International trade theory and policy 11e global edition by krugman melitz

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D’Ambrosio Portfolio Manager: Ashley Bryan Associate Acquisitions Editor, Global Edition: Ananya Srivastava Associate Project Editor, Global Edition: Paromita Banerjee Editorial Assistant: Nicole Nedwidek Vice President, Product Marketing: Roxanne McCarley Director of Strategic Marketing: Brad Parkins Strategic Marketing Manager: Deborah Strickland Product Marketer: Tricia Murphy Manager of Field Marketing: Adam Goldstein Field Marketing Manager: Carlie Marvel Field Marketing Assistant: Kristen Compton 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 Content Producer: Nancy Freihofer Content Producer, Global Edition: Nikhil Rakshit Senior Manufacturing Controller, Global Edition: Kay Holman Operations Specialist: Carol Melville Creative Director: Blair Brown Manager, Learning Tools: Brian Surette Managing Producer, Digital Studio, Arts and Business: Diane  Lombardo Digital Studio Producer: Melissa Honig Digital Studio Producer: Alana Coles Digital Content Team Lead: Noel Lotz Digital Content Project Lead: Courtney Kamauf Manager, Media Production, Global Edition: Vikram Kumar Full-Service Project Management and Composition:  SPi Global Interior Design: SPi Global Cover Design: Lumina Datamatics Cover Art: Liu zishan/Shutterstock Acknowledgments of third-party content appear on the appropriate page within the text or on page 366, which constitutes an extension of this copyright page FRED® is a registered trademark and the FRED® Logo and ST LOUIS FED are trademarks of the Federal Reserve Bank of St Louis http://research.stlouisfed.org/fred2/ PEARSON, ALWAYS LEARNING, and PEARSON MYLAB ECONOMICS® are exclusive trademarks owned by Pearson Education, Inc or its affiliates in the U.S and/or other countries Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in this work are the property of their respective owners, and any references to third-party trademarks, logos, icons, or other trade dress are for demonstrative or descriptive purposes only Such references are not intended to imply any sponsorship, endorsement, authorization, or promotion of Pearson’s products by the owners of such marks, or any relationship between the owner and Pearson Education, Inc., or its affiliates, authors, licensees, or distributors Pearson Education Limited KAO Two KAO Park Harlow CM17 9NA United Kingdom and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsonglobaleditions.com © Pearson Education Limited 2018 The rights of Paul R Krugman, Maurice Obstfeld, and Marc J Melitz, to be identified as the authors of this work, have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled International Trade: Theory & Policy, 11th Edition, ISBN 978-0-13-451955-5 by Paul R Krugman, Maurice Obstfeld, and Marc J Melitz, 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 For information regarding permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and Permissions department, please visit www.pearsoned.com/permissions/ ISBN 10: 1-292-21635-2 ISBN 13: 978-1-292-21635-5 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 Typeset in Times NR MT Pro by SPi Global Printed and bound by Vivar in Malaysia Brief Contents Contents 7 Preface 13 Introduction 23 PART International Trade Theory 32 World Trade: An Overview 32 Labor Productivity and Comparative Advantage: The Ricardian Model 46 Specific Factors and Income Distribution 73 Resources and Trade: The Heckscher-Ohlin Model 109 The Standard Trade Model 145 External Economies of Scale and the International Location of Production 173 Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises 192 Part International Trade Policy The Instruments of Trade Policy 237 237 10 The Political Economy of Trade Policy 268 11 Trade Policy in Developing Countries 305 12 Controversies in Trade Policy 320 Mathematical Postscripts 343 Postscript to Chapter 5: The Factor-Proportions Model 343 Postscript to Chapter 6: The Trading World Economy 347 Postscript to Chapter 8: The Monopolistic Competition Model 355 Index 357 Credits 366 This page intentionally left blank Contents Preface 13 Introduction 23 What Is International Economics About? 25 The Gains from Trade 26 The Pattern of Trade 27 How Much Trade? 27 Balance of Payments 28 Exchange Rate Determination 29 International Policy Coordination 29 The International Capital Market 30 International Economics: Trade and Money 31 PART International Trade Theory 32 World Trade: An Overview 32 Who Trades with Whom? 32 Size Matters: The Gravity Model 33 Using the Gravity Model: Looking for Anomalies 35 Impediments to Trade: Distance, Barriers, and Borders 36 The Changing Pattern of World Trade 38 Has the World Gotten Smaller? 38 What Do We Trade? 40 Service Offshoring 41 Do Old Rules Still Apply? 43 Summary 44 Labor Productivity and Comparative Advantage: The Ricardian Model 46 The Concept of Comparative Advantage 47 A One-Factor Economy 48 Relative Prices and Supply 50 Trade in a One-Factor World 51 Determining the Relative Price after Trade 52 box: Comparative Advantage in Practice: The Case of Usain Bolt 55 The Gains from Trade 56 A Note on Relative Wages 57 box: Economic Isolation and Autarky over Time and Space 58 Misconceptions about Comparative Advantage 59 Productivity and Competitiveness 59 box: Do Wages Reflect Productivity? 60 The Pauper Labor Argument 61 Exploitation 61 Comparative Advantage with Many Goods 62 Setting Up the Model 62 Relative Wages and Specialization 62 Determining the Relative Wage in the Multigood Model 64 8 Contents Adding Transport Costs and Nontraded Goods 66 Empirical Evidence on the Ricardian Model 67 Summary 70 Specific Factors and Income Distribution 73 The Specific Factors Model 74 box: What Is a Specific Factor? 75 Assumptions of the Model 75 Production Possibilities 76 Prices, Wages, and Labor Allocation 79 Relative Prices and the Distribution of Income 83 International Trade in the Specific Factors Model 85 Income Distribution and the Gains from Trade 86 The Political Economy of Trade: A Preliminary View 89 Income Distribution and Trade Politics 90 case study: Trade and Unemployment 90 International Labor Mobility 94 case study: Wage Convergence in the European Union 96 case study: Immigration and the U.S Economy: Future Prospects 98 Summary 101 Resources and Trade: The Heckscher-Ohlin Model 109 Model of a Two-Factor Economy 110 Prices and Production 110 Choosing the Mix of Inputs 113 Factor Prices and Goods Prices 115 Resources and Output 118 Effects of International Trade between Two-Factor Economies 119 Relative Prices and the Pattern of Trade 120 Trade and the Distribution of Income 121 case study: North-South Trade and Income Inequality 122 Skill-Biased Technological Change and Income Inequality 124 box: The Declining Labor Share of Income and Capital-Skill Complementarity 128 Factor-Price Equalization 129 Empirical Evidence on the Heckscher-Ohlin Model 130 Trade in Goods as a Substitute for Trade in Factors: Factor Content of Trade 131 Patterns of Exports between Developed and Developing Countries 134 Implications of the Tests 136 Summary 137 The Standard Trade Model 145 A Standard Model of a Trading Economy 146 Production Possibilities and Relative Supply 146 Relative Prices and Demand 147 The Welfare Effect of Changes in the Terms of Trade 150 Determining Relative Prices 151 case study: Unequal Gains from Trade across the Income Distribution 151 Economic Growth: A Shift of the RS Curve 154 Growth and the Production Possibility Frontier 154 World Relative Supply and the Terms of Trade 156 International Effects of Growth 157 Contents case study: Has the Growth of Newly Industrializing Economies Hurt Advanced Nations? 