International Economics Sixth edition
Robert M. Dunn, Jr.
George Washington University
John H. Mutti
Grinnell College
by Routledge
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© 2004 Robert M. Dunn & John H. Mutti
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Contents
List of figures xiii
List of tables xvii
List of boxes xix
List of exhibits xxi
Preface xxiii
1 Introduction 1
Learning objectives 1
Why international economics is a separate field 7 The organization of this volume 8
Information about international economics 10 Summary of key concepts 12
Questions for study and review 13 Suggested further reading 13
PART ONE
International trade and trade policy 15
2 Patterns of trade and the gains from trade: insights from classical theory 17 Learning objectives 17
Absolute advantage 17 Comparative advantage 19 Additional tools of analysis 22
International trade with constant costs 27 International trade with increasing costs 32 The effect of trade 35
The division of the gains from trade 36 Comparative advantage with many goods 41 Summary of key concepts 44
Questions for study and review 45 Suggested further reading 47
Appendix: the role of money prices 47 Notes 49
3 Trade between dissimilar countries: insights from the factor
proportions theory 51
Learning objectives 51
Factor proportions as a determinant of trade 52 Implications of the factor proportions theory 55 Empirical verification in a world with many goods 68 Summary of key concepts 70
Questions for study and review 71 Suggested further reading 72
Appendix: a more formal presentation of the Heckscher–Ohlin model with two countries, two commodities, and two factors 73
Notes 80
4 Trade between similar countries: implications of decreasing costs and
imperfect competition 82
Learning objectives 82 External economies of scale 84 The product cycle 89
Preference similarities and intra-industry trade 91 Economies of scale and monopolistic competition 94 Trade with other forms of imperfect competition 97 Cartels 101
Further aspects of trade with imperfect competition 103 Summary of key concepts 104
Questions for study and review 105 Suggested further reading 106
Appendix: derivation of a reaction curve 106 Notes 107
5 The theory of protection: tariffs and other barriers to trade 109 Learning objectives 109
Administrative issues in imposing tariffs 110 Tariffs in a partial equilibrium framework 111 Quotas and other nontariff trade barriers 116 Production subsidies 122
Tariffs in the large-country case 123 General equilibrium analysis 124 The effective rate of protection 127 Export subsidies 132
Export tariffs 134
Summary of key concepts 135 Questions for study and review 137 Suggested further reading 138 Notes 138
6 Arguments for protection and the political economy of trade policy 140 Learning objectives 140
Arguments for restricting imports 141 Dumping 154
Secondary arguments for protectionism 158 The political economy of trade policy 161 Summary of key concepts 163
Questions for study and review 164 Suggested further reading 165 Notes 165
7 Regional blocs: preferential trade liberalization 167 Learning objectives 167
Alternative forms of regional liberalization 168 Efficiency gains and losses: the general case 168 Efficiency gains and losses with economies of scale 171 Dynamic effects and other sources of gain 172 The European Union 173
NAFTA 177
Other regional groups 181 Summary of key concepts 181 Questions for study and review 182 Suggested further reading 182 Notes 182
8 Commercial policy: history and recent controversies 184 Learning objectives 184
British leadership in commercial policy 184
A US initiative: the Reciprocal Trade Agreements program 186 The shift to multilateralism under the GATT 187
The Kennedy Round 189 The Tokyo Round 190 The Uruguay Round 191 Intellectual property 197
The rocky road to further multilateral agreements 199 The Doha Development Agenda 200
Expanding the World Trade Organization 200 Summary of key concepts 202
Questions for study and review 202 Suggested further reading 203 Notes 203
9 International mobility of labor and capital 205
Learning objectives 205
Arbitrage in labor and capital markets 206 Additional issues raised by labor mobility 210 Multinational corporations 212
Summary of key concepts 220 Questions for study and review 221 Suggested further reading 221 Notes 221
10 Trade and growth 223
Learning objectives 223
The effects of economic growth on trade 224 Trade policies in developing countries 231 Primary-product exporters 233
Deteriorating terms of trade 235
Alternative trade policies for developing countries 236 Summary of key concepts 239
Questions for study and review 240 Suggested further reading 241 Notes 241
11 Issues of international public economics 242
Learning objectives 242 Environmental externalities 244 The tragedy of the commons 249 Taxation in an open economy 251 Summary of key concepts 259 Questions for study and review 260 Suggested further reading 261 Notes 261
PART TWO
International finance and open economy macroeconomics 263
12 Balance-of-payments accounting 267
Learning objectives 267
Distinguishing debits and credits in the accounts 268 Analogy to a family’s cash-flow accounts 271 Calculation of errors and omissions 273
Organizing the accounts for a country with a fixed exchange rate 274 Balance-of-payments accounting with flexible exchange rates 280 The international investment position table 281
Trade account imbalances through stages of development 285 Intertemporal trade 288
Summary of key concepts 290
Questions for study and review 291 Suggested further reading 291 Notes 292
13 Markets for foreign exchange 293
Learning objectives 293
Supply and demand for foreign exchange 294 Exchange market intervention regimes 295 Exchange market institutions 300
Alternative definitions of exchange rates 302
Alternative views of equilibrium nominal exchange rates 307 Summary of key concepts 308
Questions for study and review 309 Suggested further reading 309 Notes 310
14 International derivatives: foreign exchange forwards, futures, and options 312 Learning objectives 312
Forward exchange markets 312 Foreign exchange options 321 Other international derivatives 325 Summary of key concepts 326 Questions for study and review 327 Suggested further reading 328 Notes 328
15 Alternative models of balance-of-payments or exchange-rate determination 329 Learning objectives 329
Why the balance of payments (or the exchange rate) matters 331
Alternative views of balance-of-payments (or exchange rate) determination 334 Exchange rates and the balance of payments: theory versus reality 348
Summary of key concepts 349 Questions for study and review 350 Suggested further reading 350 Notes 351
16 Payments adjustment with fixed exchange rates 352
Learning objectives 352
David Hume’s specie flow mechanism 352
The Bretton Woods adjustment mechanism: Fiscal and monetary policies 364 The policy assignment model: one last hope for fixed exchange rates 369 Macroeconomic policy coordination 373
Summary of key concepts 374 Questions for study and review 375
Suggested further reading 375 Notes 376
17 Balance-of-payments adjustment through exchange rate changes 377 Learning objectives 377
