International Trade: Theory & Policy, Eleventh Edition
By Paul R. Krugman, Maurice Obstfeld and Marc J. Melitz
Contents:
Preface ………………………………………………………………………………………………………………..13
1 Introduction 23
What Is International Economics About?……………………………………………………………………25
The Gains from Trade………………………………………………………………………………………………. 26
The Pattern of Trade………………………………………………………………………………………………… 27
How Much Trade?……………………………………………………………………………………………………. 27
Balance of Payments………………………………………………………………………………………………… 28
Exchange Rate Determination…………………………………………………………………………………… 29
International Policy Coordination………………………………………………………………………………. 29
The International Capital Market……………………………………………………………………………….. 30
International Economics: Trade and Money………………………………………………………………..31
PART 1 International Trade Theory 32
2 World Trade: An Overview 32
Who Trades with Whom?…………………………………………………………………………………………32
Size Matters: The Gravity Model……………………………………………………………………………….. 33
Using the Gravity Model: Looking for Anomalies………………………………………………………… 35
Impediments to Trade: Distance, Barriers, and Borders…………………………………………………. 36
The Changing Pattern of World Trade……………………………………………………………………….38
Has the World Gotten Smaller?………………………………………………………………………………….. 38
What Do We Trade?…………………………………………………………………………………………………. 40
Service Offshoring……………………………………………………………………………………………………. 41
Do Old Rules Still Apply?………………………………………………………………………………………..43
Summary………………………………………………………………………………………………………………44
3 Labor Productivity and Comparative Advantage:
The Ricardian Model 46
The Concept of Comparative Advantage……………………………………………………………………..47
A One-Factor Economy…………………………………………………………………………………………..48
Relative Prices and Supply………………………………………………………………………………………… 50
Trade in a One-Factor World……………………………………………………………………………………51
Determining the Relative Price after Trade…………………………………………………………………… 52
box: Comparative Advantage in Practice: The Case of Usain Bolt…………………………………..55
The Gains from Trade………………………………………………………………………………………………. 56
A Note on Relative Wages…………………………………………………………………………………………. 57
box: Economic Isolation and Autarky over Time and Space……………………………………………58
Misconceptions about Comparative Advantage…………………………………………………………….59
Productivity and Competitiveness………………………………………………………………………………. 59
box: Do Wages Reflect Productivity?…………………………………………………………………………60
The Pauper Labor Argument…………………………………………………………………………………….. 61
Exploitation……………………………………………………………………………………………………………. 61
Comparative Advantage with Many Goods………………………………………………………………….62
Setting Up the Model……………………………………………………………………………………………….. 62
Relative Wages and Specialization………………………………………………………………………………. 62
Determining the Relative Wage in the Multigood Model……………………………………………….. 64
Adding Transport Costs and Nontraded Goods…………………………………………………………….66
Empirical Evidence on the Ricardian Model………………………………………………………………..67
Summary………………………………………………………………………………………………………………70
4 Specific Factors and Income Distribution 73
The Specific Factors Model………………………………………………………………………………………74
box: What Is a Specific Factor?…………………………………………………………………………………75
Assumptions of the Model………………………………………………………………………………………… 75
Production Possibilities…………………………………………………………………………………………….. 76
Prices, Wages, and Labor Allocation…………………………………………………………………………… 79
Relative Prices and the Distribution of Income…………………………………………………………….. 83
International Trade in the Specific Factors Model………………………………………………………..85
Income Distribution and the Gains from Trade…………………………………………………………….86
The Political Economy of Trade: A Preliminary View……………………………………………………89
Income Distribution and Trade Politics……………………………………………………………………….. 90
case study: Trade and Unemployment…………………………………………………………………………90
International Labor Mobility……………………………………………………………………………………94
case study: Wage Convergence in the European Union…………………………………………………..96
case study: Immigration and the U.S. Economy: Future Prospects……………………………………98
Summary……………………………………………………………………………………………………………. 101
5 Resources and Trade: The Heckscher-Ohlin Model 109
Model of a Two-Factor Economy……………………………………………………………………………. 110