158 Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD 160 Relative Demand and Supply Effects of a Tariff 160 Effects of an Export Subsidy 161 Implications of Terms of Trade Effects: Who Gains and Who Loses? 162 International Borrowing and Lending 163 Intertemporal Production Possibilities and Trade 163 The Real Interest Rate 164 Intertemporal Comparative Advantage 166 Summary 166 External Economies of Scale and the International Location of Production 173 Economies of Scale and International Trade: An Overview 174 Economies of Scale and Market Structure 175 The Theory of External Economies 176 Specialized Suppliers 176 Labor Market Pooling 177 Knowledge Spillovers 178 External Economies and Market Equilibrium 179 External Economies and International Trade 180 External Economies, Output, and Prices 180 External Economies and the Pattern of Trade 181 box: Holding the World Together 183 Trade and Welfare with External Economies 184 Dynamic Increasing Returns 185 Interregional Trade and Economic Geography 186 box: Soccer and the English Premiere League 188 Summary 189 Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises 192 The Theory of Imperfect Competition 193 Monopoly: A Brief Review 194 Monopolistic Competition 196 Monopolistic Competition and Trade 201 The Effects of Increased Market Size 201 Gains from an Integrated Market: A Numerical Example 202 The Significance of Intra-Industry Trade 206 case study: Automobile Intra-Industry Trade within ASEAN-4: 1998–2002 208 Firm Responses to Trade: Winners, Losers, and Industry Performance 209 Performance Differences across Producers 210 The Effects of Increased Market Size 212 Trade Costs and Export Decisions 214 Dumping 216 case study: Antidumping as Protectionism 217 Multinationals and Outsourcing 219 case study: Patterns of FDI Flows around the World 219 www.downloadslide.net 352 Mathematical Postscripts This expression can have either sign Suppose first that growth is biased toward cloth, so that while dQC 0, dQF … Then demand for cloth will rise by dDC = n(p dQC + dQF) … np dQC dQC (See footnote 1.) Thus the overall effect on excess supply will be dES∙ p = dQC - dDC As a result, dp = -dES∙ p >(dES>dp) 0: Home’s terms of trade worsen On the other hand, suppose that growth is strongly biased toward food, so that dQC … 0, dQF Then the effect on the supply of cloth at the initial p is negative, but the effect on the demand for cloth remains positive It follows that dES∙ p = dQC - dDC 0, so that dp Home’s terms of trade improve Growth that is less strongly biased can move p either way, depending on the strength of the bias compared with the way Home divides its income at the margin Turning next to the welfare effects, the effect on Foreign depends only on the terms of trade The effect on Home, however, depends on the combination of the initial income change and the subsequent change in the terms of trade, as shown in equation (6P-26) If growth turns the terms of trade against Home, this condition will oppose the immediate favorable effect of growth But can growth worsen the terms of trade sufficiently to make the growing country actually worse off ? To see that it can, consider first the case of a country that experiences a biased shift in its production possibilities that raises QC and lowers QF while leaving the value of its output unchanged at initial relative prices [This change would not necessarily be considered growth, because it violates the assumption of equation (6P-27), but it is a useful reference point.] Then there would be no change in demand at the initial p, whereas the supply of cloth rises; hence p must fall The change in real income is dy∙ p - (QC - DC)dp; by construction, however, this is a case in which dy∙ p = 0, so dy is certainly negative Now, this country did not grow, in the usual sense, because the value of output at initial prices did not rise By allowing the output of either good to rise slightly more, however, we would have a case in which the definition of growth is satisfied If the extra growth is sufficiently small, however, it will not outweigh the welfare loss from the fall in p Therefore, sufficiently biased growth can leave the growing country worse off A Transfer of Income We now describe how a transfer of income (say as foreign aid) affects the terms of trade.2 Suppose Home makes a transfer of some of its income to Foreign Let the amount of the transfer, measured in terms of food, be da What effect does this aid have on the terms of trade? At unchanged relative prices, there is no effect on supply The only effect is on demand Home’s income is reduced by da, while Foreign’s is raised by the same amount This adjustment leads to a decline in DC by -n da, while DC* rises by n* da Thus, dES∙ p = (n - n*)da (6P-29) In the online appendix to Chapter 6, we discuss an important historical example of a large income transfer and its implications for the terms of trade of the donor and recipient countries www.downloadslide.net Postscript to Chapter 6 353 and the change in the terms of trade is dp = -da n - n* (6P-30) dES>dp Home’s terms of trade will worsen if n n*, which is widely regarded as the normal case; they will, however, improve if n* n The effect on Home’s real income combines a direct negative effect from the transfer and an indirect terms of trade effect that can go either way Is it possible for a favorable terms of trade effect to outweigh the income loss? In this model it is not To see the reason, notice that dy = dy∙ n + (QC - DC)dp = -da + (QC - DC)dp = -dab + = -da (n - n*)(QC - DC) s + s* + e + e* - (n - n*)(QC - DC) r s + s * + e + e* 0.(6P-31) s + s* + e + e* - (n - n*)(QC - DC) Similar algebra will reveal correspondingly that a transfer cannot make the recipient worse off An intuitive explanation of this result is the following Suppose p were to rise sufficiently to leave Home as well off as it would be if it made no transfer and to leave Foreign no better off as a result of the transfer Then there would be no income effects on demand in the world economy But the rise in price would produce both increased output of cloth and substitution in demand away from cloth, leading to an excess supply that would drive down the price This result demonstrates that a p sufficiently high to reverse the direct welfare effects of a transfer is above the equilibrium p A Tariff Suppose Home places a tariff on imports, imposing a tax equal to the fraction t of the price Then for a given world relative price of cloth p, Home consumers and producers will face an internal relative price p = p>(1 + t) If the tariff is sufficiently small, the internal relative price will be approximately equal to p = p - p (6P-32) In addition to affecting p, a tariff will raise revenue, which will be assumed to be redistributed to the rest of the economy At the initial terms of trade, a tariff will influence the excess supply of cloth in two ways First, the fall in relative price of cloth inside Home will lower production of cloth and induce consumers to substitute away from food toward cloth Second, the tariff may affect Home’s real income, with resulting income effects on demand If Home starts with no tariff and imposes a small tariff, however, the problem may be simplified, because the tariff will have a negligible effect on real income To see this relation, recall that dy = p dDC + dDF www.downloadslide.net 354 Mathematical Postscripts The value of output and the value of consumption must always be equal at world prices, so that p dDC + dDF = p dQC + dQF at the initial terms of trade But because the economy was maximizing the value of output before the tariff was imposed, p dQC + dQF = Because there is no income effect, only the substitution effect is left The fall in the internal relative price p induces a decline in production and a rise in consumption: dQC = -sp dt, (6P-33) dDC = ep dt, (6P-34) where dt is the tariff increase Hence, dES∙ p = -(s + e)p dt 0, (6P-35) implying dp = -dES∙ p dES>dp p dt(s + e) 0.