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Summary International Economics: Theory and Policy.

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Module
International Economics: Theory and Policy

Institution
Middlesex University (MDX)

Summary International Economics: Theory and Policy. 1. Introduction Throughout the study of international economics seven themes recur: (1) the gafrom trade, (2) the pattern of trade, (3) protectionism, (4) the balance of paymenexchange rate determination, (6) international policy coordination, an...

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international economics
theory and policy
international economics theory and policy
summary international economics theory and policy

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

9th Edition

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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

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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

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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

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