International Economics: An Introduction to Theory and Policy, Second Edition
By Rajat Acharyya
Contents:
List of Tables, Figures, and Boxes xv
Preface xxiii
Introduction xxvii
Part I Basis and Gains from Inter-industry Trade
Chapter 1 Basis of Inter-industry Trade 3
1.1 Arbitrage and Inter-industry Trade 4
1.2 Comparative Advantage 8
1.2.1 Public Policy and Induced Comparative Advantage:
Fundamental Sources 8
1.2.2 Selective Factor Disadvantage, Innovations, and Shifting
Comparative Advantage 11
1.2.3 Comparative Advantage in vertical stages of production:
Global Value Chain 13
1.3 Digital and Virtual Trade 14
1.4 Advanced Topic: Revealed Comparative Advantage 15
Chapter 2 Gains from Trade 22
2.1 Trade, Gains, and Redistribution 22
2.2 Resource Reallocation and Gains from Trade 26
2.3 Decomposition of GFT: Specialization and Exchange Gains 30
2.3.1 Substitution Possibility in Consumption and the Exchange Gain 31
2.3.2 Substitution Possibility in Production and Specialization Gain 31
2.4 Sufficient Conditions for GFT 32
2.5 Pollution: A Trade-Off between GFT and Environmental Degradation 35
2.6 Increasing Returns to Scale (IRS) and GFT 36
2.6.1 Case I: GFT under Weak IRS and Violation of Tangency Condition 36
2.6.2 Case II: GFT under Strong IRS and Non-convexity 36
Appendix A2 37
Returns to Scale and Convexity of the Production Set 37
Chapter 3 Test of Comparative Advantage and Measuring GFT 44
3.1 Measuring the Welfare Change: Compensating and Equivalent Variations 44
3.2 GFT by CV Measure 45
3.3 Equivalent Variation and GFT 46
3.4 A Test of Comparative Advantage: The Case of Japan 48
Chapter 4 International Equilibrium and the Terms of Trade 52
4.1 Offer Curve of the Home Country 53
4.2 Backward Bending Offer Curve 55
4.3 Offer Curve under Constant Opportunity Cost 57
4.4 Foreign Offer Curve and the International Equilibrium 57
4.5 Welfare Properties of the International Equilibrium 60
4.5.1 Gains from trade revisited 60
4.5.2 Global Pareto optimality of free trade bundle 61
Appendix A4 62
- Geometric Measurement of the Import Demand Elasticity along Offer Curve 62
- Existence, Uniqueness, and Stability of International Equilibrium 63
- Trade Indifference Curves and Alternative Derivation of Offer Curves 65
- Measurement and Trends in Barter TOT 66
Part II Theories of Comparative Advantage and Pattern of Trade
Chapter 5 Technology and Trade 73
5.1 Constant Opportunity Cost, Technology, and Trade 73
5.2 Role of Relative Size of Trading Nations and Distribution of GFT 78
5.3 Advanced Topics 81
5.3.1 Many Commodity Extension 81
5.3.2 World Production Possibility Frontier and Many Countries Extension 84
5.3.3 Technology for Sale 86
5.4 International Trade and Technology Choice 87
Chapter 6 Factor Endowment and Trade 95
6.1 Assumptions and the Structure of the HOS Model 95
6.2 Autarchic Equilibrium and the Pattern of Trade 100
6.3 Two Properties of the Model: Output and Price Magnification Effects 103
6.3.1 Endowment Shock and Output Changes 103
6.3.2 Price Magnification Effect 106
6.4 Factor Prices at the Post-trade Equilibrium 108
Appendix A6 115
- Full Employment Output Levels and Conditions for Incomplete Specialization 115
- Price Magnification Effect 116
- Algebraic Derivation of the Relative Supply Curve 118
- Output Magnification Effect or the Rybczynski Theorem 121
- A Fixed Coefficient HOS Model 121
Chapter 7 Digressions on Factor Endowment Theory and Trade Empirics 128
7.1 Empirical Tests of the HO Theorem: Leontief Paradox 128
7.2 Factor Content and the HOV Theorem 130
7.3 Price Magnification Effect and FPE Revisited 132
7.3.1 Factor Immobility and Specific Factors 132
7.3.2 Non-traded Goods 139
7.3.3 Advanced Topic: FPE in Higher Dimensions 144
7.4 Advanced Topic: Evidence on Within Country Wage Movements and the
Wage Gap Debate 145
Appendix A7 150
- Price Magnification Effect in the SF Model 150
- Growth in Labour Force and Relative Supply 151
Part III Basis and Gains from Intra-industry Trade