(6P-36) s + s* + e + e* - (n - n*)(QC - DC) This expression shows that a tariff unambiguously improves the terms of trade of the country that imposes it = www.downloadslide.net POSTSCRIPT TO CHAPTER The Monopolistic Competition Model We want to consider the effects of changes in the size of the market on equilibrium in a monopolistically competitive industry Each firm has the total cost relationship C = F + cX, (8P-1) where c is marginal cost, F a fixed cost, and X the firm’s output This implies an average cost curve of the form AC = C>X = F>X + c (8P-2) Also, each firm faces a demand curve of the form X = S[1>n - b(P - P)], (8P-3) where S is total industry sales (taken as given), n is the number of firms, and P is the average price charged by other firms (which each firm is assumed to take as given) Each firm chooses its price to maximize profits Profits of a typical firm are p = PX - C = PS [1>n - b (P - P)] - F - cS [1>n - b (P - P)] (8P-4) To maximize profits, a firm sets the derivative dp>dP = This implies X - SbP + Sbc = (8P-5) Since all firms are symmetric, however, in equilibrium, P = P and X = S>n Thus (8P-5) implies P = 1>bn + c, (8P-6) which is the relationship derived in the text Since X = S>n, average cost is a function of S and n, AC = Fn>S + c (8P-7) In zero-profit equilibrium, however, the price charged by a typical firm must also equal its average cost So we must have 1>bn + c = Fn>S + c, (8P-8) which in turn implies n = 2S>bF (8P-9) This shows that an increase in the size of the market, S, will lead to an increase in the number of firms, n, but not in proportion—for example, a doubling of the size of the market will increase the number of firms by a factor of approximately 1.4 355 www.downloadslide.net 356 Mathematical Postscripts The price charged by the representative firm is P = 1>bn + c = c + 2F>Sb, (8P-10) which shows that an increase in the size of the market leads to lower prices Finally, notice that the sales per firm, X, equal X = S>n = 2SbF (8P-11) This shows that the scale of each individual firm also increases with the size of the market www.downloadslide.net Index A B Absolute advantage, 51–52, 68 Bolt, Usain, 55 Abundance of factors, 109 Abundant factors, 121 Activist trade policies, 321–328 Ad valorem tariffs, 237 Advanced technology products (ATP), 322, 323f Advertising agencies, 187 Agreement on Trade-Related Aspects of Intellectual Property (TRIPS), 288 Agriculture employment levels in, 42–43, 43f European Common Agricultural Policy, 250–251, 251f, 280, 287, 290 labor trends in, 92n protection of U.S., 280–281 subsidies, third world and, 292 Uruguay Round on, 287, 290 wheat imports, 294–295 in world trade, 40–41, 40f Airbus, 324–325, 324t, 325t, 326 Alang, 338 Aldonas, Grant D., 93n Allocation of labor, 79–83 Americanization, 333 Anderson, Kym, 292t Antidumping duties, 217–218 Anti-globalization movement, 28, 329–330 Antrás, Pol, 227n Apple, 225–226 Appropriability, 307–308 Argentina automobile industry in, 270 Mercosur and, 296–297 Asian miracle, 306, 315–317, 315f, 316f Association of Southeast Asian Nations (ASEAN)-4 countries, 207 intra-industry trade and, 208–209 Australia, 335 Automobile industry equilibrium in, 204f intra-industry trade in, 208–209 local content regulations and, 259 market integration in, 202–206, 205t in Mexico, 259 in South Korea, 307 tariffs in, 247 U.S import quotas on, 275–276 voluntary export restraints in, 256–257 Autor, David H., 339–340 Average cost of production, 179, 179f, 195–196, 196f Bachman, Ronald, 228n Balance of payments, 28–29 Balassa, Bela, 67n, 68, 312t Baldwin, Robert E., 279 Bangladesh clothing exports from, 69, 69t, 329 export patterns for, 135, 135f poverty in, 305 working conditions in, 334 Barriers to trade, 36–38 antidumping duties, 217–218 red-tape, 259 Baseball: An Illustrated History (Ward and Burns), 55n Beggar-thy-neighbor policies, 327 Beijing Olympics, 55 Belgium, U.S trade with, 35, 36f Bernanke, Ben, 313n Bernard, A B., 214t, 216n Bhagwati, Jagdish, 157 Biased expansion of production possibilities, 118–119 Biased growth, 154–156, 155f Binding, 285 Blinder, Alan, 42 Boeing, 193, 324–325, 324t, 325t, 326 Bolt, Usain, 55 Borders, effects of on trade, 37–38 Borjas, George, 99n Borrowing and lending, international, 163–166 Bound tariff rates, 252 Boulanger, Pierre, 250n Bowen, Harry P., 132 Brander, James, 324 Brander-Spencer analysis, 324–327, 324t Braun, Sebastian, 228n Brazil cotton subsidies and, 291 foreign direct investment in, 220 healthcare sector, 258 import-substituting industrialization in, 312t Mercosur and, 296–297 rain forest destruction in, 333 real valuation, 29 trade liberalization in, 314 wage rates in, 130t Brexit, 295–296, 340 BRICS countries, 220 British Virgin Islands, 221, 221f Brownfield foreign direct investment, 219 Buchanan, Patrick, 47 Budget constraints, 87–88, 88f Bundesbank, 29 Burnham, Forbes, 58 Burns, Ken, 55 Bush, George W., 73n Business services, 229 C Call centers, 41 Cambodia, export patterns for, 135, 135f Campaign finance laws, 279 Canada See also North American Free Trade Agreement (NAFTA) auto industry and, 208 economic integration with the U.S., 210 U.S trade with, 36–37, 36f, 37t, 38f Canada–U.S Free Trade Agreement, 210 Capital-intensive production, 115 Capital market, international, 30 Capital-skill complementarity, 128–129, 128f Carbon dioxide emissions, 337, 337f See also Environmental issues Carbon tariffs, 320, 338–339 Chile, import-substituting industrialization in, 312t China antidumping duties on, 218 in Asian takeoff, 315–316, 315f clothing exports, 69, 69t, 287 clothing industry in, 334 Doha Round and, 292 economic growth of and U.S economy, 158–160, 159f external economies in, 176 film industry in, 187 foreign direct investment by, 220, 221f foreign direct investment in, 220 impact of exports on the U.S., 339–340 income inequality and, 122–124 in international capital market, 30 iPhones from, 225–226 manufactured goods trade in, 41, 339–340 memorandum of understanding with the U.S., 268 patterns of exports from, 135–136, 136f pollution in, 336, 337f productivity and wages in, 60 solar panel subsidies in, 163 solar panel voluntary export restraint, 257 Trans-Pacific Partnership and, 297 357 www.downloadslide.net 358 Index China (Continued) U.S manufacturing employment and imports from, 91–93, 93f wage rates in, 130t wages and manufacturing in, 40 Clean Air Act, 335 Cline, William, 270t Clinton, Bill, 332 Cloth factor and goods prices, 115–116, 115f, 116f factor substitution and, 111–112, 111n, 112f, 113f inputs in, 115, 115f marginal product of labor for, 