Summary International Economics: Theory and Policy Krugman. Paul R, Obstfield, Maurice 9th Edition

Summary International Economics: Theory and Policy Krugman. Paul R, Obstfield, Maurice 9th Edition. Comparative Advantage with Many Goods......................................................................... 33 3.5.1. Setting Up the Model ....................................................................................................... 33 3.5.2. Relative Wages and Specialization................................................................................. 33 3.5.3. Determining the Relative Wage in the Multigood Model ........................................... 34 3.6. Adding Transport Costs and Nontraded Goods.................................................................. 34 3.7. Empirical Evidence on the Ricardian Model......................................................................... 35 4. Specific Factors and Income Distribution.................................................................................... 37 4.1. The Specific Factors Model.................................................................................................... 50 4.1.1. Assumptions of the Model .............................................................................................. 50 4.1.2. Production Possibilities.................................................................................................... 50 4.1.3. Prices, Wages, and Labor Allocation.............................................................................. 51 4.1.4. Relative Prices and the Distribution of Income............................................................ 52 4.2. International Trade in the Specific Factors Model.............................................................. 53 4.3. Income Distribution and the Gains from Trade................................................................... 54 4.4. The Political Economy of Trade: A Preliminary View......................................................... 55 4.4.1. Income Distribution and Trade Politics......................................................................... 55 4.5. International Labor Mobility ................................................................................................... 56 5. Resources and Trade: The Heckscher-Ohlin Model................................................................... 58 5.1. A Model of a Two-Factor Economy...................................................................................... 59 5.1.1. Prices and Production...................................................................................................... 60 5.1.2. Choosing the Mix of Inputs ............................................................................................. 61 5.1.3. Factor Prices and Goods Prices...................................................................................... 62 5.1.4. Resources and Output..................................................................................................... 62 5.2. Effects of International Trade Between Two-Factor Economies...................................... 63 5.2.1. Relative Prices and the Pattern of Trade....................................................................... 64 5.2.2. Trade and the Distribution of Income ........................................................................... 64 5.2.3. Factor-Price Equalization................................................................................................ 65 5.3. Empirical Evidence on the Heckscher-Ohlin Model........................................................... 66 5.3.1. Trade in Goods as a Substitute for Trade in Factors................................................... 66 5.3.2. Patterns of Exports Between Developed and Developing Countries....................... 67 5.3.3. Implications of the Tests................................................................................................. 67 6. The Standard Trade Model............................................................................................................ 68 6.1. A Standard Model of a Trading Economy............................................................................ 70 6.1.1. Production Possibilities and Relative Supply................................................................ 70 6.1.2. Relative Prices and Demand. International economics uses the same fundamental methods of analysis as other branches of economics, because the motives and behavior of individuals are the same in international trade as they are in domestic transactions. However, international economics involves new and different concerns such as trade quotas or currency fluctuations, because these trades and investments occur between independent nations. Distributing prohibited | Downloaded by Filip Semrad () lOMoARcPSD| © StuD 15 The subject matter of international economics thus consists of issues raised by the special problems of economic interaction between sovereign states. Throughout the study of international economics seven themes recur: (1) the gains from trade, (2) the pattern of trade, (3) protectionism, (4) the balance of payments, (5) exchange rate determination, (6) international policy coordination, and (7) the international capital market. 1.1.1. The Gains from Trade The most important single insight in all of international economics is that there are gains from trade – or, when countries sell goods and services to each other there is almost always a mutual benefit. It is a common misconception that trade is harmful if there are large disparities between countries in productivity or wages. On the one hand, less technologically advanced countries worry that they won’t be able to compete in international trade. On the other hand, technologically advanced nations worry that lower-wage countries will drag their standard of living down. This book’s first model (Chapter 3) will demonstrate that two countries can trade to their mutual benefit despite any disparity. Chapter 5 will show that trade provides benefits by allowing countries to balance their import and export goods. The benefits of international trade are not limited to trade in tangible goods as international migration and borrowing and lending are also forms of mutually beneficial trade. Chapter 4 will deal with trade of labor for goods and services, while trade of current goods for the promise of future goods will be discussed in Chapter 6. Chapter 21 will show that the exchange of risky assets can benefit all countries by allowing them to diversify its wealth and reduce the variability of its income. Although countries generally benefit from international trade, it is possible that trade may hurt groups within nations through a strong effect on the distribution of income. Theorists point out that international trade can adversely affect owners of resources that are specific to industries that compete with imports. Chapters 4 through 6 will deal with the problem that the real wages of less-skilled workers have been declining in particular countries. 1.1.2. The Pattern of Trade Because economists cannot discuss the effects of international trade with any confidence unless they know their theory is good enough to explain the international Distributing prohibited | Downloaded by Filip Semrad () lOMoARcPSD| © StuD 16 trade that is actually observed, the pattern of international trade has been a major preoccupation of international economists. Some aspects of the pattern of trade, such as climate and resources, are easy to understand. Chapter 3 will show a powerful explanation of the pattern of trade in terms of international differences in labor productivity. Chapter 5 presents alternative explanations, such as the influential theory that links trade patterns to an interaction between the relative supplies of national resources such as capital and labor on one side and the relative use of these factors in the production of different goods on the other. Theories that suggest a substantial random component in the pattern of trade will be presented in Chapters 7 and 8. 1.1.3. How Much Trade? Since the emergence of modern nation-states, governments have worried about the effect of international competition on the prosperity of domestic industries and have often placed limits on imports. The single most consistent mission of international economics has been to analyze the effects of these so-called protectionist policies, and usually to show the advantages of freer international trade. In the 1990s this debate took a new direction when a broad policy of removing barriers to international trade was pursued that reflected the view that free trade was a force for promoting world peace. Major trade agreements such as the North American Free Trade Agreement (NAFTA) and the World Trade Organization were negotiated. Since that time, however, an international political movement that opposes ‘globalization’ has grown significantly. This movement has forced advocates of free trade to seek new ways to explain their views. Over the years, economists have developed an analytical framework for determining the effects of government policies that affect international trade. This framework, presented in Chapters 9 and 10, helps predicting the effects of trade policies while also allowing for cost-benefit analysis. Although governments do not necessarily do what the cost-benefit analysis of economists tells them they should, economic analysis can help make sense by showing who benefits and who loses from policies such as quotas and subsidies. The key insight of this analysis is that conflicts of interest within nations are usually more important in determining trade policy than conflicts of interest between nations. Chapters 4 and 5 shows that trade has strong effects on income distribution within countries, while Chapters 10 through 12 reveal that the relative power of different interest groups within countries often determines policies towards international trade. Distributing prohibited | Downloaded by Filip Semrad () lOMoARcPSD| © StuD 17 1.1.4. Balance of Payments A key difference between international economics and other areas of economics is that countries usually have their own currencies, whose relative values can change over time. Due to the fact that exchange rates were fixed by government action for a long time, the study of exchange rate determination is a relatively new part of international economics. Fixed-rate systems will be discussed in Chapter 18, Chapter 19 is devoted to the historical performance of alternative exchange-rate systems, and Chapter 20 to the economics of currency areas such as the EU. Chapters 14 through 17 focus on the modern theory of floating exchange rates.