A return to supply and demand 377
Requirements for a successful devaluation 379 Effects of the exchange rate on the capital account 391
Capital losses and other undesirable effects of a devaluation 392 A brief consideration of revaluations 396
The Meade cases again 396 Summary of key concepts 399 Questions for study and review 399 Suggested further reading 400 Notes 401
18 Open economy macroeconomics with fixed exchange rates 403 Learning objectives 403
The Keynesian model in a closed economy 404 An open economy 410
The international transmission of business cycles 415 Foreign repercussions 416
Some qualifications 417
Capital flows, monetary policy, and fiscal policy 418 Domestic macroeconomic impacts of foreign shocks 425 Domestic impacts of monetary policy shifts abroad 426 Conclusion 427
Summary of key concepts 427 Questions for study and review 428 Suggested further reading 428 Notes 429
19 The theory of flexible exchange rates 430
Learning objectives 430
Clean versus managed floating exchange rates 431 The stability of the exchange market 432
Impacts of flexible exchange rates on international transactions 433 Open economy macroeconomics with a floating exchange rate 434 The domestic impacts of foreign monetary and fiscal policy shifts with
flexible exchange rates 447
Mercantilism and flexible exchange rates 449
Purchasing power parity and flexible exchange rates 451 Summary of key concepts 452
Questions for study and review 453
Suggested further reading 453 Notes 454
20 The international monetary system: history and current controversies 455 Learning objectives 455
Events before 1973 456 The Eurocurrency market 459 Floating exchange rates 465
Alternatives to flexible exchange rates 471 The European Monetary Union 473 Changes in the role of the SDR 478
Two decades of developing country debt crises 478 The new financial architecture 486
Sovereign bankruptcy for heavily indebted crisis countries 488
Prospective issues in international economic policy in the next decade 489 Summary of key concepts 491
Questions for study and review 492 Suggested further reading 493 Notes 494
Glossary 496
Index 510
Figures
1.1 Trade goods as a share of GDP in the United Kingdom 1850–1990 3 1.2 The role of foreign direct investment in the world economy (FDI stock
as a percentage of GDP) 4
2.1 Germany’s production-possibility curve 23
2.2 Consumer indifference curves 25
2.3 Equilibrium in a closed economy 28
2.4 Equilibrium with foreign trade 29
2.5 France: equilibrium before and after trade 31
2.6 Increasing costs: equilibrium in a closed economy 33
2.7 Equilibrium trade in a two-country case (increasing costs) 34
2.8 Equilibrium price determination 36
2.9 Derivation of Country A’s offer curve 38
2.10 Offer curves for Countries A and B with the equilibrium barter ratio and
trade volumes 39
2.11 The elasticity of Country A’s offer curve 40
2.12 An empirical demonstration of the relationship between relative labor
productivities and trade 43
3.1 Production with different factor intensities 53
3.2 Patterns of trade given by the factor proportions theory 55
3.3 Growth in the labour force 58
3.4 Isoquants for wheat production 73
3.5 Comparison of factor intensity in cheese and wheat 74
3.6 Box diagrams for Country A. Production-possibility curve for Country A 76 3.7 Influence of factor endowments on the production-possibility curves 78
3.8 Factor price equalization 79
3.9 The Rybczynski theorem 80
4.1 Equilibrium in a closed economy with decreasing opportunity cost 86 4.2 Equilibrium with foreign trade and decreasing opportunity cost 87 4.3 The advantage of a long-established industry where scale economies are
important 88
4.4 The product cycle 90
4.5 Production under monopolistic competition 95
4.6 The impact of free trade on prices: increased competitiveness despite
economies of scale 97
4.7 Reaction curves and duopoly trade 99
4.8 Nominal and real prices of crude petroleum, 1973–2001 (dollars per barrel) 102
4.9 A possible decline in welfare from trade with domestic monopoly 103 4.10 Isoprofit curves and the derivation of a reaction curve 106 5.1 The effects of a tariff: partial equilibrium, small-country case 112
5.2 The effect of an import quota 118
5.3 The effect of a subsidy: partial equilibrium, small-country case 122 5.4 The effect of a tariff: partial equilibrium, large-country case 124 5.5 The effects of a tariff: general equilibrium, small-country case 125 5.6 The effects of a tariff: general equilibrium, large-country case 127
5.7 The effect of an export subsidy 133
5.8 The effect of an export tax 135
6.1 An optimum tariff in a partial equilibrium model 145
6.2 An optimum tariff with offer curves 147
6.3 Subsidization of an oligopoly producer 151
6.4 Dumping can increase profits – an example of price discrimination 155
6.5 Use of a tariff to correct a domestic distortion 160
7.1 Effects of a customs union between France and Germany 169
9.1 Effects of US capital flow to Canada 208
10.1 Neutral growth in a small country 225
10.2 Effect of demand conditions on the volume of trade 226
10.3 Effect of growth on the terms of trade 230
10.4 The case of immiserizing growth 231
11.1 Marginal benefits and marginal costs of pollution abatement 244
11.2 The pollution-income relationship 245
11.3 Tax collections and the terms of trade 253
11.4 A tax on capital in a small country 255
13.1 Supply and demand in the market for foreign exchange 295 13.2 Nominal effective exchange rate for the dollar (1970–2003) 304 14.1 The determination of the forward discount on sterling 318
14.2 Profits and losses from a put option on sterling 323
14.3 Profits and losses from a call option on sterling 324
16.1 Equilibrium in the savings/investment relationship 358
16.2 Equilibrium in the market for money 359
16.3 Equilibrium in the real and monetary sectors 360
16.4 Impacts of fiscal expansion 360
16.5 Impacts of an expansion of the money supply 361
16.6 Equilibrium in the balance of payments 362
16.7 Domestic and international equilibrium 363
16.8 Domestic equilibrium with a balance-of-payments deficit 363
16.9 Balance-of-payments adjustment under specie flow 364
16.10 Payments adjustment through monetary policy 365
16.11 Payments adjustment through a tightening of fiscal policy 366 16.12 Comparing the effects of fiscal and monetary policies 366 16.13 Adjustment of a payments deficit through expansionary fiscal policy 367
16.14 Internal and external balance 370
16.15 Balance-of-payments adjustment through policy assignment 371 16.16 Balance-of-payments adjustments through policy assignment in the
deficit recession case 372
17.1 The market for foreign exchange with a balance-of-payments deficit 378
17.2 The market for foreign exchange when the local currency is devalued 379
17.3 The Marshall–Lerner case 380
17.4 The Marshall–Lerner case where a devaluations succeeds 381 17.5 The Marshall–Lerner case where a devaluation fails 381
17.6 The small-country case 383
17.7 The larger-country case 384
17.8 The effects of a successful devaluation 389
17.9 The Swann diagram 398
18.1 Equilibrium in a closed economy 406
18.2 The multiplier in a closed economy 409