76–77, 77f prices, wages, and labor allocation for, 79–83 production function of, 76–77, 76f relative consumption of, 149–150, 150f relative price and relative supply of, 147–148, 148f relative price of, 82–83, 83f, 84–85, 84f Clothing industry in developing countries, 329, 334 protection of, 281, 281t Uruguay Round on, 287, 290 working conditions in, 334 Collective action, 278, 280 Common Agricultural Policy (CAP), 250–251, 251f, 280, 287, 290 Common Market, 295 See also European Union (EU) Communities, trade shocks and, 339–340 Comparative advantage, 46–72 Bolt, Usain, 55 concept of, 47–48 definition of, 48 empirical evidence on, 67–70 gains from trade and, 56–57 in infant industry argument, 306–308 intertemporal, 166 with many goods, 62–66 misconceptions about, 59–62 nontraded goods and, 67 one-factor economies and, 48–59 pauper labor argument on, 61 productivity and competitiveness in, 59–61 relative wages and, 57–59 transport costs and, 66–67 Competition Brander-Spencer analysis of, 324–327, 324t economies of scale and, 173 imperfect, 193–201 monopolistic, 194–209 Consumer surplus, 243–245, 243f, 244f Consumption gains from trade and, 87–89 international borrowing/lending and, 164–166 standard model on, 147–149, 149f Consumption distortion loss, 248 Contracting parties, 285 Cost-benefit analysis, 28 Cotton subsidies, 291, 292 Cultural issues, 332–333 Currencies exchange rate determination and, 29 international capital markets and, 30 Customs unions, 293–296 D Dairy industry, U.S., 278 Davis, Donald, 133 Demand consumer surplus and, 243f, 244–245, 244f derived, 64 import demand curves, 238–239, 239f for labor, 64–66, 65f labor allocation and, 79–83 market equilibrium and, 198–199 market size and, 212–214 optimum tariffs and, 302 relative, 53–54 relative prices and, 147–151 Deng Xiaoping, 315–316 Derived demand, 64 Desai, Mihir, 228n Developing countries, 41 agricultural subsidies and, 292 Asian takeoff, 315–317, 315f, 316f clothing industry in, 329 definition of, 305n export patterns for, 134–136, 135f, 136f exports of, 42f free trade gains in, 270 growth of, advanced nations and, 158–160 import-substituting industrialization in, 305, 306–312 income inequality and North-South trade, 122–124 labor standards in, 332 low-wage labor in, 329–335 tariff rates in, 313f trade liberalization in, 313–314, 313f trade policy in, 305–319 wages in, 329–332 Differentiated products, 196 Diminishing returns, 76–77, 77f Distance, as trade barrier, 36–38, 38–39 Distortion loss consumption, 248 production, 248 Doha Round, 286, 291–293 Domestic market failures argument against free trade, 273–276, 274f Dorn, David, 339–340 Downs, Anthony, 277n Dumping, 216–218 Dutiable imports, 282n Dynamic gains, 270n, 289 Dynamic increasing returns, 185–186, 185f E Economic development See also Developing countries manufacturing and, 305–306 Economic geography, 186–188 Economic growth, 154–156 biased, 154–156, 155f of China vs U.S., 158–160, 159f environmental issues from, 335–337 international effects of, 157–160 standard trade model on, 154–157 world relative supply and terms of trade, 156–157, 156f Economic integration, 202–206, 205f winners and losers from, 212–214, 213f Economies of scale, 67, 173–191 definition of, 174 external, 175–176 foreign direct investment and, 223–224 internal, 175–176, 192 international trade and, 180–186 interregional trade and, 186–188 knowledge spillovers and, 176, 178–179 labor market pooling and, 176, 177–178 market equilibrium and, 179, 179f market structure and, 175–176 outsourcing and, 226 specialized suppliers and, 176–177 Education, immigration and, 99, 100f Edwards, Lawrence, 123n Efficiency case for free trade, 269, 269f Efficiency loss, 246, 248f Electoral competition, trade policy and, 277–278, 277f, 279 U.S steel tariffs and, 290–291 Elliott, Kimberly Ann, 332 Employment in high-tech industries, 326 offshoring and, 227–229 political economy of trade and, 89–94 in tradable industries, 42–43, 43f U.S autoworkers, 275–276 in U.S manufacturing, 323f Entertainment industry exports, 188, 333 Environmental issues gasoline dispute between Venezuela and the U.S., 289 globalization and, 332–333 Kuznets curve and, 336, 336f trade policies and, 320, 335–339 carbon tariffs, 320, 338–339 economic growth and, 335–337 pollution havens, 337–338 Environmental Kuznets curve, 336, 336f Equalization of factor prices, 129–130 Equilibrium, market integration and, 202–206, 204f Equilibrium interest rates, 165, 165f Equilibrium number of firms, 200 Equilibrium relative prices, 54, 152, 153f Euro, 30 www.downloadslide.net Europe See also European Union (EU) U.S trade with, 33–35, 33f, 34f, 36f European Economic Community, 250, 295–296 European Union (EU) British exit from, 295–296, 340 Chinese solar panel voluntary export restraint to, 257 Common Agricultural Policy, 250–251, 251f, 280, 287, 290 as customs union, 294–296 import quotas, 251 national procurement in, 259 oilseed production, 253–255 soybean oil tariffs, 252–253 U.S steel tariffs and, 290–291 U.S trade with, 33–35, 33f, 34f, 36f wage convergence in, 96–98 Excess returns, 324 Exchange rates, determination of, 29 Export-biased growth, 157 Export credit subsidies, 259 Export-Import Bank, 259 Export-led strategy, 310–311 Export restraints, 238 Exports in gross domestic product, 23–24, 24f, 25f patterns of between developed and developing countries, 134–136, 135f, 136f productivity and, 68, 68f subsidies, 160–163 supply curves, 238–239, 239f trade costs and firms decisions on, 214–216 U.S firms reporting, 214–215, 214t voluntary restraints on, 256–257 Export subsidies, 160, 161–162, 249–251 definition of, 249 effects of, 249–250, 249f, 259t European Common Agricultural Policy, 250–251, 251f Export supply curves, 238–240, 239f External economies of scale, 173, 175–176 See also Economies of scale Hollywood as, 176 market equilibrium and, 179, 179f theory of, 176 Externalities, 321–324 External prices, 160–161 F Factor content of trade, 130–134 Factor intensity, 109 Factor-price equalization, 129–130 Factor prices, 115–118 Factor-proportions theory, 109, 132–134, 331 Factor substitution, 111–112, 111n, 112f, 113f “Fair price” rule, 218 Fajgelbaum Pablo D., 151–152 Fallick, Bruce, 75 Index Fallows, James, 327 FDI See Foreign direct investment (FDI) Feenstra, Robert, 127n Firms dumping by, 216–218 foreign direct investment by, 219–227 in the global economy, 192–236 imperfect competition and, 193–201 intra-industry trade and, 206–209 monopolistic competition and, 194–209 multinational corporations, 35, 219–223 performance and, 209–214 response of to trade, 209–214 trade costs and export decisions of, 214–216 Fiscal policy, 24 Fixed costs, 197n Foley, C Fritz, 228n Food consumer spending on, 151–152 factor and goods prices, 115–116, 115f, 116f factor substitution and, 111–112, 111n, 112f, 113f inputs in, 113, 114f, 115, 115f prices, wages, and labor allocation for, 79–83 production function for, 77–78, 78f relative price and relative supply of, 147–148, 148f relative price of, 82–83, 83f, 84f Foreign direct investment (FDI), 28, 219–227 horizontal, 222, 223–224 patterns of flow in, 219–222, 220f, 221f vertical, 222, 224 Foreign outsourcing, 224–230 Forward-falling supply curve, 179, 179f France, red-tape barriers in, 259 Franco, Francisco, 58 Free trade, 28 additional gains from, 270–271, 270f case for, 269–272 efficiency case for, 269, 269f exploitation and, 61–62 income distribution and, 73–74 