MACROECONO 101 Summary International Economics: Theory and Policy Krugman. Paul R, Obstfield, Maurice 9th Edition

MACROECONO 101 Summary International Economics: Theory and Policy Krugman. Paul R, Obstfield, Maurice 9th Edition Contents 1. Introduction ..................................................................................................................................... 14 1.1. What Is International Economics About?............................................................................. 14 1.1.1. The Gains from Trade...................................................................................................... 15 1.1.2. The Pattern of Trade........................................................................................................ 15 1.1.3. How Much Trade?............................................................................................................ 16 1.1.4. Balance of Payments........................................................................................................ 17 1.1.5. Exchange Rate Determination........................................................................................ 17 1.1.6. International Policy Coordination .................................................................................. 17 1.1.7. The International Capital Market ................................................................................... 17 1.2. International Economics: Trade and Money........................................................................ 18 2. World Trade: An Overview............................................................................................................ 19 2.1. Who Trades with Whom? ...................................................................................................... 19 2.1.1. Size Matters: The Gravity Model.................................................................................... 19 2.1.2. Using the Gravity Model: Looking for Anomalies........................................................ 20 2.1.3. Impediments to Trade: Distance, Barriers, and Borders.............................................. 21 2.2. The Changing Pattern of World Trade................................................................................. 21 2.2.1. Has the World Gotten Smaller?...................................................................................... 21 2.2.2. What Do We Trade?........................................................................................................ 22 2.2.3. Service Offshoring............................................................................................................ 22 2.3. Do Old Rules Still Apply?........................................................................................................ 22 3. Labour Productivity and Comparative Advantage: The Ricardian Model............................... 24 3.1. The Concept of Comparative Advantage............................................................................. 24 3.2. A One-Factor Economy.......................................................................................................... 25 3.2.1. Production Possibilities.................................................................................................... 25 3.2.2. Relative Prices and Supply.............................................................................................. 26 3.3. Trade in a One-Factor World................................................................................................. 27 3.3.1. Determining the Relative Price After Trade................................................................. 28 3.3.2. The Gains from Trade...................................................................................................... 30 3.3.3. A Note on Relative Wages.............................................................................................. 31 3.4. Misconceptions About Comparative Advantage................................................................. 31 3.4.1. Productivity and Competitiveness................................................................................. 32 3.4.2. The Pauper Labor Argument........................................................................................... 32 3.4.3. Exploitation ....................................................................................................................... 32 lOMoARcPSD| © StuD 2 3.5. 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........................................................................................... 71 lOMoARcPSD| © StuD 3 6.1.3. The Welfare Effect of Changes in the Terms of Trade............................................... 71 6.1.4. Determining Relative Prices............................................................................................ 72 6.1.5. Economic Growth: A Shift of the RS curve................................................................... 72 6.1.6. Growth and the Production Possibility Frontier .......................................................... 72 6.1.7. World Relative Supply and the Terms of Trade........................................................... 73 6.1.8. International Effects of Growth...................................................................................... 73 6.2. Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD...................................... 74 6.2.1. Relative Demand and Supply Effects of a Tariff.......................................................... 74 6.2.2. Effects of an Export Subsidy........................................................................................... 75 6.2.3. Implications of Terms of Trade Effects: Who Gains and Who Loses?...................... 75 6.3. International Borrowing and Lending................................................................................... 75 6.3.1. Intertemporal Production Possbilities and Trade......................................................... 76 6.3.2. The Real Interest Rate..................................................................................................... 76 6.3.3. Intertemporal Comparative Advantage......................................................................... 77 7. External Economies of Scale and the International Location of Production........................... 78 7.1. Economies of Scale and International Trade: An Overview............................................... 78 7.2. Economies of Scale and Market Structure........................................................................... 79 7.3. The Theory of External Economies....................................................................................... 79 7.3.1. Specialized Suppliers........................................................................................................ 80 7.3.2. Labor Market Pooling...................................................................................................... 80 7.3.3. Knowledge Spillovers....................................................................................................... 80 7.3.4. External Economies and Market Equilibrium................................................................ 81 7.4. External Economies and International Trade....................................................................... 81 7.4.1. External Economies, Output, and Prices....................................................................... 81 7.4.2. External Economies and the Pattern of Trade.............................................................. 82 7.4.3. Trade and Welfare with External Economies............................................................... 82 7.4.4. Dynamic Increasing Returns........................................................................................... 82 7.5. Interregional Trade and Economic Geography.................................................................... 83 8. Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises ............................................................................................................................................................... 84 8.1. The Theory of Imperfect Competition .................................................................................. 85 8.1.1. Monopoly: A Brief Review .............................................................................................. 86 8.1.2. Monopolistic Competition ............................................................................................... 87 8.2. Monopolistic Competition and Trade ................................................................................... 89 8.2.1. The Effects of Increased Market Size............................................................................ 90 lOMoARcPSD| © StuD 4 8.2.2. Gains from an Integrated Market: A Numerical Example........................................... 90 8.2.3. The Significance of Intra-Industry Trade....................................................................... 91 8.3. Firm Responses to Trade: Winners, Losers, and Industry Performance........................... 91 8.3.1. Performance Differences Across Producers................................................................. 92 8.3.2. The Effects of Increased Market Size............................................................................ 92 8.4. Trade Costs and Export Decisions........................................................................................ 92 8.5. Dumping ................................................................................................................................... 93 8.6. Multinationals and Outsourcing ............................................................................................ 93 8.6.1. The Firm's Decision Regarding Foreign Direct Investment........................................ 94 8.6.2. Outsourcing ....................................................................................................................... 95 8.6.3. Consequences of Multinationals and Foreign Outsourcing........................................ 95 9. The Instruments of Trade Policy................................................................................................... 96 9.1. Basic Tariff Analysis................................................................................................................ 96 9.1.1. Supply, Demand, and Trade in a Single Industry.......................................................... 97 9.1.2. Effects of a Tariff .............................................................................................................. 97 9.1.3. Measuring the Amount of Protection ............................................................................ 98 9.2. Costs and Benefits of a Tariff................................................................................................ 98 9.2.1. Consumer and Producer Surplus.................................................................................... 99 9.2.2. Measuring the Costs and Benefits................................................................................. 99 9.3. Other Instruments of Trade Policy...................................................................................... 101 9.3.1. Export Subsidies: Theory............................................................................................... 101 9.3.2. Import Quotas: Theory.................................................................................................. 101 9.3.3. Voluntary Export Restraints.......................................................................................... 102 9.3.4. Local Content Requirements........................................................................................ 102 9.3.5. Other Trade Policy Instruments................................................................................... 102 9.4. The Effects of Trade Policy: A Summary............................................................................ 102 10. The Political Economy of Trade Policy.................................................................................... 104 10.1. The Case for Free Trade..................................................................................................... 105 10.1.1. Free Trade and Efficiency........................................................................................... 105 10.1.2. Additional Gains from Free Trade.............................................................................. 106 10.1.3. Rent-Seeking................................................................................................................. 106 10.1.4. Political Argument for Free Trade............................................................................. 106 10.2. National Welfare Arguments Against Free Trade........................................................... 107 10.2.1. The Terms of Trade Argument for a Tariff............................................................... 107 10.2.2. The Domestic Market Failure Argument Against Free Trade................................ 108