18.3 The propensity to import and the marginal propensity to import 412
18.4 The trade balance as income rises 412
18.5 Domestic savings, investment, and the S– 1line 412
18.6 Savings minus investment and the trade balance with both at equilibrium 413
18.7 The impact of an increase in domestic investment 413
18.8 The impact of a decline in exports 415
18.9 Impacts of a decline in exports and an increase in domestic investment 416 18.10 Effects of an expansionary monetary policy with fixed exchange rates 420 18.11 Effects of fiscal policy expansion with perfect capital mobility 423 18.12 Effects of fiscal policy expansion when BP is flatter than LM 424 18.13 Effects of fiscal policy expansion when BP is steeper than LM 424 19.1 Effects of an expansionary monetary policy with fixed exchange rates 439 19.2 Effects of an expansionary monetary policy with a floating exchange rate 440 19.3 Exchange rate overshooting after a monetary expansion 441 19.4 Effects of fiscal policy expansion with perfect capital mobility 445 19.5 Effects of fiscal policy expansion when BP is flatter than LM 445 19.6 Effects of fiscal policy expansion when BP is steeper than LM 446
Tables
1.1 Exports plus imports of goods and services as a share of GNP2
1.2 International capital flows and trade 6
2.1 An example of absolute advantage 18
2.2 The gain on output from trade with an absolute advantage 19
2.3 An example of comparative advantage 20
2.4 The gain in output from trade with comparative advantage 20
2.5 Domestic exchange ratios in Portugal and England 21
2.6 German production of wheat and steel 23
2.7 German production and consumption 30
2.8 The gain from trade 32
3.1 Differences in factor endowments by country 56
3.2 Differences in factor input requirements by industry 60 4.1 Average intra-industry trade in manufactured products 93
5.1 Employment in the steel industry 115
5.2 The US market for steel mill products 116
5.3 The Japanese price gap 121
5.4 Tariff escalation in the textile and leather sector 128
5.5 The economics of Indonesian bicycle assembly 131
6.1 Dumping cases in the United States and European Community, 1979–89 157
7.1 European Union trade, 1988 and 1994 175
7.2 Projected gains from completion of the internal market 176
7.3 EU operational budgetary balance, 2000 177
7.4 US trade and employment by SIC industries 180
8.1 Average tariff rates in selected economies 191
8.2 Tariff bindings and applied tariffs 193
8.3 Cases brought for WTO dispute resolution in 2002 196
9.1 The role of immigrants as a share of the population or work force 206
9.2 The top 25 global corporations 214
10.1 Leading Malaysian exports, 1965 and 1995 228
10.2 Trade of developing countries 232
10.3 Concentration of merchandise exports for least developed countries 234
11.1 Tax revenue as a percentage of GDP, 2000 251
11.2 Corporate income tax rates on US manufacturing affiliates 257 11.3 Taxes on corporate income as a percentage of GDP, 1965–2000 257 15.1 Impact on the domestic money supply of a balance-of-payments deficit 332
15.2 The sterilization of effects of a payments deficit 332
19.1 Strength of fiscal policy in affecting GNP under alternative exchange
rate regimes 446
19.2 Summary of open economy macroeconomics conclusions 451
20.1 The creation of a Eurodollar deposit 460
20.2 A Eurodollar redeposit 461
20.3 Exchange rate regimes of IMF members as of 31 December 2001 466
Boxes
2.1 Offer curves 38
3.1 How different are factor endowments? 56
3.2 How different are factor intensities? 59
3.3 The widening income gap: is trade to blame? 63
3.4 An intermediate case: a specific factors model 67
4.1 Intra-industry trade: how general is it? 92
4.2 Further reasons for economies of scale: the learning curve 98
5.1 How do economists measure welfare changes? 114
5.2 World steel trade – a case of permanent intervention? 115 5.3 Super sleuths: assessing the protectiveness of Japanese NTBS 121
5.4 Tariff escalation and other complications 128
5.5 Effective rates of protection and the Indonesian bicycle boom 131
5.6 EU sugar subsidies and export displacement 134
6.1 Optimum tariffs: did Britain give a gift to the world? 146 6.2 Another view of the optimum tariff: offer curve analysis 147
6.3 Semiconductors and strategic trade policy 153
7.1 Fortress Europe? 175
7.2 A NAFTA scorecard 179
8.1 Tariff bindings and applied tariffs 193
8.2 WTO dispute resolution and the banana war 195
8.3 Pharmaceutical flip flops and the TRIPS agreement 197
8.4 Who’s afraid of China? 201
9.1 Mergers, acquisitions and takeovers: hold the phone 216
10.1 Malaysia’s changing pattern of trade 227
10.2 Sustaining growth and economic miracles 228
10.3 The terms-of-trade effects of growth: offer curve analysis 230
10.4 An overview of developing-country trade 232
10.5 Measuring economic development: the NIKE index 239
11.1 Trade in toxic waste 246
11.2 Wealth of the Irish 258
12.1 Gold as a reserve asset 270
13.1 The Bic Mac index 306
15.1 Modeling the monetarist view of the balance of payments 345
15.2 Printing the budget deficit as a route to inflation 346
16.1 The IS/LM/BP graph as a route to understanding balance-of-payments
adjustment 357
16.2 IS/LM/BP analysis of adjustment under the Bretton Woods system 365 16.3 The IS/LM/BP graph for the policy assignment model 372
17.1 IS/LM/BP analysis of a devaluation 388
17.2 The “success” of Mexico’s 1994–6 adjustment program 393 18.1 Japan’s chronic current account surplus: savings minus investment 414 18.2 IS/LM/BP analysis of monetary policy with fixed exchange rates 420 18.3 IS/LM/BP graphs for fiscal policy under fixed exchange rates 423 18.4 Impacts of an expansion abroad with extensive capital market integration 425 18.5 Macroeconomics expansion abroad with little capital market integration 426
18.6 Impacts on Canada of a tighter US monetary policy 427
19.1 Canadian monetary policy in mid-1999 438
19.2 IS/LM/BP analysis of monetary policy under floating exchange rates 439 19.3 IS/LM/BP analysis of fiscal policy with floating exchange rates 444 20.1 Argentina: snatching defeat from the jaws of victory 485
Exhibits
12.1 US balance of payments summary 276
12.2 UK balance of payments in the IMF format 279
12.3 US international transactions 1993–2001 282
12.4 International investment position of the United States 1994–2001 284
12.5 UK international investment position 285
13.1 Exchange rates 303
13.2 Real effective exchange rate indices 305
14.1 Exchange rates: spot and forward 313
14.2 Exchange rate futures 314
14.3 Foreign exchange options 322
19.1 Why is the Fed suddenly so important? 436
19.2 Save an auto worker’s job, put another American out of work 449
20.1 One currency, but not one economy 475
20.2 $40 billion for Wall Street 481
Preface
This book is an introduction to international economics, intended for students who are taking their first course in the subject. The level of exposition requires as a background no more than a standard introductory course in the principles of economics. Those who have had intermediate micro and macro theory will find that background useful, but where the tools of intermediate theory are necessary in this book they are taught within the text.