liberalization since 1985, 313–314 market failure justification and, 307–308 monopolies and, 264–265 national welfare arguments against, 272–276 pauper labor argument on, 61 political argument for, 271–272 preferential trading agreements and, 293–297 productivity/competitiveness and, 59–61 Free trade areas, 293–296 Frisch, Max, 100 Function of external prices, 160–161 359 G Gains from trade, 26–27, 56–57 income distribution and, 86–89 The Gap, 61, 62 Gasoline dispute between Venezuela and the U.S., 289, 335 GATT See General Agreement on Tariffs and Trade (GATT) General Agreement on Tariffs and Trade (GATT), 29–30 congressional votes on, 279 creation of, 285 preferential trading agreements and, 293–297 trade rounds, 285–286 Uruguay Round, 28, 281, 286–288 World Trade Organization compared with, 287–288 General equilibrium analysis, 53, 238 import-substituting industrialization and, 308–309 Germany offshoring and, 227–229 reunification of, 29 wage convergence in, 97 wage rates in, 130t Gervais, Antoine, 186t Globalization backlash against, 28, 329 environmental issues and, 320, 332–333, 335–339 labor standards and, 332 low-wage labor and, 329–335 two waves of, 39–40 Goldin, Claudia, 124n Goldsmith, James, 61 Gold standard, 29 Goods prices, 115–118 Gravity model of trade, 32, 33–38 Great Depression, 39–40, 284 import-substituting industrialization and, 309 Greenfield foreign direct investment, 219 Greenpeace, 338 Gross domestic product (GDP), 32–33, 33f Asian takeoff and, 315, 315f, 316f efficiency case for free trade and, 269, 269f, 270f gains from liberalization and, 292 gravity model of trade and, 33–35, 34f of India, 316–317 international comparison of, 306t international trade and, 24, 25f productivity and, 60–61 trade liberalization and, 313–314, 313f U.S., 23, 24f Grossman, Gene, 228n, 280n, 335 Grove, Andy, 326 H Haiti, export patterns for, 135, 135f Hanson, Gordon, 127n, 339–340 www.downloadslide.net 360 Index Healthcare protection with LCR, 258 Heckscher, Eli, 109 Heckscher-Ohlin model, 109–144, 145 biased growth and, 154 empirical evidence on, 130–137 factor and goods prices in, 115–118 on factor-price equalization, 129–130 on income distribution, 121–129 input mix in, 113–115 on international trade between twofactor economies, 119–130 prices and production in, 110–113 on relative prices and patterns of trade, 120–121 resources and output in, 118–119 two-factor economy model in, 110–119 Help centers, 41 Helpman, Elhanan, 280n Henderson, J Vernon, 187n Herbert, Bob, 61n High-tech industries, 321–324, 326 semiconductors, 327–328 wages in, 330–331, 330t Hindu rate of growth, 317 Hines, James R., 228n Hollywood, 333 Homogenization, cultural, 332–333 Hong Kong, in Asian takeoff, 315–316 Horizontal FDI, 223–224 Housing markets, 30 Howard, John, 335 Human resources, 44 Hume, David, 23, 24 I Immigration Brexit and, 295–296 international labor mobility and, 95–100 in mutually beneficial trade, 26 U.S economy and, 98–100 Immiserizing growth, 157–158 Imperfect capital markets, 307–308 Imperfect competition, 193–201 strategic trade policy and, 324–328 Import-biased growth, 157 Import demand curves, 238–240, 239f Import quotas, 251–255 effects of, 259–260, 259t monopolies and, 265–267 rent seeking and, 271 Imports demand curve, 238–239, 239f in gross domestic product, 23–24, 24f, 25f quotas on, 251–255, 259–260, 259t, 265–267 sugar industry restrictions on, 89, 94 tariffs on, 73, 160–163 unemployment related to, 90–93 Import-substituting industrialization, 305–306 Asian takeoff and, 314–315 definition of, 308 infant industry argument on, 306–308 problems of, 311–312 protectionism in, 308–309 Import tariffs, 160 Income See also Wages in Bangladesh, 334 in developing countries, 305 effects of immigration on, 98–100 exports/imports in national, 23–24, 24f, 25f Income distribution, 73–108 in developing countries, 305–306 Doha Round and, 293t in the EU, 96–98 gains from trade and, 86–89 international trade and, 67 North-South inequality in, 122–124 politics of trade and, 89–94 relative prices and, 83–85, 121–122 skill-biased technological change and, 124–129 specific factors model and, 74–86 trade policies and, 276–281 unequal gains from trade and, 151–152 Income effects, 149 Increasing returns See Economies of scale India in Asian takeoff, 315–316, 315f call/help centers in, 41 economic boom in, 317 foreign direct investment by, 220, 221f foreign direct investment in, 220 import-substituting industrialization in, 309 manufacturing protection in, 307 pollution havens in, 337–338 productivity and wages in, 60 rent seeking in, 271 wage rates in, 130t Indifference curves, 148–149, 149f Indonesia, intra-industry trade and, 208–209 Industrial districts, 176 Industrialization, economic development and, 305–306 infant industry argument on, 306–308 Infant industry argument, 186, 306–308 technology and, 320–324 Information, insufficient, 325–326 Information technology, 321–324 Inputs economies of scale and, 174–175, 174t in two-factor economies, 113–115, 114f Inshoring, 229 Insufficient information, 325–326 Integrated markets, 202–206, 205t winners and losers from, 212–214, 213f Intel, 222, 326, 327 Intellectual property rights, 288, 297–298 Interest rates equilibrium, 165, 165f real, 164–166 Intermediate goods, 257 Internal economies of scale, 175–176 See also Economies of scale Internalization motive, 224 Internal prices, 160–161 International borrowing and lending, 163–166 International economics trade and money in, 31 what it’s about, 25–30 International Monetary Fund (IMF), 160, 285 International negotiations, 282 advantages of, 283–284 benefits and costs of, 289–290 definition of, 283 GATT and WTO, 287–291 history of trade agreements and, 284–286 labor standards and, 332 trade liberalization and, 286–287 Uruguay Round, 286–287 International trade analysis of, 31 balance of payments and, 28–29 comparative advantage and, 47–50 economies of scale and, 173–191 external economies and, 180–186 gains from, 26–27 Heckscher-Ohlin model on, 119–130 how much to allow, 27–28 income distribution and gains from, 86–89 international policy coordination on, 29–30 patterns of, 27 political economy of, 89–94 relative prices and, 85–86, 86f Ricardian model on, 67–70 specific factors model on, 85–86 statistics on, 23, 24f International Trade Commission, 218 International Trade Organization (ITO), 285 Internet, distance barriers and, 38–40 Interregional trade, 186–188 Intertemporal budget constraint, 171 Intertemporal comparative advantage, 166 Intertemporal production possibility frontier, 164, 164f Intertemporal trade, 163–166, 170–172 Intra-industry trade, 205–209 ASEAN-4 and, 208–209 definition of, 205 NAFTA and, 208 significance of, 206–207, 207t Investor-state dispute settlement, 297–298 IPhones, 225–226 Ireland, U.S trade with, 35 Irwin, Douglas, 58 Isovalue lines, 147 Ito, Keito, 208n J Japan high-tech industries in, 322 in international capital market, 30 www.downloadslide.net limited domestic oilseed production, 252 rice policy, 74, 280–281 semiconductor industry, 327–328 voluntary export restraints, 256–257 wage rates in, 130t wages and manufacturing in, 40 Jefferson, Thomas, 58 Jensen, J Bradford, 43f, 186t, 214t, 216n Johnson, Robert C., 226n Jomini, Patrick, 250n Jones, Ronald, 74 K Kambourov, Gueorgui, 75 Katz, Lawrence F., 124n Kennedy, Paul, 59n Kennedy Round, 286 Keynes, John Maynard, 39 Kletzer, Lori G., 43f Knahdelwal, Amit K., 151–152 Knowledge spillovers, 