monetary policy, 289 exchange rates in, 248–251 gold standard and, 258 growth abroad and, 248 strength of economic growth and, 248 6/14/17 3:19 PM www.downloadslide.com Index Mercado Común del Sur (MERCOSUR), 34, 391 Mercantilism, 66 Mexican Crisis of 1994–95, 26 Mexican Peso crisis of 1994–1995, 55 austerity measures, 310 case study, 307–310 devaluation, 309 lessons, 310 pesos per dollar, 310 Tequila effect, 227 world capital market and, 308 Mexico agriculture, 346–347 debt crisis, 342 drug violence issue, 344 economic reforms, 341–343 ejidos, 346–347 flexible exchange rates, 264 foreign investment limit, 397 GDP per capita growth, 397 import substitution industrialization (ISI), 342, 396–398 ISI debt crisis relationship, 398 Lost Decade, 342 NAFTA in, 346–347 pegging peso to dollar, 264 poverty, 398 MFN (most favored nation) status, 45 Middle East, regional trade blocs, 49 Migration factors, 110 policies, 384 trade and, 109–111 Monetary policy contractionary, 283 current account and, 288–290 for current account imbalance elimination, 293 defined, 280 exchange rates and, 289 expansionary, 283 functioning of, 275 Great Depression, 285 impact on income, 289 long-run effects, 290 main effects of, 290 medium-run effects, 289 open market operations, 282 short-run effects, 289 summary, 297–298 Z02_GERB4160_07_GE_IDX.indd 497 497 Monetary union convergence criteria, 374, 375 costs and benefits of, 375–377 euro and, 374–375 Money increase in demand for, 291 supply and demand, 283 Monopolistic competition defined, 121 illustrated, 122 Moral hazard, 311 Most favored nation (MFN) status, 45 Multi-Fiber Arrangement, 152 Multilateral agreements, 47 Multilateral organizations, 33 Mutual recognition of standards, 183–184 N NAFTA bilateral investment treaties (BITs) and, 351 Canada-U.S trade relations, 340 demographic and economic characteristics, 338–339 dispute resolution, 344 drug violence issue, 345 environmental side agreement, 350 free trade qualification, 343 immigration issues, 344 implementation of, 36, 409 importance of, 334 investor-state disputes, 344 jobs gains/losses due to, 352–354 labor side, 350 Mexican economic reforms, 341–343 model, 338–346 in multilateral system push, 337 as optimal currency area, 269 partner importance, 334 purchasing power parity (PPP), 339 ratification, 343 region population and GDP, 339 as regional trade agreement, 34 tariffs, 343 trade barriers and, 343 trade growth, 352 National income and product accounts (NIPA) defined, 221 gross domestic product (GDP), 221–223 gross national product (GNP), 221–223 variable definitions, 222 6/14/17 3:19 PM www.downloadslide.com 498 Index National savings, 224, 226 National treatment, 45 Negotiations, 200 Neoliberal model, 405 Net foreign investment, 224 Net national welfare loss, 165 Netherlands, trade-to-GDP ratio, 29 New Trade Theory defined, 35, 120 economies of scale, 120 Newly industrializing economies (NIEs), 422 NIPA See National income and product accounts (NIPA) Nominal exchange rate, 254 Nominal rate of protection, 150–151 Nondiminishable, 53 Nondiscrimination, 45 Nonexcludable, 53 Nontariff barriers (NTBs), 156 Nontariff measures defined, 156 formats and economic activities, 156–157 Nontransparent trade barriers, 140 North American Agreement on Environmental Cooperation, 344 North American Agreement on Labor Cooperation, 344 North American Free Trade Agreement (NAFTA) See NAFTA Norway, EU membership and, 360 NTBs (Nontariff barriers), 156 Numbering system, United States, 237 O OAS (Organization of American States), 410 Odious debt, 230–231 Official reserve assets, 217 Off-shoring debate focus, 107–108 defined, 107 effects and extent of, 107 by U.S multinational corporations, 108–109 OLI (ownership-location-internalization) theory, 106 Oligopoly, 121 Olson, Mancur, 167 Open