The primary purpose of this book is to present a clear, straightforward, and current account of the main topics in international economics. We have tried to keep the student’s perspective constantly in mind and to make the explanations both intuitively appealing and rigorous.
Reactions from users of the first five editions – both students and faculty – have been encouraging. The passage of time, however, erodes the usefulness of a book in a constantly evolving area such as international economics, and we have consequently prepared a sixth edition.
The book covers the standard topics in international economics. Each of the two main parts, International Trade and Trade Policy (Part One) and International Finance and Open Economy Macroeconomics (Part Two), develops the theory first, and then applies it to recent policy issues and historical episodes. This approach reflects our belief that economic theory should be what J.R. Hicks called “a handmaiden to economic policy.”
Whenever possible, we use economic theory to explain and interpret experience. That is why this book contains more discussion of historical episodes than do most other inter- national economics textbooks. The historical experience is used as the basis for showing how the theoretical analysis works. We have found that students generally appreciate this approach.
This is the second edition of this book with John Mutti as co-author and with Routledge as the publisher. John Mutti replaced James Ingram, who is now Emeritus at the University of North Carolina, Chapel Hill, who authored the first two editions alone, and who co- authored the next two with Robert Dunn. Both authors of this edition would like to express their great appreciation for the help which Jim Ingram provided, including his permission to carry over some material which he wrote for previous editions. It would have been impossible to continue this project without Jim’s help, and his spirit and many of his concepts remain central to the book.
Changes in the coverage of international trade
In the first half of the book some important changes in the presentation of conceptual material should be noted, in addition to the inclusion of several more recent developments
in commercial policy and multilateral trade negotiations. Chapter 3 pays greater attention to common extensions of the Heckscher–Ohlin framework for analyzing patterns of trade.
It gives a more systematic presentation of the effects on patterns of production from growth in factor endowments, and it addresses the conditions for factor price equalization more formally. Chapter 5 extends the analysis of tariffs to consider tariff escalation and tariff-rate quotas, and it assesses US safeguard protection in the steel industry and EU export subsidies for sugar.
Following the treatment of arguments for protection in Chapter 6, the order of the next three chapters changes. Chapter 7 now presents the analysis of regional trade blocs. The decision of the European Union in 2002 to offer membership to ten additional countries raises several important issues of governance and economic policy that are discussed there.
With respect to the North American Free Trade Agreement, because a longer time frame is available to observe the consequences of its creation, the scope of adjustments faced by US industries is put in better perspective. Chapter 8 now reviews world commercial policy.
It especially notes significant issues that arose in initiating the Doha Development Round of multilateral trade talks in 2001, and it notes others that will be addressed in the nego- tiations. Chapter 9 now covers issues of capital mobility, immigration, and multinational corporations.
Chapter 10 on trade and growth pays particular attention to the position of the least developed countries. Chapter 11, which discusses issues of public economics, notes the advance of the Kyoto Protocol to the Climate Change Convention, in spite of US opposition, and the success of the Irish in international tax competition.
Changes in the discussion of international finance and open economy macroeconomics
First, all graphs and tables have been updated to what was available in early 2003. Within Chapter 12, the coverage of intertemporal trade has been moved forward from an appendix into the main text. The discussion of what assets constitute foreign exchange reserves has been extended, and the discussion of the IMF format for the balance of payments accounts made more thorough. In Chapter 13 the discussion of various means of evading exchange controls has been made far more complete, and now includes a discussion of hawala banking.
The fact that all of these techniques are relevant for criminal or terrorist groups which wish to move money in undetected ways, makes this topic of greater importance than it was before September 11, 2001.
In Chapter 14 the discussion of foreign exchange options, which some readers found to be confusing, has been rewritten and extended, with an emphasis on intrinsic and time values in determining premiums on foreign exchanged puts and calls. In Chapter 16, the treatment of currency boards has been extended, with an emphasis on why Argentina’s institution failed. Dollarization is also covered more thoroughly. Chapter 17 now includes far more on the disastrous effects of currency mismatches when a country devalues. If banks and other firms in a country have large liabilities denominated in foreign exchange without offsetting foreign exchange assets of other forms of cover, a devaluation can produce a wave of insolvencies and create something approaching a depression, as Argentina discovered very unhappily. The diagram developed by Trevor Swann to analyze a devaluation has been added at the end of this chapter, with the accompanying discussion emphasizing how both the exchange rate and domestic macroeconomic policies must be adjusted to produce both payments equilibrium and an acceptable level of GDP. In Chapter 19, the “impossibility
trinity” of “trilemma,” which is associated with Robert Mundell is introduced. If a country wishes to have a stable price level through a fixed exchange rate, an independent national monetary policy, and free mobility for international capital flows, it can have any two of the three, but not the third. In theory a fixed rate and independent monetary policy are possible through rigid exchange controls, but if one believes that such controls are not likely to succeed, the options decline to two. A country can have an independent monetary policy at the cost of living with a floating exchange rate and some price instability, or it can have a fixed exchange rate and stable prices if it gives up all monetary policy independence, perhaps through a currency board.
The largest changes in the second half of the book are in what were the last two chapters.
Chapter 20 in the fifth edition has been combined with Chapter 21 to produce a new Chapter 20. The discussion of the history of the international financial system before 1973 had to be considerably reduced in length to stay within the planned length for the book. The treatment of the eurodollar, or eurocurrency, market has, however, been fully retained.
The section on the history of floating exchange rates has, of course, been updated to early 2003. The European Monetary Union, which is now in full operation, is covered far more thoroughly than was the case in the previous edition. The main change in this chapter, however, is in the discussion of developing country debt crises. Less emphasis is put on the Latin American crisis of the 1980s, and far more is put on the events in Asia during 1997–9.
Recent research on such crises, including the issue of crisis contagion, is covered. Late in the chapter, the so-called New Financial Architecture is introduced, with the Basel I and proposed Basel II accords. Sovereign bankruptcy for heavily indebted developing countries, as proposed by Anne Krueger at the IMF, is also introduced. The chapter closes with a list of likely international policy issues during the next decade. Some of those issues are carried over from the fifth edition, but a number of them are new. Finally, the Glossary has been updated and new terms have been added.
Instructors’ options for the use of this book
Those instructors using this book for a full-year course can cover the entire volume and assign a supplementary book of readings. Those who choose to use this book for a one- semester (or one-quarter) course will probably want to eliminate some chapters. The core chapters are 2 through 7, and 12 through 19. For a one-semester chapter emphasizing trade, Chapters 1 through 11 provide a compact, self-contained, unit. For a one-term course empha- sizing international finance and open economy macroeconomics, Chapter 1 and Chapters 12 through 20 are the appropriate choice.