Chapter 8 Theories of Intra-industry Trade 159
8.1 IIT in Identical Products 160
8.2 IIT in Horizontally Differentiated Products 164
8.2.1 Love for Variety Approach, Monopolistic Competition, and IIT 164
8.2.2 Characteristic Approach 165
8.3 Product Development and IIT in Vertically Differentiated Products 168
8.4 Firm Heterogeneity and Export Decision 173
8.5 Advanced Topic: Intra-industry Trade Indices 174
8.5.1 The Grubel–Lloyd (GL) Index of Intra-industry Trade 174
8.5.2 Other Measures and Refinements of the GL Index of
Intra-industry Trade 177
Appendix A8 179
- Algebra of Brander (1981) Model with Transport Cost: Linear Market Example 179
- Monopolistic Competition and IIT in Differentiated Goods: Krugman (1979) 182
Part IV Trade Intervention and Coordination
Chapter 9 Import Tariff and Export Subsidies 193
9.1 Economic Effects of an Import Tariff: A Partial Equilibrium Analysis 194
9.2 Revenue Motive and Revenue Maximizing Tariff 196
9.3 General Equilibrium Analysis: TOT and Volume of Trade (VOT) Effects 198
9.3.1 Change in Output, Consumption, and Volume of Trade for a
Small Economy 198
9.3.2 TOT Effect, Welfare Change, and the Optimum Tariff for a
Large Country 200
9.3.3 Tariff Retaliation and Trade War among Countries 204
9.4 Tariffs and Protection of Domestic Industries 206
9.4.1 Infant Industry Argument for Protection 207
9.4.2 Imported Input and Effective Rate of Protection 207
9.4.3 Tariff Protection in a Large Country: The Metzler Paradox 210
9.5 Tariff and Income Distribution 212
9.6 Export Subsidy, TOT Deterioration, and Welfare Loss 213
Appendix A9 216
- Import Demand Elasticity and Its Decomposition 216
- Change in Real Income and the Optimum Tariff 216
- Revenue Maximizing and Optimum Tariffs 218
- Welfare Reaction Curves 221
- Lerner’s Symmetry Result 222
- Lerner’s Case: Government Spending and TOT Deterioration 222
VII. Symmetry of Lerner’s Case and the Metzler Paradox 223
Chapter 10 Quantitative Restrictions, Non-tariff Barriers, and Equivalence 229
10.1 Import Quota, Implicit Tariff, and Scarcity Rent 229
10.2 Voluntary Export Restraints 233
10.3 Other Non-tariff Barriers 237
Chapter 11 Market Imperfection and Trade Policy 241
11.1 Competitive World Production and Domestic Monopoly 241
11.2 Protection of a Domestic Monopoly 243
11.2.1 Competitive Foreign Supply: Non-equivalence of Tariff and Quota 243
11.2.2 Monopoly Foreign Supplier and Strategic Competition 244
11.3 International Price Discrimination and Dumping 247
11.4 International Market Share Rivalry and Strategic Trade Policy 248
11.4.1 Export Subsidies and Market Share Rivalry 249
11.4.2 Tariff as an Export Promotion Strategy 252
11.5 Advanced Topic: Monopoly, Pareto Sub-Optimality, and GFT 252
Appendix A11 255
- Decomposition of the Change in Real Income in a Non-competitive Economy 255
Chapter 12 Political Economy of Trade Policy 260
12.1 DUP Lobbying Activities 260
12.2 Political Economy of Trade Policy Choice 264
12.2.1 Democracy, Political Risk, and Political Support Approach 264
12.2.2 Lobbying and Contribution Approaches 267
Appendix A12 270
- Comparison of Profits Under Import Quota and Import Tariff 270
Chapter 13 Market Failure, Distortions, and Trade Policy 274
13.1 Taxonomy of Distortions 275
13.1.1 Types of Distortions 276
13.1.2 Causes of Distortions 277
13.2 Optimal Intervention 286
13.2.1 Tariff or Quota as Optimal Policy Intervention for Foreign Distortion 286
13.2.2 Optimal Policy Intervention for Production Distortion 288
13.2.3 Optimal Policy Intervention for Consumption Distortion 290
Appendix A13 290
Product Distortion under Wage Differential 290
Chapter 14 Multilateralism and Regionalism 295
14.1 Typology of Regional Trading Agreements (RTAs) and
Economic Cooperation 296
14.1.1 Different Stages of Regional Economic Cooperation 296
14.1.2 Evolution of the European Union through Successive Stages
of Cooperation 297
14.1.3 Open and Unanimous Regionalism 299
14.1.4 Scope and Coverage of RTAs 300
14.2 Bilateralism and Regionalism: Old and the Contemporary 300
14.2.1 Pre–World War I Bilateralism and Regionalism 300
14.2.2 Post–World War and Contemporary Regionalism 301
14.3 Regional Trading Agreements: Trends, Causes, and Effects 302
14.3.1 Growth, Composition, and Distribution of RTAs 302
14.3.2 Economic Effects and Gains from Regionalism 303
14.3.3 Why are RTAs Formed? 307
14.4 Multilateralism in the Post-WTO Era and Global Free Trade 310
14.4.1 From Regionalism to Multilateralism? 311
Part V Input Trade, Services, and Growth
Chapter 15 Trade, Growth, and Inclusion 321
15.1 International Trade and Growth 322
15.1.1 Trade as an Engine of Growth 322
15.1.2 Trade as Vent for Surplus 323
15.1.3 Trade, Redistribution, and Growth 323
15.1.4 Trade, Variety, and Growth 324
15.1.5 Import-led Growth (ILG) 325
15.1.6 Country Experiences 325
15.2 Growth, TOT, and Welfare 327
15.2.1 Secular Deterioration in TOT for a Primary Good Exporter 328
15.2.2 Immiserizing Growth 330
15.3 Trade, Growth, and Inclusion 332
Appendix A15 335
- Diversification of the Export Basket 335
- Composition of the Export Basket: Manufacturing and High-Technology Exports 335
Chapter 16 Foreign Capital Inflow, Multinationals, and Migration 342
16.1 Factor Flows and the Goods Price Equalization (GPE) Theorem 343
16.2 Foreign Capital Inflow: Causes and Consequences 345
16.2.1 Growth, Welfare, and Distributional Consequences of Foreign
Capital Inflow 346
16.2.2 Foreign Capital Inflow and Aggregate Employment in the Host Country 351
16.3 Foreign Direct Investment and Multinational Corporations (MNCs) 352
16.3.1 Tariff Jumping Theory 354
16.3.2 Fragmentation and Economies of Scale 357
16.3.3 Fragmentation, Vertical Specialization and Global Value Chain 358
16.3.4 Government Policies in Developing Countries: Export Processing
Zones (EPZs) 361
16.4 Asymmetry between Labour Migration and Capital Flow 361
Chapter 17 Services Trade 367
17.1 Conceptual Issues 367
17.2 Services Trade: Types and Trends 368
17.3 Determinants of Services Trade 372
17.4 Services Trade, Welfare Gains, and Growth 375
17.4.1 Welfare Gains and Income Distribution 375
17.4.2 Services Export-Led Growth 376
Part VI Standards, Regulations, and Multilateral
Trade Agreements
Chapter 18 Product Standards, Regulations, and Trade 385
18.1 Quality Standards, Trade, and Employment 386
18.2 Labour Standards and Trade Sanctions 388
18.3 Environmental Standards, Trade, and FDI 392
18.3.1 Standards, Comparative Advantage, and Unfair Trade 392
18.3.2 Trade, Income Gains, and Demand for Higher Standards 394
18.3.3 Capital Flight, Pollution Havens, and Migration of Dirty Industries 395
Chapter 19 World Trade Organization and Trade Agreements 400
19.1 Structure and Functions of the WTO 400
19.1.1 Structure of the WTO 400
19.1.2 Functions of the WTO 401
19.2 Decision Making 402
19.3 WTO Rules and Principles of Trade Policy 403
19.4 WTO Agreements 405
19.4.1 Multilateral Agreements on Trade in Goods 405
19.4.2 Agreement on Trade Related Intellectual Property Rights (TRIPS) 409
19.4.3 Plurilateral Trade Agreements: Agreement on Government
Procurement (GPA) 413
Appendix A19 414
- Tariff Reductions and Market Access for Non-agricultural Products (NAMA) 414
Part VII Theory of Balance of Payments and Open
Economy Macroeconomics
Chapter 20 Balance of Payments and National Income Accounting 423
20.1 Classification of Transactions and Sub-accounts 423
20.2 BOP Accounting: An Example 426
20.3 Autonomous and Accommodating Transactions and BOP Equilibrium 428
20.4 Basic Identities in BOP and National Income Accounting 429
Chapter 21 National Income and Current Account Balance:
The Income Approach 437
21.1 Effective Demand, National Income, and Trade Balance: Income Approach 438
21.2 Expenditure and Foreign Trade Multipliers Without the International
Transmission Effect 440
21.2.1 Foreign Trade Multipliers 441
21.2.2 Expenditure Multipliers 444
21.3 International Transmission Mechanism 446
21.4 Transfers and Trade Balance: The Transfer Problem 449
21.4.1 The Classical Case 451
21.4.2 Under-Effected Transfer in a Keynesian World 453
Appendix A21 455
- Foreign Trade and Expenditure Multipliers without Transmission Mechanism 455
- Expenditure Multiplier with Transmission Mechanism 455
- Transfer, TOT, and Real Income of the Donor 456
- Under-Effected Transfer in an Effective-Demand Model 457
Chapter 22 International Currency Systems and Exchange Rate Regimes 463
22.1 The International Monetary System 464
22.1.1 Gold Standard 464
22.1.2 Bretton Woods and Thereafter 464
22.1.3 Different Currency and Exchange Rate Regimes in the Post-Bretton
Woods Era 466
22.2 Exchange Rate under a Clean Float 469
22.3 Interventions in the Foreign Exchange Market 474
22.3.1 A Dirty or Managed Float 474
22.3.2 Over-Valued Pegged Exchange Rate Regime 476
22.3.3 Exchange Control and Black Market for Foreign Exchange 478
22.3.4 BOP Crisis under Over-Valued Pegged Exchange Rate Regime 483
22.3.5 Target Zone 485
22.4 India’s BOP Crisis and Its Exchange Rate Policies 486
Appendix A22 488
- Existence, Uniqueness, and Stability in the Foreign Exchange Market under Clean Float 488
- The Optimal Under-Invoicing of Exports 489
- Allocation of Expenditure and Black Market Dollar Demand 490
Chapter 23 BOP Adjustment Policies in a Pegged Exchange Rate Regime 497
23.1 Two Types of Adjustment Policies 498
23.1.1 Expenditure Reducing Policies: Absorption Approach 498
23.1.2 Expenditure Switching Policy: Elasticity Approach 500
23.2 Synthesis Approach 502
23.2.1 Expenditure Reducing Policy 504
23.2.2 Expenditure Switching Policies 505
23.3 Internal and External Balance and the Policy Conflict 509
23.4 Advanced Topics on Devaluation 512
23.4.1 The Laursen–Metzler Effect 512
23.4.2 Non-traded Good, Real Exchange Rate, and Devaluation 513
Appendix A23 515
- Elasticity Approach 515
- Synthesis Approach: Slopes of YiYi and TBi = 0 Curves 516
- III. Devaluation and Trade Balance 517
- Tariff, National Income, and Trade Balance 517
- Devaluation and the Real Exchange Rate 518
Chapter 24 Money, Price, and Exchange Rate 523
24.1 The Monetarist Approach to BOP 524
24.1.1 Hume’s Price-Specie Flow Mechanism 524
24.1.2 Building Blocks of the Monetarist Model 525
24.1.3 Monetary Adjustment under Fixed Exchange Rate 527
24.1.4 Monetary Adjustment under Flexible Exchange Rate 533
24.2 Monetary Adjustment under Keynesian Assumption 535
24.2.1 Mundell’s Income-Specie Flow Mechanism 535
24.2.2 Capital Mobility and Stabilization Policies under Pegged
Exchange Rate 537
24.2.3 Capital Mobility and Stabilization Policies under Clean Float 542
24.3 Asset Market, Portfolio Choice, and the Exchange Rate 544
24.4 Purchasing Power Parity and the Exchange Rate 551
24.4.1 Wage-Price Flexibility and the Long-Run Exchange Rate 551
24.4.2 The Purchasing Power Parity Puzzle 552
24.4.3 Exchange Rate Pass-Through 554
Appendix A24 556
- Price Changes in Monetarist Model under Flexible Exchange Rate 556
- Mundell–Fleming Model under Flexible Exchange Rate: Shift of the
IS Curve and the B = 0 Locus 557
Chapter 25 Financial Crises in the Developing World 563
25.1 Latin American Debt Crisis of the 1980s 564
25.1.1 Austerity measures and management of the Debt Crisis 570
25.2 Financial Crisis in Asia in late 1990s 574
25.2.1 Nature, Dimension and Cause of the crisis 574
25.2.2 Measures to manage the crisis 577
25.3 Current Scenario: Another Debt Crisis on the card? 577
Chapter 26 Currency Regimes Revisited 585
26.1 Policy Targets and Choice of Exchange Rate Regime 585
26.1.1 Targeting BOP Equilibrium 585
26.1.2 Insulating the Domestic Economy: Inflation and Output 586
26.1.3 Uncertainty and Destabilizing Speculative Activity 587
26.1.4 Internal Balance and Effectiveness of Domestic Stabilizing Policies 588
26.1.5 Autonomy of Domestic Monetary Policy 589
26.2 Capital Flows, Money Supply, and Exchange Rate: The Impossible Trinity 591
26.3 Optimum Currency Area 593
Glossary of International Agencies 599
Index 603
About the Author 609