economies, 35 Open market operations, 282 Opportunity costs absolute productivity advantage and, 69 and slope of PPC, 93 Z02_GERB4160_07_GE_IDX.indd 498 Optimal currency areas defined, 267 NAFTA region as, 269 Order, maintenance of, 53–55 Organization of American States (OAS), 410 Orthodox model, 406 Outsourcing, 107 P Partial equilibrium analysis, 141 Partial trade agreements, 49 Pegged exchange rate systems crawling pegs, 260 defined, 256 pegging to group of currencies, 264 problem sources, 259 Pegs crawling, 260, 312 hard, 256 maintaining, 312 popularity, 263 soft, 256 Peru de Soto experiment, 427 economic populism, 399 Plaza Accord, 296 Plurilateral trade agreements, 337 Pollution havens, 195 Population in China, 447, 450 East Asia, 418–420 EU forecast, 385 EU membership, 361 income and, 185 in India, 447, 450 Latin America, 390–392 NAFTA region, 339 Portfolio investments, 216 Portugal, as-euro-crisis country, 376 PPC See Production possibilities curve (PPC) PPP See Purchasing power parity (PPP) Predatory practice, low labor standards as, 191–192 Preferential agreement, 348 Private returns defined, 130 divergence, 131–132 reasons for difference, 132 Producer surplus, 142 6/14/17 3:19 PM www.downloadslide.com Index Product cycle model Chinese export to U.S and, 104–105 defined, 102 in high-income countries, 103 in low-income countries, 103 overview of, 102–103 Product differentiation, 121 Production possibilities curve (PPC) defined, 72 illustrated, 72 with increasing costs, 92 opportunity costs and, 93 slope, 73 Productivity differences availability of inputs and, 90 labor argument and, 170 Profits, effects on foreign producers, 154–156 Protection arguments for, 162–163 effective rate of, 150–151 hidden forms of, 156–157 intellectual property, lack of, 158 as international economic issues, 35–36 nominal rate of, 150–151 in U.S., 175–178 Protectionism antidumping duties, 175–177 benefits of, 167 costs of, 165–167 cultural protection argument, 172 economic sanctions (case study), 178–180 escape clause relief, 177–178 infant industry argument, 171 labor argument, 170–171 labor standards and, 190–191 logic of collective action and, 166–167 national security argument, 172 retaliation argument, 172–173 revenue and, 169–170 Section 325 and Special 325, 178 in U.S., 175–178 use of, 169–173 Public goods characteristics of, 53 defined, 53 examples of, 54 free riding, 53 as nondiminishable, 53 as nonexcludable, 53 Z02_GERB4160_07_GE_IDX.indd 499 499 Public procurement, as SEA implementation problem, 372 Purchasing power parity (PPP) adjustment, 339 assumption, 247 currency values and, 246 definition, 245 as percentage of EC-12 average, 385 Q Qualified majority, 363 Quota rents, 154 Quotas analysis of, 153–157 costs in high-income countries, 166 defined, 32 effects on profits of foreign producers, 154–156 hidden forms of protection, 156–157 IMF, 43 import licensing requirement, 154 intellectual property rights and trade (case study), 157–158 tariffs versus, 155–156 types of, 154 voluntary export restraint (VER), 154 R Race to the bottom, 184 R&D See Research and development (R&D) Real exchange rate, 254–255 defined, 254 formula, 254, 381 nominal rate equal to, 254 Reforms in China, 450–452 in India, 450–451, 452–453 Reforms (international financial architecture) conditionality, 321 data dissemination standards, 322 ideas, 319 lender of last resort, 320–321 need for, 319 urgency, 322 Reforms (Latin America) goals, 410 neoliberal, 405–411 next generation of, 410–411 structural, 410 trade, 389–415 6/14/17 3:19 PM www.downloadslide.com 500 Index Reforms (Mexican), 341–343 Regional trade agreements (RTAs), 47–52 common market, 50 controversy, 34 customs union, 50 defined, 34, 47 economic union, 50 examples of, 34 for/against, 51–52 free-trade area, 49, 50 as international economic issues, 36 membership in, 48 multilateral, 47 prominent, 48–49 trade diversion, 50 types of, 47–50 WTO and, 50–51 Regional trade blocs See Trade blocs Relative prices, 73 Rent seeking defined, 135 HPAE avoidance, 418 import substitution industrialization (ISI), 396 tariffs and, 148 Research and development (R&D), industrial policy problem, 135 Resource allocation, effect of tariffs on, 144–146 Resource curse, 100 Resources, Chinese, 465 Restructuring effects, 370–371 Retaliation argument, 172–173 Revenue EU membership, 364 tariff, 169–170 Reverse engineering, 137 Ricardian trade model after opening of trade, 82 assumptions, 68 defined, 68 notion of gains from trade, 94 RTAs See Regional trade agreements (RTAs) Rule of 96, 418 Russia, USSR collapse and China success (case study), 455–456 Russian Crisis of 1998–99, 26 S Savings global imbalances, 325 Z02_GERB4160_07_GE_IDX.indd 500 HPAE, 421 and investment, 2001–2015, 225 national, 224, 226 Schengen Agreement (case study), 367–368 SCM (Subsidies and Countervailing Measures), 137–138 SDRs (special drawing rights), 43–44 SEA See Single European Act (SEA) Section 325, 178 Securitization, 323 Separate standards, 184 Services, goods and, 209 SEZ (Special Economic Zones), 452 Shallow integration, 32 Short run capital flows, 249 currency values and, 248 effects of fiscal and monetary policy, 289 exchange rates in, 248–251 gold standard and, 258 interest rates role in, 249 Single currency areas conditions, 267–268 costs of, 267 gains versus costs conditions, 267 optimal, 267 overview of, 266 reasons for, 266 Single European Act (SEA), 358 defined, 368 four freedoms, 368 gains forecast, 369–370 harmonization of technical standards, 369 implementation of, 368 implementation problems, 370–372 predictions for impacts, 369 public procurement, 372 restructuring effects, 371–372 signing of, 361 value-added taxes, 371–372 Single Market Program (SMP), 368 Smith, Adam, 66–67 Smithsonian Agreement, 261 SMP (Single Market Program), 368 Social networks, 110 Social returns defined, 130 divergence, 131–132 reasons for difference, 132 6/14/17 3:19 PM www.downloadslide.com Index Soft pegs, 256 Sovereign default, 305, 380 Sovereign wealth funds, 325 Sovereignty defined, 57 international economic institutions, 57–58 Spain as-euro-crisis country, 376 EU membership, 383–384 housing market, 324 switch from emigration to immigration (case study), 383–384 Special 325, 178 Special drawing rights (SDRs), 43–44 Special Economic Zones (SEZ), 452 Specific factors model, 97 determinants of comparative advantage with, 98 illustrated, 98 Speculators, 241 Spending-production-income-spending cycle, 279 Spot markets, 242 Spot rates expectations and, 250 foreign exchange rate difference, 250 Stabilization policies, 405–407 Standards, 182–205 environmental, 194–197 harmonization of, 183, 184 home country, 199–200 income and, 182–183 income, environment, and society (case study), 185–186 labor, 186–193 mutual recognition of, 183–184 overview of, 182–183 separate, 184 setting, 183–184 study questions, 204–205 summary, 203 trade measure alternatives, 197–202 vocabulary, 204 Standstills, 322 State capitalism, 466–467 State-owned enterprises (SOE), 467 Statistical discrepancy, 214 Stolper-Samuelson theorem defined, 95 illustrated, 96 magnification effect, 96 Z02_GERB4160_07_GE_IDX.indd 501 501 Structural reform policies, 407 Subprime mortgage crisis, 26, 55, 323 See also Global crisis of 2007 definition, 323 spread of, 323 Subsidiarity, 362 Subsidies agricultural, 167–169 countervailing duties (CVD) and, 177 direct, 167 Subsidies and Countervailing Measures (SCM), 137–138 Sudden stops, 216 Supply and demand aggregate, 275–280 British pounds, 243 domestic, for imported goods, 143 exchange rates, 243–244 money, 283 Supply-push factors, 110 Switzerland, EU membership and, 360 T TAA (Trade adjustment assistance), 83 Tariff rates agricultural, 163 average, 147, 164 comparison of (case study), 146–147 Latin America, 408 patterns, 163–164 products with highest average, 164 in world’s major traders, 164 Tariffs, 140–161 analysis of, 140–141 common external, 50 consumer and producer surplus and, 141–142 costs in high-income countries, 166 countervailing duties (CVD), 177 cuts, diminishing marginal returns, 164 decline of, 336 defined, 32 Doha Round, 151–153 economic effects of, 146 effective rate of protection, 150–151 effects on prices, output, and consumption, 142–144 effects on resource allocation and income distribution, 144–146 innovation and, 148 6/14/17 3:19 PM www.downloadslide.com 502 Index Tariffs, (Contd.) large country case, 149–150 NAFTA, 343 nominal rate of protection, 150–151 other potential costs, 148 quotas versus, 155–156 rent seeking and, 148 retaliation and, 148 revenue, 169–170 study questions, 160–161 summary, 159 Uruguay Round, 151–153 vocabulary, 159 zero, 169 Taxes, value-added, 371–372 Technology transfer, 232 TEDs (turtle excluder devices), 196 Tequila effect, 227 Terms of trade (TOT), 393 Thailand currency loss, 227 pegged exchange rates, 259 Tokyo Round, 46–47 Total factor productivity (TFP), 442 TPP (Trans-Pacific Partnership), 348 Trade absence of, 73 after World War II, 30 balance of payments and, 208–236 benefits of, 34 capital flows and, 34 change and, 83 in China, 446 economic growth and, 34–35 environmental impacts that not cross borders and, 194–195 external economies and, 128–129 foreign trade, 105–107 gains (see gains from trade) GATT rounds, 45 geography and, 125–129 impact on wages and jobs, 111–112 income distribution and, 94–98 in India, 446 intellectual property rights and, 157–158 interindustry, 119 intrafirm trade, 105 intraindustry, 119–123 labor standards and, 190–191 Z02_GERB4160_07_GE_IDX.indd 502 migration and, 109–111 policy reform in Latin America, 389–415 reasons for, 118–119 transboundary environmental problems and, 195–196 world, growth of, 28–30 Trade adjustment assistance (TAA), 83 Trade balance decomposition, 209 defined, 209 overview, 209 U.S (1980–1988), 295 Trade barriers cultural protection argument, 172 economic sanctions (case study), 178–180 effectiveness, 190 endangered species and, 196–197 labor argument, 170 NAFTA, 343 national security argument, 172 nontransparent, 140 retaliation argument, 172–173 transparent, 140 Trade blocs See also Regional trade agreements (RTAs) Africa, 49 Asia, 49 East Asia, 440–441 Europe, 49 Latin America, 408–409 Middle East, 49 Western Hemisphere, 49 Trade conflict resolution, 36–37 Trade creation, 50 Trade deficits, 36 Trade diversion, 50 Trade measure alternatives efficient policies and, 198 home country standards, 199–200 international negotiations increase, 197–202, 200 labels for exports, 198–199 Trade prices, 76–77 Trade relations Canada-U.S., 340 shifting focus of, 334, 336–337 Trade rounds, 45, 46–47 Trade wars, 191 Trade-Related Aspects of Intellectual Property Rights (TRIPS) 6/14/17 3:19 PM www.downloadslide.com Index defined, 137 fundamental economic rationale for, 158 Uruguay Round, 152 Trade-Related Investment Measures (TRIMs) defined, 136 prohibitions, 136 Uruguay Round, 152 Trade-to-GDP ratio country examples, 29 defined, 29 United States, 32 Traditional knowledge, 173–174 Tranches, 321 Transaction costs, 31 Transboundary and non-transboundary environmental impacts, 194–196 Trans-Pacific Partnership (TPP), 348 Transparency, international economic institution, 57–58 Transparent trade barriers, 140 Transportation costs geography and, 125–126 manufacturing, 125 Treaty of Rome, 362 Treaty on European Union, 358, 374 TRIMs See Trade-Related Investment Measures (TRIMs) TRIPS See Trade-Related Aspects of Intellectual Property Rights (TRIPs) Turtle excluder devices (TEDs), 196 U Uncertainty reduction, 53–55 United Kingdom Bretton Woods founding principles, 56 housing market, 324 increase in demand for pounds, 258 increase in supply of pound, 258 leaving gold standard, 285–286 recessions, 366 trade-to-GDP ratio, 29 United Nations (UN), 33 United States, in global economy, 332–357 background and context, 333–337 free trade agreements, 337 housing market, 324 investor-state relations, 351–352 job loss due to trade, 352–354 key trade initiatives, 348 Z02_GERB4160_07_GE_IDX.indd 503 503 labor and environmental standards, 349–351 leading trade partners, 334 manufacturing (case study), 335–336 NAFTA model, 338–346 new and old agreements, 348–354 new world economy, 332–333 preferential agreement, 348 shifting focus of trade relations, 334, 336–337 size and, 332 size and rank, 332 study questions, 357 summary, 355–356 trade-to-GDP ratio, 29, 333 vocabulary, 356–357 United States International Trade Commission (USITC), 177 United States Trade Representative (USTR), 178 Unsustainable debt, 230 Upper-middle-income countries, 185 Uruguay Round Agreement on Textiles and Clothing (ATC), 152 agriculture, 167–168 case study, 151–153 defining prohibitive subsidies, 132 HPAE export promotion policies and, 439 new agreements, 135 results, 152 WTO creation, 45 USITC (United States International Trade Commission), 177 USTR (United States Trade Representative), 178 V Value-added Apple iPhone 3G and, 113 defined, 108 taxes, 371–372 Volatile capital flows, 305–306 Voluntary export restraint (VER), 154 W WAEMU (West African Economic and Monetary Union), 265 Wages as international economic issues, 35–36 minimum, 187 trade impact on, 111–112 6/14/17 3:19 PM www.downloadslide.com 504 Index Washington Consensus, 410 West African Economic and Monetary Union (WAEMU), 265 Western Hemisphere, regional trade blocs, 49 Widening the European Union, 382–383 World Bank, 33 criticisms of, 57–59 defined, 41 income and population categories, 185 membership, 44 targeted industrial policies and, 433 voting structures, 58 World economy capital and labor mobility, 30–32 China in, 445–470 country isolation from, 34–35 globalization in economic sphere, 27 India in, 445–470 international economic integration, 26–27 international economic issues, 35–39 international economic relations, 32–34 Latin America in, 38 multilateral organizations, 33 regional trade agreements, 33–34 trade and economic growth, 34–35 trade-to-GDP ratio, 32 Z02_GERB4160_07_GE_IDX.indd 504 trends shaping, 33 U.S in, 332 vocabulary, 39 World Trade Organization (WTO), 33 creation of, 43 criticisms of, 57–59 Dispute Settlement Body, 196 dumping, 175–176 environment agreements, 200 governing structure, 58 member treatment, 191 national treatment and nondiscrimination, 45 regional trade agreements and, 50–51 rules against industrial policies, 135–137 sanctions, 52 sea turtle dispute resolution, 197 trade agreement challenges and, 46 in trade conflict resolution, 36 Uruguay Round rules, 132 World War II international institutions since, 41–42 international trade after, 30 Z Zero sum, 67 6/14/17 3:19 PM ...www.downloadslide.com International Economics SEVENTH EDITION GLOBAL EDITION A01_GERB4160_07_GE_FM.indd 6/17/17 12:04 PM www.downloadslide.com The Pearson Series in Economics Abel/Bernanke/Croushore Macroeconomics*†... A01_RAMA7654_08_SE_FM.indd 09/03/2017 17:58 www.downloadslide.com Contents International Economics James Gerber San Diego State University SEVENTH EDITION GLOBAL EDITION A01_GERB4160_07_GE_FM.indd 6/17/17 12:04 PM... Act 1988 Authorized adaptation from the United States edition, entitled International Economics, 7th edition, ISBN 978-0-13447209-6, by James Gerber, published by Pearson Education © 2018 All rights