176, 178–179, 188 in high-tech, 326 Krueger, Alan, 335 Kuznets curve, 336, 336f L Labor allocation of, 79–83 biased expansion of production possibilities and, 118–119 capital-skill complementarity and income share of, 128–129, 128f marginal product of, 76–77, 77f as mobile factor, 74 production possibility frontier and, 76–79 in specific factors model, 75–79 trade policies and low-wage, 329–335 Labor-capital ratios, 115f relative prices and, 118 Labor-intensive production, 115 Labor market pooling, 176, 177– 178, 188 Labor mobility Brexit and, 295–296 international, 95–100 in specific factors model, 75 Labor productivity, 27 comparative advantage and, 46–72 competitiveness and, 59–61 with many goods, 62–66 offshoring and, 227–229 in one-factor economies, 48–51 production possibility frontier and, 49–50, 49f relative prices and supply and, 50–51 relative wages and, 57–59 in Ricardian model, 48–70 wages and, 59–61 Labor standards, 332 Laissez-faire, 321 Lawrence, Robert Z., 89n, 93n, 123n Leamer, Edward E., 132 Index Learning curve, 185–186, 185f Leontief, Wassily, 131–132, 131t Leontief paradox, 131–132, 131t Less-developed countries (LDCs), 305n See also Developing countries Licensing system, 258 Lithuania, export-led strategy, 310–311 Local content requirements (LCR), 257–259 Location motive, 224–225 M MacDougall, G D A., 67n Magee, Christopher S., 279 Malaysia intra-industry trade and, 208–209 solar panel production in, 163 Manovskii, Iourii, 75 Mantegna, Guido, 29 Manufacturing, 27 in Canada, 210, 214 in economic development, 305–306 employment levels in, 42–43, 43f in the EU, 96–98 in high-tech industries, 326 North-South trade in, 122–124, 137 offshoring and, 227–229 problems of favoring, 311–312 promoting through protection, 308–309 U.S., and imports from China, 91–93, 93f U.S employment in, 323f in world trade, 40–41, 40f, 41t Marginal cost, 195–196, 196f markup over, 200, 216–218 performance and, 210–212 Marginal product of labor, 76–77, 77f labor allocation and, 79–81, 80f Marginal revenue, 194–195 determining, 236 Marginal social benefit, 274 Market disruption, 285 Market equilibrium external economies and, 179, 179f monopolistic competition and, 198–201, 199f Market failures, infant industry protection and, 307–308, 321 labor standards and, 332 Market integration, 202–206, 205t winners and losers from, 212–214, 213f Market size integration and, 212–214 monopolistic competition and, 201–203, 202f Markup over marginal cost, 200 dumping and, 216–218 Marshall, Alfred, 176, 178 Martin, Will, 292t Mayer, Thierry, 216n McDonald’s, wages at, 97f, 98 361 Median voter model, 277–278, 277f Melitz, Marc J., 210n Mercosur, 296–297 Mexico See also North American Free Trade Agreement (NAFTA) auto industry in, 209 automobile industry in, 259 income inequality and, 122–124 relative wages in, 57 U.S trade with, 36–37, 36f wage rates in, 130t, 331 Mining employment levels in, 42–43, 43f in world trade, 40–41, 40f Mobile factors, 74, 75 Monetary policy, 24 balance of payments and, 28–29 Money, international, 31 Monopolies, 173 free trade and, 264–265 marginal revenue and, 194–195, 236 pure, 194 tariffs and quotas and, 264–267 trade costs and exports decisions, 214–216 Monopolistic competition, 194–209 assumptions on, 197–198 average and marginal costs in, 195–196, 196f differentiated products and, 196–197 market equilibrium and, 198–201, 199f market size and, 201–203 trade and, 201–209 Moore’s Law, 327 Mortgage crisis, 30 Most favored nation (MFN) status, 293 Multi-Fiber Arrangement, 256, 281, 287 Multinational corporations, 219–223 foreign direct investment decisions, 222–224 in Ireland, 35 outsourcing by, 224–230 N NAFTA See North American Free Trade Agreement (NAFTA) National Bureau of Economic Research, 91f National procurement, 259 National welfare arguments against free trade, 272 collective action and, 278, 280 domestic market failure, 273–276, 274f electoral competition and, 277–278, 277f, 279 terms of trade argument for a tariff, 272–273 Netherlands, U.S trade with, 35, 36f Newly industrializing economies (NIEs) economic growth of, advanced nations and, 158–160 income inequality and, 122–124 www.downloadslide.net 362 Index Nontariff barriers, 238 See also Import quotas Nontradable industries, 186–188, 186t Nontraded goods, 67 North American Auto Pact of 1964, 207 North American Free Trade Agreement (NAFTA), 28, 37, 127, 207 congressional votes on, 279 environmental issues and, 336 free trade area in, 293–295 intra-industry trade and, 208 wages and, 330 North-South trade, income inequality and, 122–124, 137 O Obama, Barack, 73n OECD See Organization for Economic Cooperation and Development (OECD) Offshoring, 224–230 definition of, 224 “Of the Balance of Trade” (Hume), 23 Ohlin, Bertil, 109 Oil prices, 160 Oilseeds meals, 254–255f production in EU, 253–255 tariff rates, 252 world trade in, 252 Oligopoly, 173, 197 Olson, Mancur, 278 One-factor economies, 48–50 gains from trade and, 56–57 production possibilities in, 49–50 relative prices and supply in, 50–56 relative wages and, 57–59 trade between, 51–59 Opportunity cost, 47 production possibility frontier and, 50 relative prices and supply and, 50–51 Optimum tariffs, 272–273, 273f, 302–304 Orderly marketing agreements (OMAs), 256 Organization for Economic Cooperation and Development (OECD), 288–289 FDI flows in, 219–220, 220f Output economies of scale and, 174–175, 174t market value of, 147 resources and, 118–119 Outsourcing, 224–230 consequences of, 230 service, 41 vertical FDI and, 226 P Pakistan, 307 import-substituting industrialization in, 312t Panagariya, Arvind, 317n “The Parable of the Chips” (Fallows), 327 Paraguay, in Mercosur, 296–297 Partial equilibrium analysis, 52–53, 238 Pauper labor argument, 61 Performance, firms and, 209–214 Perot, Ross, 61 Pew Research Center Survey, 225n Philippines import-substituting industrialization in, 312t intra-industry trade and, 208–209 Political argument for free trade, 271–272 Political economy case for free trade and, 269–272 electoral competition and, 277–278, 277f, 279 modeling the political process and, 280 of trade, 89–94 of trade policy, 268–304 U.S steel tariffs and, 290–291 Politics of trade, 73–74, 89–95 Pollution havens, 337–338 Portugal, productivity and competitiveness of, 59–61 Postel, Virginia, 210n Powell, Asafa, 55 Preferential trading agreements, 293–297 Mercosur, 296–297 Price discrimination, 217 Prices equalization of factor, 129–130 equal-proportional changes in, 82, 82f equilibrium world, 240, 240f external, 160–161 factor, 115–118 goods, 115–118 income distribution and, 83–85 internal, 160–161 labor allocation and, 79–83 marginal revenue and, 194–195, 236 monopolistic competition and, 198–200, 199f North-South trade and, 122–124 optimum tariffs and, 302, 303f production and, 113, 114f relative, 50–56 changes in, 82, 82f demand and, 147–151 in specific factors model, 79–83 Price setters, 194 Price takers, 193 Prisoner’s dilemma, 284 Procurement, national, 259 Producer surplus, 244–245, 244f, 245f, 247 Production abundance of factors of, 109 average cost of, 179, 179f, 195–196, 196f economies of scale and location of, 173–191 international borrowing/lending and, 164–166 intertemporal, 163–164 marginal cost of, 195–196, 196f monopolistic pricing and, 194–195, 194f in one-factor economies, 49–50 performance differences in, 210–212 prices and, 113, 114f specific factors and, 75 standard model on, 147–149, 149f vertical disintegration of, 40 Production distortion loss, 248 Production function, 75–76, 76f Production possibility frontiers, 49–50, 49f, 51–52, 52f biased expansion of, 118–119 budget constraints and, 87–88, 88f factor substitution and, 111–112, 111n, 112f intertemporal, 164–166, 164f relative supply and, 146–147 in specific factors model, 76–79 wages and, 59–60 Productivity, competitiveness and, 59–61 Profits, 196n economic vs accounting, 200n Protectionism, 27–28, 73 See also Tariffs antidumping as, 216–218 effects of on world trade, 39–40, 39f in import-substituting industrialization, 308–309 rent seeking and, 271 tariffs in, 241–243 welfare costs of, 281t who gets protected by, 280–281 Proximity-concentration trade-off for FDI, 223–224 Pseudoinfant industries, 307 Public good, 278, 280 Q Quota rents, 252 Quotas, 25–26 monopolies and, 264–267 R Rain forest destruction, 333 Random access memories (RAMs), 328 Real interest rates, 164–166 Redding, S J., 214t, 216n Red-tape barriers, 259 Relative demand curve, 53–54, 53f Relative prices, 50–51 budget constraints and, 87–88, 88f convergence in, 54–55, 56f, 120–121, 120f demand and, 147–151 determination of, 84f, 151–154 equilibrium, 54, 152, 153f income distribution and, 83–85 international borrowing/lending and, 163–166 international trade and, 85–86, 86f labor allocation and, 79–81 labor-capital ratios and, 118 North-South trade and, 123–124 patterns of trade and, 120–121 trade and, 52–56 www.downloadslide.net Relative supply curve, 53–54, 53f production possibilities and, 146–147 Relative wages, 57–59 determination of, 64–65, 65f with many goods, 62–66, 63t, 65f Rent seeking, 271 Resources, 27, 109–144 gains from trade and, 26–27 in interregional trade, 187 output and, 118–119 Ricardian model on, 67 Returns, excess, 324 Reverse engineering, 178 Ricardian model, 46–70, 145 biased growth and, 154 definition of, 48 empirical evidence on, 67–70 labor in, 79 with many goods, 62–66 nontraded goods in, 67 production possibility frontier in, 49–50, 49f relative prices and supply in, 50–51 transport costs in, 66–67 Ricardo, David, 24, 27, 43 on comparative advantage, 48 Rice imports policy, Japan, 74, 280–281 Rodriguez, Francisco, 313n Rodrik, Dani, 313n, 317n Rogoff, Kenneth S., 313n Romalis, John, 134 See also HeckscherOhlin model Roses, production of, 47–48, 48t Rossi-Hansberg, Esteban, 228n Rothfeder, Jeffrey, 92n Russia, foreign direct investment in, 220 Rybczynski, T M., 118n S Sachs, Jeffrey D., 123n Safety nets, 89 Salop, Stephen, 197n Samsung, 225 Samuelson, Paul, 46, 74, 88n, 118n Schott, Peter K., 136n, 216n Schott, P K., 214t Second best, theory of the, 274–275, 276, 296 Sector-switching costs, 74 Semiconductor industry, 176–177, 327–328 Service offshoring, 41–43 Services employment levels in, 42–43, 43f nontraded goods, 67 in world trade, 40–41, 40f Shatz, Howard, 123n Shipbreaking, 337–338 Sign test, 132–133 Silicon Valley, 176–177, 178–179 Singapore, in Asian takeoff, 315–316 Skill-biased technological change, 124–129, 135–136, 135f Slaughter, Matthew J., 89n, 93n, 123n Smith, Adam, 23 Index Smoot-Hawley Act of 1930, 284 Social gains, 244–245 Solar panels Chinese subsidies for, 163 Chinese voluntary export restraint on, 257 South Africa, foreign direct investment in, 220 South Korea advanced-country status of, 305 in Asian takeoff, 315–316, 315f automobile industry in, 307 productivity and wages in, 60 RAM production in, 328 wage rates in, 130t Sovereignty, 25–26, 333 Spain economic isolation and autarky, 58 wage rates in, 130t Special-interest politics, free trade and, 271, 279 Specialized suppliers, 176–177, 188 Specific factors model, 74–86, 145 assumption in, 75–76 definition of, 74–75 gains from trade and, 86–89 international labor mobility and, 95–100 international trade in, 85–86 politics of trade and, 89–95 prices, wages, and labor allocation in, 79–83 production possibilities in, 76–79 relative prices and income distribution in, 83–85 Specific tariffs, 237 Spencer, Barbara, 324 Standard trade model, 145–172 economic growth in, 154–156 on international borrowing and lending, 163–166 production possibilities and relative supply in, 146–147 relative price determination in, 151–154 relative prices and demand in, 147–150 tariffs and export subsidies in, 160–163 welfare effect of terms of trade in, 150–151 world relative supply and terms of trade in, 156–157 Steel tariffs, 290–291 Stolper, Wolfgang, 118n Stolper-Samuelson effect, 118n, 277 Strategic trade policy, 320 imperfect competition and, 324–328 Subramanian, Arvind, 317n Subsidies, 160–163, 249–251 cotton, 291, 292 export credit, 259–260, 259t for high-tech industries, 321–324, 323f implications of, 162–163 Substitution effects, 149 Sugar industry, 89, 94 Suppliers, specialized, 176–177 363 Supply in one-factor economies, 50–51 optimum tariffs and, 302 relative, 53–54 production possibilities and, 146–147 relative price and, 147–148, 148f world relative, terms of trade and, 156–157, 156f Supply curves, export, 238–239, 239f Surplus consumer, 243–245, 243f, 244f producer, 244–245, 244f, 245f Sveikauskas, Leo, 132 T Taiwan, in Asian takeoff, 315–316 Tariff equivalent, 253–254 Tariff escalation, 252 Tariff-rate quotas, 271 origin and application in oilseeds, 252–255 Tariffs, 160–163 ad valorem, 237 amount of protection from, 241–243, 241f basic analysis of, 237–243 binding, 285 carbon, 320, 338–339 costs and benefits of, 243–248 demand and, 302 in developing countries, 313f domestic market failures argument for, 273–276, 274f effects of, 240–241, 241f, 259–260, 259t efficiency case for free trade and, 269, 269f implications of, 162–163 monopolies and, 264–267 optimum, 272–273, 273f, 302–304 political competition and, 277–278, 277f prices and, 302, 303f punitive, 73 rates of U.S., 282, 282f rent seeking and, 271 specific, 237 supply, demand, and trade in a single industry and, 238–240 supply and, 302 terms of trade argument for 272–273 welfare effects of optimum, 303–304, 303f Technology activist trade policies and, 321–324 barriers to trade and, 38–40 factor content of trade and, 132–133, 134 information, service offshoring and, 41–43 skill-biased technological change and, 124–129 www.downloadslide.net 364 Index Technology-skill complementarity, 124–129 Terms of trade, 146 implications of effects of, 162–163 international effects of, 157–160 tariffs/subsidies and, 160–163 between U.S and China, 158–160, 159f welfare effect of changes in, 150–151 world relative supply and, 156–157 Terms of trade argument for a tariff, 272–273 Terms of trade gain, 246, 248f for optimum tariffs, 302–304 Textiles, 281, 281t, 287 See also Cloth Uruguay Round on, 290 Thailand, intra-industry trade and, 208–209 Theory of the second best, 274–275, 276, 296 Third world, 41 agricultural subsidies and, 292 Thought experiments, 58 Tokyo Round, 286 Toyota, 223 Tradable industries, 42–43, 43f, 186–188, 186t Trade See also International trade; World trade barriers to, 36–38 consumption possibilities expanded by, 54–55, 56f factor content of, 130–134 gains from, 56–57, 86–89 gravity model of, 32, 33–38 impediments to, 36–38 intertemporal, 163–166, 170–172 money and, 30–31 in one-factor world, 51–59 politics of, 73–74, 89–94 Trade agreements, North American Free Trade Agreement, 36 Trade creation, 296 Trade diversion, 163, 296–297 Trade flows, equilibrium relative price and, 152, 153f Trade policies, 237–267, 320–342 arguments for activist, 321–328 collective action