In writing this book, we have accumulated a number of obligations: to our students and colleagues, and to international economists too numerous to mention whose work is drawn upon in preparing a textbook such as this. We also gratefully acknowledge the economics editors and outside reviewers both at Wiley and at Routledge: for the second edition, Maurice B. Ballabon of Baruch College, Elias Dinopoulos of the University of California at Davis, Geoffrey Jehle of Vassar College, Marc Lieberman of Vassar College, Don Shilling of the University of Missouri, and Parth Sen of the University of Illinois at Champaign/
Urbana; for the third edition, Robert Gillispie of the University of Illinois at Champaign/
Urbana, Henry Goldstein of the University of Oregon, Gerald Lage of Oklahoma State University, Robert Murphy of Boston College, William Phillips of the University of South Carolina, and Henry Thompson of Auburn University; for the fourth edition, Ron Schramm of Columbia University, John Carlson of Purdue University, Wayne Grove of the College
of William and Mary, Oded Galor of Brown University, Chong Kip of Georgia State University, Chi-Chur Chao of Oregon State University, Zelgian Suster of the University of New Haven, Mark Shupack of Brown University, Paolo Pesenti of Princeton University, and Francis Lees of St. John’s University; for the fifth edition, Keith Bain of the University of East London, Christopher Dent of the University of Lincoln and Humberside, Miroslav Jovanovic of the Economics Commission for Europe, United Nations, Jean-Claude Léon of the Catholic University of America, Richard Schatz of the Nanjing University, China, and Houston Stokes at the University of Illinois at Chicago. We would like to thank Professor Ronald Shone of Stirling University in the United Kingdom, and Walter Vanthielen of Limburg University in Belgium for their help in reviewing drafts of this edition.
Finally, we thank users of the first five editions of the book who made useful comments and suggestions.
Robert M. Dunn, Jr.
George Washington University Washington, DC John H. Mutti Grinnell College Grinnell, Iowa July 2003
1 Introduction
Although world trade shrank in 2001 as a result of economic recession in the largest economies, a general characteristic of the entire post-World War II period has been a remarkable expansion of trade. In fact, global trade and investment has grown much more rapidly than output. The process of globalization has left ever fewer countries isolated or unaffected by worldwide economic conditions outside their own borders. While some protest the destruction of traditional ways of life and the challenge to national sovereignty caused by greater trade and investment, others note that trade and investment have been engines of growth that allow rising standards of living.
What explains this expansion of global commerce? Tariffshave fallen substantially. Latin American countries that in the past avoided multilateral trade organizations such as the General Agreement on Tariffs and Trade(GATT) have become members, a signal of their commitment to a different approach to trade. Former communist states and many countries in the developing world whose previous goal was to be self-sufficient have become active traders. Transportation and communication costs have continued to fall, making it less expensive to reach foreign markets. Consumer incomes have risen, and correspondingly, their demand for variety and foreign goods has risen. Rapid technical change generates new products whose innovators aggressively seek new markets. Multinational corporations, rather than produce complete products in a single plant or country, have located stages of the production process where the inputs necessary at that stage are cheaper. Many host countries
Learning objectives
By the end of this chapter you should be able to understand:
• the extent to which international trade in goods and services and international capital flows have increased more rapidly than output over the past several decades for the world as a whole;
• why barriers to the free flow of goods, labor, and capital are central to the study of international trade;
• why separate currencies and national business cycles are central to the study of international finance;
• how information about international economic events is available from a variety of sources, including the Internet.
now seek out rather than penalize such investment. These are just some of the reasons that the globalization process shows no sign of reaching a plateau.
Yet, this process is not proceeding at the same pace everywhere. The figures in Table 1.1 suggest why this trend has been particularly newsworthy in the United States. Trade in goods and services as a share of national output more than doubled in the past 30 years, from 11 percent in 1970 to 26 percent in 2000. Perhaps the US rate of increase appears large because the country started from a small initial base. In the case of Canada, however, in spite of the fact that the country was much more reliant on trade in 1970, the increase in its trade/output ratio from 43 percent to 86 percent represents an even bigger change in the share of the economy attributable to trade. For most European economies, a similar expansion of trade occurs. Surprisingly, the Japanese figure has changed little. Does this signify an advantage to Japan as being less subject to external shocks, or does it represent a lost opportunity to gain from the type of trade enjoyed by other advanced nations? We hope succeeding chapters provide insights into the various questions raised in this introductory chapter.
Other important trends also appear in these figures. For developing countries such as Korea and Malaysia that have relied upon export-led growthin recent decades, the ratio of trade to national output is higher than for other developing countries, and it has grown over the past 30 years. We might initially puzzle over the figures for Malaysia, which show a trade to output ratio that exceeds 100 percent. The explanation rests on the rapid rise of imports of intermediate goods that are assembled into products for export; while the output term in the denominator depends upon the income generated in the process of assembling goods, the trade term in the numerator includes the value of inputs produced elsewhere, and that has increased even more quickly.
Prior to 1991 India pursued a strategy of import substitution, based on the goal of becoming self-sufficient and avoiding dependence on a few primary exports. The larger the country, the more feasible the goal, and the figures in Table 1.1 suggest that some countries have held trade to a comparatively small share of their economies. Has this turned out to be a strategy that has effectively protected those economies from major swings in economic fortunes, and has it required any sacrifice in how rapidly their standard of living grows?
Table 1.1 Exports plus imports of goods and services as a share of GNP (percentage)
Country 1970 1975 1980 1985 1990 1995 2000
United States 10.8 15.8 20.5 17.1 20.4 23.3 26.0
Canada 42.5 46.8 54.7 54.0 50.8 71.3 85.8
United Kingdom 43.8 52.5 52.0 56.6 50.6 57.1 58.1
Japan 20.3 25.6 27.9 25.0 19.8 16.8 20.1
Germany 43.2 49.5 55.1 63.8 61.6 48.2 67.1
France 31.1 36.9 43.2 46.8 43.6 43.6 55.8
Italy 30.5 39.1 44.1 45.4 39.4 50.0 55.7
Ireland 81.9 91.5 112.6 117.6 109.3 141.6 175.6
Netherlands 91.3 96.4 99.9 112.2 99.6 95.4 129.6
Korea 37.7 62.9 152.7 65.0 59.4 61.9 86.5
Malaysia 90.5 92.6 112.6 104.6 146.9 192.1 229.6
India 8.0 13.5 16.6 14.0 15.7 23.2 —
China — — — 28.8 34.5 39.7 —
Brazil 14.9 18.1 20.2 19.3 15.2 17.2 23.2
Mexico 17.4 16.5 23.7 25.9 40.7 58.1 64.0
Source: Calculated from International Monetary Fund, International Financial Statistics.