Prices and Production…………………………………………………………………………………………….. 110
Choosing the Mix of Inputs…………………………………………………………………………………….. 113
Factor Prices and Goods Prices………………………………………………………………………………… 115
Resources and Output…………………………………………………………………………………………….. 118
Effects of International Trade between Two-Factor Economies…………………………………….. 119
Relative Prices and the Pattern of Trade…………………………………………………………………….. 120
Trade and the Distribution of Income……………………………………………………………………….. 121
case study: North-South Trade and Income Inequality………………………………………………… 122
Skill-Biased Technological Change and Income Inequality…………………………………………… 124
box: The Declining Labor Share of Income and Capital-Skill Complementarity……………… 128
Factor-Price Equalization………………………………………………………………………………………… 129
Empirical Evidence on the Heckscher-Ohlin Model……………………………………………………. 130
Trade in Goods as a Substitute for Trade in Factors: Factor Content of Trade………………… 131
Patterns of Exports between Developed and Developing Countries……………………………….. 134
Implications of the Tests…………………………………………………………………………………………. 136
Summary……………………………………………………………………………………………………………. 137
6 The Standard Trade Model 145
A Standard Model of a Trading Economy………………………………………………………………… 146
Production Possibilities and Relative Supply………………………………………………………………. 146
Relative Prices and Demand…………………………………………………………………………………….. 147
The Welfare Effect of Changes in the Terms of Trade………………………………………………….. 150
Determining Relative Prices…………………………………………………………………………………….. 151
case study: Unequal Gains from Trade across the Income Distribution…………………………… 151
Economic Growth: A Shift of the RS Curve………………………………………………………………. 154
Growth and the Production Possibility Frontier………………………………………………………….. 154
World Relative Supply and the Terms of Trade…………………………………………………………… 156
International Effects of Growth……………………………………………………………………………….. 157
case study: Has the Growth of Newly Industrializing Economies
Hurt Advanced Nations?……………………………………………………………………………………. 158
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD…………………………………. 160
Relative Demand and Supply Effects of a Tariff…………………………………………………………. 160
Effects of an Export Subsidy……………………………………………………………………………………. 161
Implications of Terms of Trade Effects: Who Gains and Who Loses?…………………………….. 162
International Borrowing and Lending………………………………………………………………………. 163
Intertemporal Production Possibilities and Trade………………………………………………………… 163
The Real Interest Rate…………………………………………………………………………………………….. 164
Intertemporal Comparative Advantage……………………………………………………………………… 166
Summary……………………………………………………………………………………………………………. 166
7 External Economies of Scale and the International
Location of Production 173
Economies of Scale and International Trade: An Overview………………………………………….. 174
Economies of Scale and Market Structure………………………………………………………………… 175
The Theory of External Economies…………………………………………………………………………. 176
Specialized Suppliers……………………………………………………………………………………………. 176
Labor Market Pooling………………………………………………………………………………………….. 177
Knowledge Spillovers…………………………………………………………………………………………….. 178
External Economies and Market Equilibrium…………………………………………………………….. 179
External Economies and International Trade…………………………………………………………….. 180
External Economies, Output, and Prices……………………………………………………………………. 180
External Economies and the Pattern of Trade…………………………………………………………….. 181
box: Holding the World Together……………………………………………………………………………. 183
Trade and Welfare with External Economies………………………………………………………………. 184
Dynamic Increasing Returns……………………………………………………………………………………. 185
Interregional Trade and Economic Geography…………………………………………………………… 186
box: Soccer and the English Premiere League…………………………………………………………… 188
Summary……………………………………………………………………………………………………………. 189
8 Firms in the Global Economy: Export Decisions,
Outsourcing, and Multinational Enterprises 192
The Theory of Imperfect Competition……………………………………………………………………… 193
Monopoly: A Brief Review……………………………………………………………………………………… 194
Monopolistic Competition………………………………………………………………………………………. 196
Monopolistic Competition and Trade………………………………………………………………………. 201