and, 278, 280 community effects from, 339–340 controversies in, 320–342 in developing countries, 305–319 in European countries, 238 effects of, 259–260, 259t end of trade agreements and, 291–298 environmental issues and, 320, 335–339 export subsidies and, 249–251 globalization and low-wage labor and, 329–335 imperfect competition and, 324–328 import quotas, 251–255 income distribution and, 276–281 international coordination of, 29–30 international negotiations and, 282–291 local content requirements, 257–259 monopolies and, 264–267 national welfare arguments against free trade and, 272–276 political economy of, 268–304 second-best, 274–275, 276 strategic, 320 tariff analysis and, 237–243 tariff costs and benefits, 243–248 voluntary export restraints, 256–257 Trade-Related Aspects of Intellectual Property (TRIPS), 288 Trade rounds, 285–286 Doha Round, 286, 291–293 Trade shocks, 339–340 Trade wars, 283–284, 283t Trans-Pacific Partnership (TPP), 297–298 Transportation, barriers to trade and, 38–40 Transport costs, comparative advantage and, 66–67 The Trap (Goldsmith), 61 Trefler, Daniel, 132–133, 210 Trump, Donald, 92n Tuna, tariff-rate quota on, 271 U Umemoto, Masaru, 208n Unemployment political economy of trade and, 89–94 United Kingdom British exit from the EU and, 295–296, 340 external economies in, 176 labor productivity in, 67–69 manufactured goods trade in, 41, 41t United States automobile import quotas, 275–276 barriers to trade with, 36–38, 37t, 38f campaign finance laws, 279 dairy industry, 278 economic growth of China and, 158–160 economic integration with Canada, 210 entertainment exports, 188 external economies in, 176 factor content of trade, 131–132, 131t free trade to no trade in, 58 gasoline dispute with Venezuela, 289, 335 immigration to and economy of, 98–100 income inequality in, 122 labor productivity in, 67–69 manufactured goods trade in, 41, 41t memorandum of understanding with China, 268 non-production–production employment in, 126–127, 126f relative wages in, 57 semiconductor industry, 327–328 service outsourcing in, 42–43 steel tariff by, 290–291 sugar industry, 89, 94 technology industries, 321–324, 323f, 326 trade deficit with China, 225–226 trade in business services, 229 trade statistics, 23, 24f trading partners of, 32–33, 33f Trans-Pacific Partnership and, 297–298 wage rates in, 130t Unit labor requirement, 48–49, 63–64, 63t Uruguay, in Mercosur, 296–297 Uruguay Round, 28, 281, 286–288 costs and benefits of, 288–290 Uruguay’s Round Agreement on Agriculture (URAA), 253, 254 U.S Bureau of Labor Statistics, 90 U.S International Trade Commission, 271, 281t U.S Trade Adjustment Assistance program, 93 V Vegetable oils, 252, 254–255 Venezuela bound tariff rate, 252 entertainment industry, 188 gasoline dispute with the U.S., 289, 335 oil exports, 160 Vertical disintegration of production, 40 Vertical FDI, 223, 224 outsourcing and, 226 Vertical integration, 226 Voluntary export restraints (VER), 255–257 effects of, 259–260, 259t Voluntary restraint agreements (VRAs), 255 W Wages comparative international, 130t convergence of in EU, 96–98 effects of immigration on, 99 exploitation and, 61–62 labor allocation and, 79–83 North-South inequality in, 122–124 pauper labor argument on, 61 productivity and competitiveness and, 59–61 relative, 57–59 skill-biased technological change and, 124–129 in specific factors model, 79–83 trade globalization and, 329–332, 330t trade policies, globalization, and, 329–335 The Wealth of Nations (Smith), 23 Weinstein, David, 133 Welfare effect, 150–151 costs of U.S protection, 281t of export subsidies, 248–249, 249f www.downloadslide.net from full liberalization, 291–292, 292t of intermediate goods, 258 of optimum tariffs, 303–304 of sugar import quota, 253–254 of tariffs, 246, 248f Wheat imports, 294–295 Wolfe, Tom, 178n Wood, Adrian, 123n Working conditions, 331–332, 334 World Bank, 285 on Bangladesh incomes, 334 on import-substituting industrialization, 312 Index on Mercosur, 297 on welfare gains from liberalization, 291–292, 292t World trade, 32–45 anomalies in, 35 changing rules in, 43–44 composition of, 40–41 gravity model of, 32, 33–38 patterns of, 38–40 service offshoring in, 41–43 trading partners, 32–38 World Trade Organization (WTO), 29–30 China in, 92 creation of, 287–288 365 dispute resolution in, 288, 289 environmental issues and, 335 established, 28, 285 export-led strategy, 310–311 national independence and, 333–335 trade rounds, 285–286 U.S steel tariff and, 290–291 World War I, 39–40 World War II, multilateral negotiations after, 285 Z Zero-profit number of firms, 200 www.downloadslide.net CREDITS PHOTOS Chapter p 55, AP Photo; p 58, North Wind Picture Archives Chapter p 217, Si Wei/Color China Photo/AP Images; p. 225, Courtesy of IHS Markit http://news ­ihsmarkit.com/sites/ihs.newshq.­businesswire com/files/Exploded_View_Apple_iPhone_7 jpg Chapter p 247, Courtesy of Subaru of America, Inc.; p 250, AP Photo/Jockel Finck; p 255, Pearson Education, Inc.; p 258, Tribune Content Agency LLC/Alamy Stock Photo TEXT Chapter p 39, Keynes, John, The Economic Consequences of the Peace 1919 New York Harcourt, Brace and Howe Inc.; p. 42, Blinder, Alan Offshoring: The Next Industrial Revolution? Foreign Affairs March/ April 2006 Chapter p 68, G D A MacDougall “British and American Exports: A Study Suggested by the Theory of Comparative Costs.” Economic Journal 61 (December 1951), pp 697–724; 62 (September 1952), pp 487–521 Chapter 366 p 93, Pearson Education, Upper Saddle River; p 97, The Conference Board International Labor Comparisons, 2015; and Orley Ashenfelter, “Comparing Real Wage Rates.” American Economic Review 102 (2012), pp 617–42; p 98, U.S Census Bureau; p 100, U.S Census Bureau Chapter pp 176–177, Annalee Saxenian Regional Advantage Cambridge: Harvard University Press, 1994; p 178, Annalee Saxenian Regional Advantage Cambridge: Harvard University Press, 1994; p 178, Alfred Marshall, Principles of Economics, 8th ed (London: Macmillan and Co., 1920) From Book IV, Chapter X, Section [First edition: 1890.]; p 178, Annalee Saxenian Regional Advantage Cambridge: Harvard University Press, 1994 Chapter p 218, “Wielding a Heavy Weapon Against China,” Business Week June 21, 2004 Chapter 10 p 271, U.S International Trade Commission; p 282, Compiled from official statistics of the U.S Department of Commerce; p. 298, Michaely, Michael, Trade Preferential Agreements in Latin America: An Ex-Ante Assessment (March 1996) World Bank Policy Research Working Paper No 1583 Available at SSRN: https://ssrn.com/abstract=620535 Chapter 12 p 332, Kimberly Ann Elliott Can Labor Standards Improve Under Globalization? Washington, D.C.: Institute for International Economics, 2001 A survey of the issues by an economist sympathetic to the cause of the activists; p 337, Energy Information Agency ... the United States edition, entitled International Trade: Theory & Policy, 11th Edition, ISBN 978-0-13-451955-5 by Paul R Krugman, Maurice Obstfeld, and Marc J Melitz, published by Pearson Education... International Policy Coordination 29 The International Capital Market 30 International Economics: Trade and Money 31 PART International Trade Theory 32 World Trade: ... of Global Edition titles Klein Mathematical Methods for Economics Krugman/ Obstfeld /Melitz International Economics: Theory & Policy* † Laidler The Demand for Money Lynn Economic Development: Theory

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