Countries such as Mexico have faced major financial crises over this period and have changed policies. These changes were not simply political pronouncements that were easily reversed. Rather, Mexican trade liberalization during the 1980s shows up in a rapid increase in the role of trade from 26 percent in 1985 to 64 percent in 2000. More gradual liberal- ization, as in the case of China, still demonstrates a pattern substantially different from that of India.
These trends are noteworthy, but we should not automatically conclude that this experi- ence represents a major aberration compared to the past. Figure 1.1 shows UK experience over a longer period, tracing out the ratio of imports plus exports of goods to GDP from 1850 to 1990. Current figures do not represent a peak, but rather a return to a degree of openness that existed prior to the devastating effects of depression and war. The pattern for the United States is similar, but the increase in trade since 1970 has been even more marked. The expansion of the post-war period is significant, but the view that in earlier times economies were more sheltered from the outside influence of trade is simply inaccurate.
The composition of trade, however, has changed. At the start of the post-war period, agricultural trade fell and manufactures rose as a share of total trade. Those trends have con- tinued at a slower pace over the past 25 years. A more recent phenomenon has been the expansion of trade in services, such as banking, insurance, telecommunications, trans- portation, tourism, education and health care; they have grown faster than trade in goods.
That change has not had a uniform effect across countries, either. Even within the three largest developed economies, a different picture emerges. For example, between 1985 and 1997 the United States’ net exports of services rose by $74 billion, while its net imports of goods rose by $77 billion. Conversely, over that same period, Japan’s net exports of goods rose by $37 billion while its net imports of services rose by $44 billion. In the case of Germany, net exports of goods rose by $64 billion and net imports of services rose by $34 billion. While all three countries may seem similar because they are net exporters of high- technology products and their producers often compete against each other in international markets, the pattern of trade in goods versus services should serve as a warning against any presumption that industrialized countries as a bloc have identical production patterns and trading interests.
0.419
0.510
0.361
0.233 0.412
0.387 0.489
0.303
0.425 0.440
0.494
0.352 0.418
0.452
0.459 0.465
0.000 0.100 0.200 0.300 0.400 0.500 0.600
1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Year
Ratio (X-M)/GDP
Figure 1.1 Trade in goods as a share of GDP in the United Kingdom 1850–1990.
Source: B.R. Mitchell, International Historical Statistics, Europe 1750–1993, 4th edn, (London, Macmillan Reference Ltd, 1998).
Another major aspect of the globalization process has been the explosion of international investment. Economists refer to one category of this investment as “foreign direct invest- ment.” This label applies when multinational corporations control how assets are used.
Generally it is motivated by longer-run considerations, because such investments cannot be easily reversed in the short run. Figure 1.2 shows that a traditional image of investment by multinational corporations (MNCs) being dominated by a few developed countries is no longer very accurate. Such investments now come from companies headquartered in a variety of developed countries and even some developing countries. Also, they do not flow in one direction only, with a country being only an importer or only an exporter. The United States, for example, is not simply an important source of foreign direct investment in other countries, but also a major recipient of investment by MNCs based in other countries. Some countries appear to discourage such inflows that entail foreign control, as in the case of India, Japan, and Korea, while others, such as Malaysia, appear to encourage such inflows as a way to gain access to technology and marketing networks. Countries such as Brazil and Mexico appear to have changed both their receptiveness and their attractiveness to foreign investors over the past two decades. What explains these variations across countries?
An even larger share of international investment is accounted for by purchases and sales of stocks and bonds and by deposits and loans from financial institutions when one of the parties to the transaction is a foreigner. Often, the time horizon that motivates such investments is quite short and the volatility of such investment flows has given them the
1999
16.4
65.3 5.7
49.8
3.6 7.9 4 1
26.8 27.9
30.9
11.1
1.5 0.2
22.6 5.5
4.7
30.6 13
2.5
0 10 20 30 40 50 60 70
Mexico India Malaysia Korea Germany Japan UK Canada US
China Out
In 1980
21.1 1.8
20.6 3.1
3.6 0.7
4 0.3
11.7 3.1
0 0.1
0.8 0.2
4.7 1.9
15 9 8.1
0 10 20 30 40 50 60 70
Mexico India Malaysia Korea Germany Japan UK Canada US
China Out
In
Figure 1.2 The role of foreign direct investment in the world economy (FDI stock as a percentage of GDP).
Source: United Nations, World Investment Report 2001, Annex Table B.6, pp. 325–55.
pejorative label “hot money.” Financial liberalization has allowed the growth of such flows to accelerate, as national capital markets become integrated into a world market where savers have many more options regarding the assets they acquire. Critics of globalization fault the rapid pace at which financial markets in developing countries have been liberalized, because it has occurred without adequate supervision. Not only have banking systems been adversely affected by rapid increases and decreases in the availability of funds from abroad, but national governments face more constraints over the way they conduct macroeconomic policy.
In part, the expansion of capital flows can be attributed to changing economic circum- stances and government policies. For example, the rapid rise in oil prices that the OPEC cartel achieved in the 1970s led to a major increase in international financial inter- mediation. Major petroleum exporting countries such as Saudi Arabia were able to deposit large amounts of funds in banks in industrialized countries, who in turn recycled or lent them to developing countries. In the 1980s, Japanese regulations of financial institutions were liberalized to allow them to acquire foreign assets, just at the time the United States ran large government budget deficits and attracted large capital inflows. In the 1990s, however, Japanese economic recession, bad loans and near bankruptcy of many financial institutions slowed the rapid expansion of its capital flows in the earlier decade. Many developing countries and transition economies experienced large inflows of private capital in the 1990s, which often came from countries such as Germany or the United States, even though those countries themselves were net borrowers internationally.
Table 1.2 reports balance-of-payments measures of three categories of capital flows: direct investment, already examined in Figure 1.2; portfolio investment, applicable when foreign buyers of stocks or bonds have no management control; and other investment, which includes operations of banks and other financial institutions. Consider first the total figures.
Aside from Japan, they indicate that the rate of growth of international capital flows was much greater than the rate of growth of trade in goods over all of the decades shown. For example, in Germany and the United Kingdom trade flows measured in dollars increased by a factor of five over the decade, but capital flows started from a small base and rose by a much greater multiple. In the United States, the same pattern can be observed, although it is not as pronounced.
Table 1.2 also demonstrates that while portfolio investment rose in importance, the role of banks and other financial institutions remains a dominant factor. The fact that these four countries have both large capital inflows and large capital outflows likely indicates that they play a role as intermediaries of international investment flows, accepting deposits from sources that seek security and making loans to riskier borrowers. How should such risk-taking be regulated, and who should bear the consequences of failed loans?