The Effects of Increased Market Size………………………………………………………………………… 201
Gains from an Integrated Market: A Numerical Example…………………………………………….. 202
The Significance of Intra-Industry Trade…………………………………………………………………… 206
case study: Automobile Intra-Industry Trade within ASEAN-4: 1998–2002……………………. 208
Firm Responses to Trade: Winners, Losers, and Industry Performance………………………….. 209
Performance Differences across Producers…………………………………………………………………. 210
The Effects of Increased Market Size………………………………………………………………………… 212
Trade Costs and Export Decisions…………………………………………………………………………… 214
Dumping…………………………………………………………………………………………………………….. 216
case study: Antidumping as Protectionism………………………………………………………………… 217
Multinationals and Outsourcing……………………………………………………………………………… 219
case study: Patterns of FDI Flows around the World………………………………………………….. 219
The Firm’s Decision Regarding Foreign Direct Investment…………………………………………… 223
Outsourcing………………………………………………………………………………………………………….. 224
box: Whose Trade Is It?………………………………………………………………………………………… 225
case study: Shipping Jobs Overseas? Offshoring and Labor Market
Outcomes in Germany………………………………………………………………………………………. 227
Consequences of Multinationals and Foreign Outsourcing…………………………………………… 230
Summary……………………………………………………………………………………………………………. 231
Part 2 International Trade Policy 237
9 The Instruments of Trade Policy 237
Basic Tariff Analysis……………………………………………………………………………………………. 237
Supply, Demand, and Trade in a Single Industry………………………………………………………… 238
Effects of a Tariff…………………………………………………………………………………………………… 240
Measuring the Amount of Protection……………………………………………………………………….. 241
Costs and Benefits of a Tariff………………………………………………………………………………… 243
Consumer and Producer Surplus………………………………………………………………………………. 243
Measuring the Costs and Benefits…………………………………………………………………………….. 245
box: Tariffs and Retaliation…………………………………………………………………………………… 247
Other Instruments of Trade Policy………………………………………………………………………….. 249
Export Subsidies: Theory………………………………………………………………………………………… 249
case study: Europe’s Common Agricultural Policy……………………………………………………… 250
Import Quotas: Theory…………………………………………………………………………………………… 251
case study: Tariff-Rate Quota Origin and its Application in Practice with Oilseeds………….. 252
Voluntary Export Restraints……………………………………………………………………………………. 255
case study: A Voluntary Export Restraint in Practice…………………………………………………. 256
Local Content Requirements……………………………………………………………………………………. 257
box: Healthcare Protection with Local Content Requirements……………………………………… 258
Other Trade Policy Instruments……………………………………………………………………………….. 259
The Effects of Trade Policy: A Summary…………………………………………………………………. 259
Summary……………………………………………………………………………………………………………. 260
10 The Political Economy of Trade Policy 268
The Case for Free Trade……………………………………………………………………………………….. 269
Free Trade and Efficiency………………………………………………………………………………………… 269
Additional Gains from Free Trade……………………………………………………………………………. 270
Rent Seeking…………………………………………………………………………………………………………. 271
Political Argument for Free Trade…………………………………………………………………………….. 271
National Welfare Arguments against Free Trade……………………………………………………….. 272
The Terms of Trade Argument for a Tariff………………………………………………………………… 272
The Domestic Market Failure Argument against Free Trade…………………………………………. 273
How Convincing Is the Market Failure Argument?……………………………………………………… 275
Income Distribution and Trade Policy……………………………………………………………………… 276
Electoral Competition…………………………………………………………………………………………….. 277
Collective Action……………………………………………………………………………………………………. 278
box: Politicians for Sale: Evidence from the 1990s……………………………………………………… 279
Modeling the Political Process………………………………………………………………………………….. 280
Who Gets Protected?………………………………………………………………………………………………. 280
International Negotiations and Trade Policy…………………………………………………………….. 282
The Advantages of Negotiation……………………………………………………………………………….. 283
International Trade Agreements: A Brief History……………………………………………………….. 284
The Uruguay Round………………………………………………………………………………………………. 286
Trade Liberalization……………………………………………………………………………………………….. 286
Administrative Reforms: From the GATT to the WTO………………………………………………… 287
Benefits and Costs………………………………………………………………………………………………….. 288
box: Settling a Dispute—And Creating One……………………………………………………………… 289
case study: Testing the WTO’s Metal………………………………………………………………………. 290
The End of Trade Agreements?………………………………………………………………………………. 291
box: Do Agricultural Subsidies Hurt the Third World?……………………………………………….. 292
Preferential Trading Agreements………………………………………………………………………………. 293
box: Free Trade Area Versus Customs Union……………………………………………………………. 294
box: Brexit…………………………………………………………………………………………………………. 295
case study: Trade Diversion in South America…………………………………………………………… 296
The Trans-Pacific Partnership………………………………………………………………………………….. 297
Summary……………………………………………………………………………………………………………. 298
11 Trade Policy in Developing Countries 305
Import-Substituting Industrialization………………………………………………………………………. 306
The Infant Industry Argument…………………………………………………………………………………. 306
Promoting Manufacturing through Protection……………………………………………………………. 308
case study: Export-Led Strategy…………………………………………………………………………….. 310
Results of Favoring Manufacturing: Problems of Import-Substituting Industrialization……. 311
Trade Liberalization since 1985………………………………………………………………………………. 313
Trade and Growth: Takeoff in Asia…………………………………………………………………………. 315
box: India’s Boom………………………………………………………………………………………………… 317
Summary……………………………………………………………………………………………………………. 317
12 Controversies in Trade Policy 320
Sophisticated Arguments for Activist Trade Policy…………………………………………………….. 321
Technology and Externalities…………………………………………………………………………………… 321
Imperfect Competition and Strategic Trade Policy………………………………………………………. 324
box: A Warning from Intel’s Founder………………………………………………………………………. 326
case study: When the Chips Were Up………………………………………………………………………. 327
Globalization and Low-Wage Labor………………………………………………………………………… 329
The Anti-Globalization Movement…………………………………………………………………………… 329
Trade and Wages Revisited………………………………………………………………………………………. 330
Labor Standards and Trade Negotiations…………………………………………………………………… 332
Environmental and Cultural Issues……………………………………………………………………………. 332
The WTO and National Independence………………………………………………………………………. 333
case study: A Tragedy in Bangladesh……………………………………………………………………….. 334
Globalization and the Environment………………………………………………………………………….. 335
Globalization, Growth, and Pollution……………………………………………………………………….. 335
The Problem of “Pollution Havens”………………………………………………………………………….. 337
The Carbon Tariff Dispute………………………………………………………………………………………. 338
Trade Shocks and Their Impact on Communities……………………………………………………….. 339
Summary……………………………………………………………………………………………………………. 340
Mathematical Postscripts 343
Postscript to Chapter 5: The Factor-Proportion Model……………………………………………….. 343
Factor Prices and Costs…………………………………………………………………………………………… 343
Goods Prices and Factor Prices………………………………………………………………………………… 345
Factor Supplies and Outputs……………………………………………………………………………………. 346
Postscript to Chapter 6: The Trading World Economy………………………………………………… 347
Supply, Demand, and Equilibrium……………………………………………………………………………. 347
Supply, Demand, and the Stability of Equilibrium………………………………………………………. 349
Effects of Changes in Supply and Demand………………………………………………………………… 351
Economic Growth………………………………………………………………………………………………….. 351
A Transfer of Income……………………………………………………………………………………………… 352
A Tariff………………………………………………………………………………………………………………… 353
Postscript to Chapter 8: The Monopolistic Competition Model…………………………………….. 355
Index 357
Credits 366
ONLINE APPENDICES (www.pearsonglobaleditions.com/Krugman)
Appendix A to Chapter 6: International Transfers of Income and the Terms of Trade
The Transfer Problem
Effects of a Transfer on the Terms of Trade
Presumptions about the Terms of Trade Effects of Transfers
Appendix B to Chapter 6: Representing International Equilibrium with Offer Curves
Deriving a Country’s Offer Curve
International Equilibrium
Appendix A to Chapter 9: Tariff Analysis in General Equilibrium
A Tariff in a Small Country
A Tariff in a Large Country