These snapshots of aggregate inflows and outflows from major economies do not ade- quately reflect the rapidity with which capital flows can shift from one country to another, thereby affecting the value internationally of a country’s currency (its exchange rate), stan- dards of living, and the competitive positions of goods produced in different locations.
Also, we have said nothing of the way macroeconomic policies in individual countries may affect incentives to invest in a country and influence the exchange rate, or the freedom that countries have in determining those policies.
In the 1950s and 1960s, for example, capital flows were often regulated but exchange rates were fixed; countries were not free to pursue any domestic monetary policy that they chose if they were to maintain a stated exchange rate. In the 1990s, exchange rates were no longer fixed between many countries, but capital flows internationally were much less restricted.
Table 1.2International capital flows and trade Capital outflowsCapital inflowsTrade in goods DirectPortfolio Other TotalDirect Portfolio Other TotalExportsImports investmentinvestmentinvestmentinvestmentinvestmentinvestment Germany 19711.20–0.160.911.951.090.572.784.4438.39 19804.704.1919.4128.300.33–3.9833.1729.52191.16183.22 199024.2015.1774.67114.042.5313.4443.2859.25410.92341.88 200052.05197.5274.83324.40189.1836.46115.49341.13549.17491.87 Japan 19804.908.7725.5339.200.1913.2224.2337.64126.74124.61 199048.0540.2089.14177.391.7635.39118.70155.85280.85216.77 200031.5383.364.15119.048.2347.3910.2165.83459.51342.8 US 19706.531.083.2710.881.262.252.736.2442.45 198019.233.5757.1279.9216.9314.1528.1359.21224.25249.76 199029.9528.8013.7372.4847.9222.0252.24122.18388.71498.34 2000152.44124.94303.27580.65287.68474.59261.961024.23774.861224.43 UK 19701.680.321.163.161.490.33–0.181.6419.51 198011.237.7981.22100.2410.122.8879.7492.74109.62106.27 199019.3232.6394.58146.5332.4324.82118.48177.73181.73214.47 2000266.2599.89411.54777.68119.93258.34423.31801.58284.38330.27 Source: International Monetary Fund, International Financial Statistics.
Because of that greater capital mobility, countries still faced constraints on the type of macroeconomic policy they pursued. For example, a country may have little freedom to fight a recession by following an expansionary fiscal policy, if any tendency for interest rates to rise results in a capital inflow that causes its currency to appreciate and reduce foreign demand for its goods.
Additionally, events outside the borders of a country can have a significant impact on its economic performance and policy choices. For example, recession in Europe in 1992 slowed Japanese and US recovery at that time. Financial turmoil in Asia and in Russia in 1997–8 gave industrialized countries an incentive to pursue more expansionary macro- economic policies to spur domestic demand.
An asymmetry in the international financial system exists because the US dollar plays the role of a reserve currency. Other countries can acquire reserves by selling more goods and assets to the United States than they buy from it. When the European Union introduced the euro in January 1999, many expected it to challenge the role of the US dollar as the dominant reserve currency. Weakness of the euro after its introduction, however, meant that this challenge did not materialize during the first four years of its existence.
Why international economics is a separate field
International trade theory and domestic microeconomics both rest on the same assumption that economic agents maximize their own self-interest. Nevertheless, there are important differences between domestic and foreign transactions. Similarly, international finance is closely tied to domestic macroeconomics, but political borders do matter, and international finance is far more than a modest extension of domestic macroeconomics. The differences between international and domestic economic activities that make international economics a separate body of theory are as follows:
1 Within a national economy labor and capital generally are free to move among regions;
this means that national markets for labor and for capital exist. Although wage rates may differ modestly among regions, such differences are reduced by an arbitrageprocess in which workers move from low- to high-wage locations. There are even smaller differ- ences in the return to financial capital across regions because investors have lower costs (the price of a postage stamp) of moving funds from one location to another. As a result, domestic microeconomic analysis generally rests on the assumption that firms competing in a market pay comparable wages and borrow funds at comparable interest rates.
International trade is quite different in this regard. Immigration laws greatly limit the arbitraging of wage rates among nations, so that wage rates differ sharply across the world. Labor in manufacturing can be hired in Sri Lanka for 40 rupees per hour. Industrial wages in the United Kingdom, including fringe benefits, are typically over £11 per hour, implying a ratio of the UK to the Sri Lankan wage rate of about 30:1. Although capital flows among nations more easily than does labor, exchange controls, additional risks, costs of information, and other factors are sufficient to maintain significant differences among interest rates in different countries. Therefore, international trade theory centers on competition in markets where firms face very different costs.
2 There are normally no government-imposed barriers to the shipment of goods within a country. Accordingly, firms in one region compete against firms in another region of the country without government protection in the form of tariffs or quotas. Domestic microeconomics deals with such free trade within a country. In contrast, tariffs, quotas,
and other government-imposed barriers to trade are almost universal in international trade. A large part of international trade theory deals with why such barriers are imposed, how they operate, and what effects they have on flows of trade and other aspects of economic performance.
3 Domestic macroeconomics normally deals with monetary and fiscal policy choices that address cyclical economic fluctuations that affect the country as a whole. With one currency used throughout the country, establishing a different monetary policy or interest rate for different regions is not possible. While there are differences across regions in the way central government spending is allocated and in the location of interest-sensitive industries, essentially fiscal and monetary policies that exist in one part of the country also prevail in other parts.
International finance, or open economy macroeconomics, is about a very different situation. Different countries have different business cycles; the significance of strikes, droughts, or shifts in business confidence, for example, regularly differs across countries.
Because some countries may be in a recession while others enjoy periods of economic expansion, they generally choose different monetary and fiscal policies to address these circumstances. These differences in macroeconomic conditions and policies among countries have major consequences for trade flows and other international transactions.
The second half of this book, which deals with international finance, discusses these issues.
4 A country normally has a single currency, the supply of which is managed by the central bank operating through a commercial banking system. Because a New York dollar is the same as a California dollar, for example, there are no internal exchange markets or exchange rates in the United States.
International finance involves a very different set of circumstances. There are almost as many currencies as there are countries, and the maintenance of a currency is typically viewed as a basic part of national sovereignty. The choice of eleven European nations to give up some of this sovereignty in forming the European Monetary Union and launching the euro in 1999 represents a remarkable political achievement. International finance is concerned with exchange rates and exchange markets, and the influence of government intervention in those markets.
The organization of this volume
This book is divided into two broad segments, the first of which deals with international trade, and the second with international finance. Chapters 2 to 4 examine alternative explanations of the pattern of trade among countries and the potential economic gains from trade. We pay particular attention to differences in technology, the availability of capital, labor and other factors of production, and the existence of economies of scale, all of which are important determinants of trade.
Chapters 5 and 6 assess the consequences of policies to restrict international trade and consider possible motivations for protectionist policies that are chosen. Some policy decisions that affect international trade are taken unilaterally by a single country, but often these choices are made by several countries acting together. Chapter 7 treats preferential trade agreements, a form of trade liberalization that favors members of a trade bloc but dis- criminates against nonmembers. Chapter 8 addresses multilateral trade agreements, tracing progress since the 1930s to establish nondiscriminatory rules for international trade and to reduce trade barriers.
Chapter 9 extends the basic framework for analyzing trade in goods to treat trade in factor services, including capital flows, labor migration and the operations of multinational corpo- rations. Chapter 10 considers the relationship between international trade and economic growth, and includes an analysis of trade and investment policies particularly relevant to developing countries. Chapter 11 recognizes that devising an efficient trade policy while ignoring the existence of other national and international distortions may leave a country worse off, and therefore it addresses areas where domestic policy choices over environmental regulation and government taxation have important implications for the design of trade policy.
The treatment of international finance begins with Chapter 12 and continues through the remainder of the book. It begins with a discussion of balance-of-payments accounting.
Chapters 13 and 14 discuss foreign exchange markets. Initially we focus on the relationship between what is occurring in the balance-of-payments accounts and events in exchange markets, and then consider in more detail the financial instruments, commonly referred to as derivatives, that have resulted in greater interdependence among national financial markets.
Chapters 12 to 16 focus on the problem of balance-of-payments disequilibria, primarily under the assumption of a fixed exchange rate. This early emphasis on a regime of fixed exchange rates may seem strange because countries such as Britain, Japan, and the United States do not attempt to maintain fixed exchange rates among their currencies. This organ- izational approach has been adopted for two reasons. First, the vast majority of the countries of the world do not have fully flexible exchange rates, but instead maintain some form of parity or very limited flexibility. More important still, students find it much easier to under- stand a fixed exchange rate system than a regime of floating exchange rates. Once students understand the problems of balance-of-payments disequilibria and adjustment under fixed exchange rates, they will find it much easier to learn how a flexible exchange rate system operates.
Chapter 17 discusses changes in otherwise fixed rates, that is, devaluations and revalua- tions. Chapter 18 deals with open economy macroeconomics for countries with fixed exchange rates. The theory of flexible exchange rates is then covered at some length in Chapter 19, with particular emphasis on open economy macroeconomics in such a setting.
Chapter 20 applies the previously developed theory to historical and current events.
A glossary follows Chapter 20. The first time a word in the glossary appears in the text it is printed in bold type. Readers encountering terms in the text that are unclear should refer to the glossary for further help. The inclusion of a glossary and a detailed index is intended to make this book useful to readers long after a course in international economics has been completed.
This book is designed for students whose previous exposure to economics has been limited to a two-semester principles course, but it also attempts to teach the theory of international economics with some rigor. Each chapter begins with a statement of learning objectives to alert you to the main ideas to be covered in it. At the end of the chapter we include a summary of key concepts, a set of questions to give you practice in explaining concepts and applying principles presented in the chapter, and suggestions for further reading. Some of the tools of intermediate microeconomics and macroeconomics are presented in the text and are used to treat international issues. Offer curves and Edgeworth boxes are introduced in the trade theory chapters, and the IS–LM model, modified to include the balance of payments, is taught in the international finance chapters. These analytical tools are treated in self-contained sections separate from the main text. Students and instructors who wish to
omit these entirely self-contained sections can do so, because the main text is designed to be understood without necessary reference to this material. However, the student will gain a fuller understanding of the theory by working through these graphical explanations.
A web site that students have found useful in supplementing material presented here is maintained by Professor A.R.M. Gigengack of the University of Groningen, the Netherlands, at http://www.eco.rug.nl/medewerk/gigengack.
Information about international economics
A course in international economics will be both more enjoyable and better understood if an attempt is made to follow current events in the areas of international trade and finance.
Both areas are full of controversies and are constant sources of news. We note here some useful sources of current information, some of which are available through the Internet. In many cases they provide extensive access to the most current publication without requiring a user subscription.
Publication Web site
Financial Times http://www.ft.com/
(daily newspaper)
The Economist http://www.economist.com
(a weekly magazine)
The New York Times http://nyt.com/
(financial section, daily newspaper)
The Wall Street Journal http://online.wsj.com/
(daily, international news in section 1, market data in section 3)
Important sources of current and historical statistics in the areas of international trade and finance are given below. We first list international organizations, which compile comparable information for a broad range of countries and issue regular reports. These agencies often provide working papers on selected topics that can be downloaded; they usually charge for electronic access to their data.
Organization Reports
Bank for International Settlements •Annual Report
• http://www.bis.org/wnew.htm
International Monetary Fund •Annual Report
• http://www.imf.org/ •Balance of Payments Statistics Yearbook
•Direction of Trade Statistics
•Government Finance Statistics Yearbook
•International Financial Statistics Organization for Economic Cooperation
and Development •Main Economic Indicators
• http://www.oecd.org •Economic Country Surveys
•Revenue Statistics of OECD Countries United Nations •International Trade Statistics Yearbook
• http://www.unctad.org/ •Monthly Bulletin of Statistics
• http://unstats.un.org/unsd/mbs/ •World Investment Report
•Trade and Development Report
World Bank(International Bank for •Finance and Development(quarterly, by the Reconstruction and Development) IMF and the World Bank)
• http://www.worldbank.org •World Development Report(annual)
•World Tables(annual)
•Global Development Finance(annual) World Trade Organization •Annual Report
• http://www.wto.org •International Trade Statistics
•Country Trade Policy Reviews
•Dispute Resolution Activity
In its statistics directory, the WTO site provides links to national statistical offices. We include some common ones here:
Country Web site
Australia http://www.abs.gov.au/
Canada http//www.statcan.ca/start.html
European Union http://www.europa.eu.int/comm/eurostat/
United Kingdom http//www.ons.gov.uk/ons_f.htm
US data sources and agency reports that are particularly relevant for international economists are:
Agency Web site
Bureau of Labor Statistics http://www.bls.gov/
(Export and import price indices)
US Bureau of the Census http//www.census.gov/
(Trade and balance of payments data)
Federal Reserve Board http://www.federalreserve.gov/releases/
(Exchange rates and financial flows)
US Department of Commerce, http://www.ita.doc.gov/
International Trade Administration (Trade data, unfair trade cases)
US Department of State, (Country http://www.state.gov/www/issues/economic/
Reports: Economic Policy and Trade trade_reports/
Practices)
US International Trade Commission http://www.usitc.gov/
(Investigations and trade cases)
A particularly useful compilation of international data for 1950–92 on real output and prices, created by Professors Heston and Summers of the University of Pennsylvania, is accessible in a form that allows you to download data and view it graphically:
