omy is kept as a stabilization tool In a monetary union, where states have also relinquished monetary policy to the ECB, the pain of hard fiscal rules is likely to be intolerable 2  Preface ■ Once countries joined the euro, the main “carrot” enticing them to follow the SGP’s budget rules (or to pretend to follow them) disappeared Hence, surveillance, punishment, and commitment all quite predictably weakened once the euro was up and running These failures of the SGP came to light only gradually, but by 2003 the pact was in ruins, once it became clear that France and (ironically) Germany would be in breach of the pact and that no serious action would be taken against them As we see next, fiscal problems in the Eurozone have only gotten worse, although whether the principles of the SGP can, or should, be reinstated is the subject of ongoing disagreement A MODERN BOOK FOR A MODERN AUDIENCE Feenstra and Taylor’s text incorporates fresh perspectives, current topics, and The Eurozone in Crisis, 2008–2013 up-to-date empirical research It expands For almost 10 years, Eurozone policy making focused on two main macroeconomicthe study of international economics to goals: the ECB’s monetary policy credibility and inflation target, seen as a broad success given low and stable inflation outcomes; and the Eurozone governments’encompass the latest theories and world fiscal responsibility, seen as a failure given the general disregard for the SGP rules.events However, policy makers (like their counterparts all over the world) failed to spot key macroeconomic and financial developments that were to plunge the Eurozone into crisis in 2008 and beyond Boom and Bust: Causes and Consequences of an Asymmetrical Crisis With a fanatical devotion to inflation targeting, the ECB (and its constituent central banks) paid insufficient attention to what was historically a primary responsibility of central banks, namely, financial stability Within some parts of the Eurozone (as elsewhere) borrowers in the private sector were engaged in a credit-fueled boom In other parts of the Eurozone, savers and banks funneled ever more loans toward those borrowers The creditors were core Northern European countries like Germany and the Netherlands; the debtors were fast-growing peripheral nations such as Greece, Ireland, Portugal, and Spain (so called because they are located geographically on the periphery of Europe) In Greece, much of the borrowing was by a fiscally irresponsible government that was later found to be falsifying its accounts In the other peripheral nations, however, the flow of loans funded rapid investment and consumption surges, including a residential construction boom that in places (e.g., Dublin and Barcelona) rivaled the property bubble in parts of the United States In Ireland and Spain, even as this boom took place, the governments had maintained a fiscal position close to balance, or even surplus; the asymmetric boom helped them at that time The trouble was to come 222 Part ■ New Explanations for International Trade when the boom gave way to a severe asymmetric bust The chapter on the euro covers the dramatic developments since 2010, including the Greek debt restructuring; assistance programs in Spain, Ireland and Portugal; and the Cyprus banking crisis page 843 Feenstra_IntEcon_3e_Ch21.indd 843 FIGURE 7-14 Trade surplus 140 (US$ billion) 120 1/10/14 2:03 PM 100 United States 80 United Kingdom 60 40 20 India –20 1970 THEORY TESTED AND REFINED Feenstra and Taylor’s text covers many empirical studies that prove or refute existing theories, revealing important new lessons about the determinants of trade, factor flows, exchange rates, and crises 1975 1980 Trade Surplus in Business Services This figure shows the combined trade surplus in computer and information services, insurance, and financial services for the United States, the United Kingdom, and India from 1970 to 2010 The U.S surplus in these categories of services has been growing since about 1985, with an occasional dip, and exceeded the trade surplus of the 1985 1990 1995 2000 2005 2010 United Kingdom, its chief competitor, up until about 2000 Since then the surpluses of the United Kingdom and of the United States have been similar India’s surplus began growing around 2000 and is based entirely on its exports of computer and information services Source: World Bank World Development Indicators The Politics and Future of Offshoring page 222 Offshoring is controversial and is often the topic of political debate In February 2004 the first quote at the beginning of this chapter appeared in the Economic Report of the President The writer of that sentence, Harvard economist N Gregory Mankiw, who was chairman of the Council of Economic Advisors, also said that “outsourcing is just a new way of doing international trade More things are tradable than were tradable in the past, and that’s a good thing.” Those comments were widely criticized by the Democrats and Republicans alike, and Professor Mankiw later apologized in a letter to the House of Representatives, writing, “My lack of clarity left the wrong impression that I praised the loss of U.S jobs.” In the Democratic primary elections of 2007 and in the presidential campaign Chapter 10 ■ Export Policies in Resource and High-Technology Industries 351 MODERN TOPICS Feenstra and Taylor’s text shows why trade and capital flows have been liberalized and allowed to grow The text focuses more attention on emerging markets and developing countries—regions that now carry substantial weight in the global economy TIM WIMBORNE/Reuters/Corbis In March 2012, the United States, the European Union, and Japan filed another WTO case against China charging that it applied unfair export restrictions on its rare earth minerals, as well as tungsten and molybdenum The first step in such a case is for the parties involved (the United States, Europe, and Japan on one side; China on the other) to see whether the charges can be resolved through consultations at the WTO Those consultations failed to satisfy either side, and in September 2012, the case went to a dispute settlement panel at the WTO The Chinese government appealed to Article XX of the GATT, which allows for an exception to GATT rules in cases “relating to the conservation of exhaustible natural resources.” But the WTO ruled against China, who is expected to appeal Regardless of the ultimate outcome of that case, it appears that China has already changed its policies on rare earth minerals By the end of 2012, China realized that its policy of export quotas for rare earth minerals was not having the desired effect of maintaining high world prices It therefore shifted away from a strict reliance on export quotas, and introduced subsidies to help producers who were losing money These new policies are described in Headlines: China Signals Support for Rare Earths The new subsidy policy might also lead to objections from the United States, the European Union, and Japan But as we have seen earlier in this chapter, it is more difficult for the WTO to control subsidies (which are commonly used in agriculture) than to control export quotas A final feature of international trade in rare earth minerals is important to recognize: the mining and processing of these minerals poses an environmental risk, because rare earth minerals are frequently found with radioactive ores like thorium or uranium Processing these minerals therefore leads to low-grade radioactive waste as a by-product That aspect of rare earth minerals leads to protests against the establishment of new mines The Lynas Corporation mine in Australia, mentioned in the Headlines article, processes the minerals obtained there in Malaysia That processing facility was targeted by protesters in Malaysia, led by a retired math teacher named Tan Bun Teet Although Mr Tan and the other protestors did not succeed in preventing the processing facility from being opened, they did delay it and also put pressure on the company to ensure that the radioactive waste would be exported from Malaysia, in accordance with that country’s laws But where will this waste go? This environmental dilemma arises because of the exploding worldwide demand for high-tech products (including your own cell phone), whose manufacturing involves environmental risks This case illustrates the potential interaction between international trade and the environment, a topic we examine in more detail in the next chapter ■ Protesters from the Save Malaysia Stop Lynas group demonstrating outside a hotel in Sydney, Australia High-Technology Export Subsidies We turn now to consider high-technology final products This sector of an economy also receives substantial assistance from government, with examples including subsidies to the aircraft industries in both the United States and Europe In the United States, subsidies take the form of low-interest loans provided by the Export-Import page 351 Feenstra_IntEcon_3e_Ch10.indd 351 1/8/14 10:07 AM Chapter 12 ■ The Global Macroeconomy 417 HEADLINES Chapter ■ Import Tariffs and Quotas Under Perfect Competition 269 Economic Crisis in Iceland International macroeconomics can often seem like a dry and abstract subject, but it must be remembered that societies and individuals can be profoundly shaken by the issues we will study This article was written China and the Multifibre Arrangement just after the start of the severe economic crisis that engulfed Iceland in One of the founding principles of GATT2008, was that countries should of not quotasrate, a financial crisis, and a following the collapse itsuse exchange Applications illuminate real-world to restrict imports (see Article XI of Side Bar: Key Provisions theoutput GATT) government fiscal crisis.ofReal per The person shrank by more than 10%, Multifibre Arrangement (MFA), organizedand under the auspicesrose of the policies, events, and empirical evidence unemployment fromGATT 1% to in 9%.1974, Five years later a recovery was just was a major exception to that principle andbeginning allowed the industrial to take shape.countries to restrict imports of textile and apparel products from the developing countries Importing “The 550 families we welcome here small, formerly fishing-based economy Reykjavik—The crisis that brought countries could join the MFA and arrange quotas bilaterally (i.e., afterdown negotiating represent about 2,700 people, and the with fast cash Iceland’s economy in 2008 quotas threw estabwith exporters) or unilaterally (on their own) In practice, thelate import number keeps going up And we think Back then, the biggest worry for many of ed formerly well-off families lished under the MFA were very detailedthousands and specifi the amount of each textile it will keep growing until next year, at poverty, forcing people like Iris to Icelanders was who had the nicest SUV, and apparel product that each developinginto country could sell to countries including least,” said Asgerdur Jona Flosadottir, or the most opulent flat turn to charity to survive Canada, Europe, and the United States who manages the Reykjavik food bank But today visible signs of poverty Each week, up to 550 families queue Although the amount of the quotas was occasionally revised upward, it did not keep For Iris, the fall came quickly up at a small white brick warehouse in are quickly multiplying in the Nordic isup with the increasing ability of new supplying countries to sell Under the Uruguay She is struggling to keep up with payReykjavik to receive free food from the land nation, despite its generous welfare page 269 Round of WTO negotiations held from 1986 to 1994, developing countries were able 12 ■ The Global Macroeconomy ments on two car loans, which she took out state, as the middle class is increasingly Icelandic Aid to Chapter Families organisation, 417 to negotiate an end to this system of import quotas expired January in foreign currencies on what proved to be hit 1, by unemployment, which is up from three times The more MFA than before the on crisis 2005 The biggest potential supplier of textileRutur and Jonsson, apparel products was retired China, soone the disastrous advice from her bank, and which to nine per cent in about a year, and a 65-year-old have tripled since the kronur’s collapse a large number of defaults on mortgages mechanical fellowto other expiration of the MFA meant that China could exportengineer, as muchand as ithis wanted HEADLINES Threatened in November with eviction Icelanders who lose their job are initheirindays distributcountries—or so it thought The potentialvolunteers for a hugespend increase exports from China Headlines boxes insights into theofglobal from her home in the village Vogar, ts worth 70 per offer milk,developing bread, eggs countries and cannedexpected food tially posed a problem for many other countries.ing Some that entitled to benefi some 40 kilometres (25 miles) southcent the amount by own businesses rising exports Crisis from China compete donated with their exportand of individuals apparel items, onof their wages—but economy from international media sources Economic in would Iceland west of Reykjavik, she managed to dwindles fast the longer they are withor bought The in bulk at the supermarket which many workers depended for their livelihood large producers in importing negotiate a year’s respite with her bank “I have time toabstract spend on others and out work Coupled with growing debt, International macroeconomics canwith oftenthe seem like a dry countries were also concerned potential riseand in Chinese exports because it “I feel very bad and I am very worthat’s and the best thing I can thinkbeI can do,” the spike in long-term unemployment is subject, butto it the mustloss be of remembered that own societies could lead jobs for their workers individuals in textiles and apparel ried,” she said, running her fingers heThis saidarticle as he was pre-packed profoundly shaken by the issues we will study writtengrocery bags taking a heavy toll full of produce Growth in start Exports Immediately after January just after the of thefrom severeChina economic crisis that engulfed Iceland1,in2005, exports of In a small, close-knit country of just textilesfollowing and apparel from China rapidly exports 2008, the collapse of its grew exchange rate,For a fiexample, nancial crisis, and of a Chinese tights 317,000by people, where everyone and knows and pantyhose tocrisis the European Union increased 2,000% in January February, government fiscal Real output per person shrank by more than 10%, the stigma of accepting a as compared with arose year earlier; ofeveryone, pullovers and jerseyswas from China jumped and unemployment from 1% toimports 9% Five years later a recovery just hand-out is hard to live down and of nearly 1,000%; imports of trousers more than tripled Overall in 2005, China’s beginning to takeand shape the dozens of people waiting outside textile and apparel imports to the United States rose by more than 40% as compared the food bank in the snow on a dreary “The 550 families we welcome here small,8-12, formerly fishing-based economy Reykjavik—The thatas brought with the year crisis before, showndown in Figure where we include theonly top one 20 exportMarch afternoon, Iris is the withwefast cash.the change in the value represent Iceland’s economy in late 16 2008 page In threw panel (a), show of textileabout 2,700 people, and the ers417 to the U.S market willing to talk number keeps going up And we think then, the biggest worryfrom for many thousands of formerly families and apparel importswell-off from each country.Back The of imports China “Itsurge was very difficult for me to come came at it will keep growing until next year, at into poverty, forcing people like Iris to Icelanders was who had the nicest SUV, the expense of some higher-cost exporters, such as South Korea, and here in the beginning But Hong now I Kong, try least,” said Asgerdur Jona Flosadottir, or the most opulent flat turn to charity to survive notdeclined to care so Taiwan, whose exports to the United States bymuch 10%anymore,” to 20% said the who manages the Reykjavik food bank But today visible signs of poverty Each week, up to 550 families queue weary-looking 41-year-old, whoprices lost her textiles In apanel of Figure 8-12, weinshow percentage change the Iris, the fall came quickly arethe quickly multiplying in theinNordic is- of For up at small(b) white brick warehouse job in a pharmacy last summer, as she and apparel products fromfrom eachthecountry, depending the products Shewere is struggling to keep up with payland nation, despiteon itswhether generous welfare Reykjavik to receive free food wrung her hands nervously “constrained to the MFA quota 1, 2005 China hason the ments two car loans, which she took out state, as thebefore middleJanuary class is increasingly Icelandic Aid togoods,” Familiessubject organisation, The contrast is brutal with the oslargest drop in prices fromthe 2004 to 2005, 38% in the “constrained in foreign currencies on what proved to be hit by unemployment, which is upgoods” from categories three times more than before crisis tentatious wealth that was on display Many countries also experienced in their prices to theadvice from her bank, and which disastrous nine per centfall in about a year, and due Rutur other Jonsson, a 65-year-old retired one atosubstantial across the island just two years ago, as Protesters outside the Icelandic parliament in Reykjavik demand that the government more have a large number defaults on and mortgages mechanical engineer, and18% his for fellow end of the MFA quota: Pakistan; 16% for of Cambodia; 8% to 9% fortripled the since the kronur’s collapse a hyperactive banking sector flooded the to improve conditions for the recently poor Icelanders lose their job are ini- dueThreatened volunteers spend their days India, distributPhilippines, Bangladesh, Indonesia, and Sriwho Lanka A drop in price to the in November with eviction Continued on next page her home in the village of Vogar, to benefi ts worth 70 per as from ing milk, bread, and quota cannedisfood removal of the eggs import exactlytially whatentitled we predict from the theory, we move APPLICATION APPLICATIONS HALLDOR KOLBEINS/AFP/Getty Images HEADLINES 11/8/13 10:13 AM 9:27 AM HALLDOR KOLBEINS/AFP/Getty Images some 40 kilometres (25 miles) southdonated by businesses and individuals cent of their wages—but the amount west of Reykjavik, she managed to dwindles fast the longer they are withor bought in bulk at the supermarket 16 “I have time to spend on others and negotiate out work Coupled are with growing debt, and Figure 8-12 and the welfare estimates in the following paragraphs from James Harrigan Geoffreya year’s respite with her bank Barrows, the Theory of Trade the Policy: from the Abrupt End is of the Multifi brevery bad and I am very wor“I feel spikeEvidence in long-term unemployment that’s the2009, best “Testing thing I think I can do,” Available now: Arrangement,” The Review of Economics and Statistics, vol 91(2), pp 282–294 ried,” she said, running her fingers he said as he pre-packed grocery bags taking a heavy toll full of produce International Economics 417 In a small, close-knit country ofFeenstra_IntEcon_3e_Ch12.indd just International Trade 317,000 people, where everyone knows International Macroeconomics everyone, the stigma of accepting a hand-out is hard to live downEssentials and of of International Economics the dozens of people waiting outside the food bank dreary For more information, go to www.worthpublishers.com/economics Feenstra_IntEcon_3e_Ch08.indd 269 in the snow on a 12/18/13 March afternoon, Iris is the only one willing to talk “It was very difficult for me to come here in the beginning But now I try not to care so much anymore,” said the weary-looking 41-year-old, who lost her job in a pharmacy last summer, as she wrung her hands nervously The contrast is brutal with the ostentatious wealth that was on display across the island just two years ago, as Protesters outside the Icelandic parliament in Reykjavik demand that the government more a hyperactive banking sector flooded the to improve conditions for the recently poor Continued on next page Feenstra_IntEcon_3e_Ch12.indd 417 11/8/13 10:13 AM This page intentionally left blank third edition international economics This page intentionally left blank third edition international economics ROBERT C FEENSTRA ALAN M TAYLOR University of California, Davis University of California, Davis Worth Publishers A Macmillan Higher Education Company Senior Vice President, Editorial and Production: Catherine Woods Publisher: Charles Linsmeier Associate Director of Digital Marketing: Scott Guile Marketing Manager: Tom Digiano Marketing Assistant: Tess Sanders Senior Acquisitions Editor: Sarah Dorger Development Editors: Jane Tufts and Bruce Kaplan Associate Development Editor: Mary Walsh Associate Media Editor: Lukia Kliossis Director of Digital and Print Development: Tracey Kuehn Associate Managing Editor: Lisa Kinne Project Editor and Supplements Project Editor: Edgar Bonilla Senior Designer, Cover and Interior Design: Kevin Kall Photo Editor: Cecilia Varas Photo Researchers: Ramon Rivera Moret and Eileen Liang Production Manager: Barbara Anne Seixas Supplements Production Manager: Stacey Alexander Composition, Layout Designer, and Graphics: TSI Graphics Printing and Binding: RR Donnelley Cover Photo Credits: © Ocean/Corbis Library of Congress Control Number: 2013957830 ISBN-13: 978-1-4292-7842-3 ISBN-10: 1-4292-7842-0 © 2014, 2008, 2012 by Worth Publishers All rights reserved Printed in the United States of America First printing Worth Publishers 41 Madison Avenue New York, NY 10010 www.worthpublishers.com Bud Harmon About the Authors Robert C Feenstra and Alan M Taylor are Professors of Economics at the University of California, Davis They each began their studies abroad: Feenstra received his B.A in 1977 from the University of British Columbia, Canada, and Taylor received his B.A in 1987 from King’s College, Cambridge, U.K They trained as professional economists in the United States, where Feenstra earned his Ph.D in economics from the Massachusetts Institute of Technology in 1981 and Taylor earned his Ph.D in economics from Harvard University in 1992 Feenstra has been teaching international trade at the undergraduate and graduate levels at UC Davis since 1986, where he holds the C Bryan Cameron Distinguished Chair in International Economics Taylor teaches international macroeconomics, growth, and economic history at UC Davis, where he also holds appointments as Director of the Center for the Evolution of the Global Economy and Professor of Finance in the Graduate School of Management Both Feenstra and Taylor are active in research and policy discussions in international economics They are research associates of the National Bureau of Economic Research, where Feenstra directs the International Trade and Investment research program They have both published graduate level books in international economics: Offshoring in the Global Economy and Product Variety and the Gains from Trade (MIT Press, 2010), by Robert C Feenstra, and Global Capital Markets: Integration, Crisis and Growth (Cambridge University Press, 2004), by Maurice Obstfeld and Alan M Taylor Feenstra received the Bernhard Harms Prize from the Institute for World Economics, Kiel, Germany, in 2006, and delivered the Ohlin Lectures at the Stockholm School of Economics in 2008 Taylor was awarded a Guggenheim Fellowship in 2004 and was awarded a Houblon-Norman/George Fellowship by the Bank of England in 2009–10 Feenstra lives in Davis, California, with his wife, Gail, and has two grown children: Heather, who is a genetics counselor; and Evan, who is a musician and entrepreneur Taylor also lives in Davis, with his wife, Claire, and has two young children, Olivia and Sebastian v � I-21 MFA See Multifibre Arrangement Miami industry value-added in, 141f Mariel boat lift, industry output and influence on, 140–142, 141f Michelin, 252 Middle East, 1, 327, 578f cross-border finance and, 654f household workers in, 157 OPEC and, 53, 347–348 shares of world trade, 8t trade with, 10 U.S foreign aid to, 646 Migrants foreign-born (2005), 16, 17f with hardship and discrimination, 152n14 remittances of, 155 Migration, allocation of labor and capital with, 136f box diagram with influence of, 135–136, 135f, 136f education levels and, 131–132, 132f, 143t, 155 equilibrium with full, 153–154 with European and U.S immigration, 18–19 factor price insensitivity theorem and, 140 foreign-born migrants, 16, 17f, 18 gains from, 156–159, 157t home labor increase and, 137–138 industry output and influence on, 133–134, 138–139, 139f long-run influences of, 134–139, 134f, 135f, 136f, 137f, 139f map of, 16–19 Mariel boat lift and, 17n9, 123–124, 126, 140–142, 141f, 160 to New World, 128–129, 128f PPF and, 135f real wage and real rental determined with, 136–137 reform and economic windfall, 131 rentals on capital and land with, 133 of Russian Jews to Israel, 124 Rybczynski theorem and, 139–140 with shift in home production possibilities curve, 134f short-run influences of, 125–127, 133–134 specific-factors model and influence of, 125–127, 126f, 127f to U.S and Europe, 129–133, 132f with U.S wages (1990–2006), 142–144, 143t world gains from, 154, 156 Mill, John Stuart, 281, 305, 411–412, 567, 814 Millennium Challenge Account, 646 Minerals industrial, 350, 350n5 rare earth, 2, 327, 349–351, 350n6, 352, 400 Minimum wage, 385 Ministry of International Trade and Industry (MITI), 268 Miquelon, 812n2 Mismatch currencies, 734 Mitchell, Wesley, 560n6 Mobility capital, 537 labor, 821 Mobutu Sese Soko, 645 Mohamad, Mahathir, 452, 452n9 Mohatarem, Mustafa, 180 Mojave Desert, 350, 400 Moldova, 251 currency crash in, 416f NUT/GNI per person (2001–2010) in, 578f Molybdenum, 351 See also “Rare earth” minerals Monaco, 812n2 Monetary approach to exchange rates, 473 with adjustment from short run to long run, 547 asset approach unified with, 541–550, 543f, 546f, 549f, 550f complete theory of floating exchange rates and, 543f with confessions of FX trader, 544 evidence for, 495–496, 495f, 496f exchange rates for major currencies before and after 1973, 550f forecasts using simple model, 492–495, 494f fundamental equation of the, 490 general model, 499–509, 502f, 505f, 506f, 508f hyperinflations and, 496–499, 498f, 499f implications and evidence, 492–499, 494f, 495f, 496f, 498f, 499f in long run, 545–546, 546f long-run policy analysis and, 542–548 monetary and exchange rate regimes with, 509–514, 512t, 513t money market equilibrium in simple model and, 486–492, 487f, 490f overshooting and, 548–550 permanent shock to home money supply and, 544–545 PPP and goods market equilibrium with, 474–485, 478f, 480f, 481f, 485t in short run, 547 Monetary autonomy, 727–730, 728f Monetary model of exchange rate, 490–491 of prices, 489–490, 490f short run versus long run, 534–535 Monetary policy, 689 Bank of England and, 803–804 Bretton Woods to present, 750–753 contingent commitment with, 797–799, 798f, 799f contingent policies and multiple equilibria, 801f costs and benefits of pegging, 801–803, 801f exchange rate regime choice and, 717–730, 719f, 721f, 724f, 726f, 728f, 730f with fixed exchange rate benefits, 730–739, 732t, 735f, 736f, 737t, 739f fixed exchange rate systems and, 740–747, 741f, 744f under fixed exchange rates, 692–693, 693f fixed exchange rates with contingent, 797–804, 798f, 799f, 801f under floating exchange rates, 691–692, 691f with gold standard’s rise and fall, 747–750 government with independence and, 426–427, 426f international monetary experience and, 747–752, 750f, 751f large recession, peg credible and, 800 large recession, peg not credible and, 800–801 OCAs with nominal anchors and, 818–819, 818f problem with contingent commitment with, 797–799 simple model, 798–803, 801f small recession, peg credible and, 800 solutions to trilemma before and after World War I, 750f solutions to trilemma since World War II, 751f Monetary policy autonomy, 729n10 in long run, 553–554 in short run, 551–553, 553f Monetary regimes with choice of nominal anchor and implications, 511–512 exchange rate regimes and, 509–514, 512t, 513t with exchange rate regimes and nominal anchor, 512t exchange rate target and, 510, 512t global disinflation and, 513t inflation target plus interest rate policy and, 511, 512t money supply target and, 510–511, 512t nominal anchor and, 510–512, 512t with nominal anchors in theory and practice, 512–514, 513t Monetary union See Currency union Money See also Money supply with equilibrium in money market, 489 exchange rate forecasts using general model, 507–509, 508f explanation of, 486 with first hyperinflation of twenty-first century, 500 growth, inflation and depreciation, 491–492 with interest rates and prices in long run, 499–509, 502f, 505f, 506f, 508f liquid, 486, 487 I-22 Money (continued) macroeconomics and, 411–412 measurement of, 486–487, 487f, 487n7 MZM, 487n7 quantity theory of, 488, 499 real money demand function, 501 simple monetary model of exchange rate with, 490–491 simple monetary model of prices with, 489–490, 490f Money demand backing ratio and, 770–771 changes in level of, 769–772, 770f currency board operation and, 771 general model, 500–501 home money market with changes in money supply and, 532f in hyperinflations, 498–499, 499f money market equilibrium and, 488–489 reasons for fluctuation, 771–772 shock to home output or foreign interest rate with, 769–770 shocks in Argentina (1993–1994), 775–776, 776f shocks to, 770f standard model of real, 502f Money growth exchange rate and rate of, 496f inflation, depreciation and, 491–492 rates for inflation (1975–2000) and, 495f Money market home, 530f, 532f in U.S., 535–536, 536f Money market equilibrium adjustment in short run with, 530–531, 530f assumptions, 529 with equilibrium in money market, 489 graphical solution, 530 interest rates in short run and, 528–535, 530f, 531f, 532f LM curve and, 686–689, 687f, 688f long-run equilibrium in, 501–502, 502f measurement of money and, 486–487, 487f, 487n7 model, 529–530 with money, prices and exchange rates in long run, 486–492, 487f, 490f money demand and, 488–489 money explanation and, 486 money growth, inflation and depreciation with, 491–492 money supply and, 487–488, 494f nominal interest rates determined with, 528–530 recap, 686 short-run, 531 simple monetary model of exchange rate and, 490–491 simple monetary model of prices and, 489–490, 490f Money of zero maturity (MZM), 487n7 Money supply, 508f, 771n11 changes in composition of, 777–782, 778f, 781f long-run adjustment with home, 546f money demand and home money market with changes in, 532f money market equilibrium and, 487–488, 494f nominal interest rates and changes in, 531–532 permanent shock to, 544–545 reasons for fluctuation, 779–782, 781f responses to permanent expansion of home, 549f with shock to domestic credit, 777–779 short-run impact of permanent expansion of home, 546f sterilization and, 778f temporary expansion of foreign, 539f temporary expansion of home, 538f temporary shock to foreign, 539–540 temporary shock to home, 537–539 Money supply target, 510–511, 512t Monnet, Jean, 811, 851 Monopolistic competition, 167 assumptions, 170–172 equilibrium without trade and, 172–174 with increasing returns to scale, 171f long-run equilibrium and, 173–174, 174f long-run monopolistic competition equilibrium with trade and, 177f numerical example, 172 short-run equilibrium and, 172–173, 172t, 173f short-run monopolistic competition equilibrium with trade and, 175f trade under, 170–177 Monopoly discriminating, 281, 296, 297f equilibrium, 168–169, 169f foreign, 291–295, 292f home, 281–291, 283f, 287f, 320 Monopoly profit, 172, 239, 239n3 Montenegro, 812, 812n2 Montreal Protocol on Substances that Deplete the Ozone Layer, 388, 402 Moore, J S., 725 Moral hazard, 738, 807, 910 Morales, Evo, 59–60 Morgenthau, Henry, 751 Morocco, 155t, 644f Most favored nation principle, 235n2, 237, 370 Motorcycles, heavyweight, 308, 313n18 with calculation of deadweight loss, 311–312 with future gain in producer surplus, 312–313, 312t with protection success, 313–314 U.S imports of, 312t U.S tariff on, 281, 310–314, 312t Motorola, 197 Movement between countries See Foreign direct investment; Migration Moyo (Zimbabwean citizen), 500 Mozambique, 343, 646 MPC See Marginal propensity to consume MPK See Marginal product of capital MPL See Marginal product of labor Multifibre Arrangement (MFA), 263, 267–268 with growth in exports from China, 269, 271 import quality, 271 import quotas, China and, 269–272, 270f with U.S and European reaction, 271–272 welfare cost of, 271, 271n18 Multilateral agreements, 369 Multilateral environmental agreements, 388 Multilateral exchange rates, 440–441, 441f Multilateral real exchange rates, 713 Multilateral trade agreements free trade and, 372 Nash equilibrium and, 373 payoff matrix, 371–372 payoffs in tariff game, 372f prisoner’s dilemma, 372–373 tariffs, 372 tariffs for large country, 370–371, 371f with trade agreements, 373 Multiple equilibria, 798 Mundell, Robert, 663, 706, 811, 817 Myanmar, 369 MZM See Money of zero maturity N NAALC See North American Agreement on Labor Cooperation NAFTA See North American Free Trade Agreement Napoleonic Wars, 627 Nash, John, 354, 354n9 Nash equilibrium, 354–356, 373, 401–402 National economic aggregates recent trends, 581–582 understanding data for, 580–582 U.S CA and components (1990–2012), 582f U.S economic aggregates (2012), 580t U.S GNE components (1990–2012), 581f uses, 578–580 National Election Studies (NES), 117–119 National income and product accounts, 568–570, 569f National income and product accounts (NIPA), 593n12 National income identity, 582 National saving, 582 Native Americans, 398 I-23 Natural gas, 59–60 Natural resources, 30, 60 See also “Rare earth” minerals Neodymium, 2, 350 See also “Rare earth” minerals Nepal, 155, 578f NES See National Election Studies Net borrower, 594 Net creditor, 597 Net debtor, 597 Net domestic assets, 784 Net exports See Trade balance Net factor income from abroad (NFIA), 570, 576f Net lender, 594 Net unilateral transfers (NUT), 572, 578f Netherlands, 1, 8n2, 18n10 airline industry in, 359 banking crisis in, 763t EU and, 158n16 golf club trade and, 166t labor productivity and wages in, 108f snowboard exports, 28t, 30–31 Treaty of Rome and, 827 New Balance, 91–92 New World migration to, 128–129 wages in Europe and, 128f New York, 39 New Zealand Big Mac index and, 485t cross-border finance and, 654f golf club trade and, 166t labor productivity and wages in, 108f, 109 ozone-layer hole above, 402 quota auctions and, 267 shares of world trade, 8t, 10 steel tariffs and, 251 Trans-Pacific Partnership and, 369 New Zealand model, 837 News exchange rates and overreaction to, 544 wartime with FX market and, 558–562, 559f, 561f The New York Times, 22 Newton, Isaac, 189 See also Gravity equation NFIA See Net factor income from abroad NGOs See Nongovernmental organizations Niagara Falls, 31 Nicaragua, 498f Nigeria currency crash in, 416f debt default and, 422 risk premiums in, 644f Nighthawk firms, 226 Nike, 91 NIPA See National income and product accounts NML Capital Ltd v Republic of Argentina, 885n19 No-arbitrage band, 861 No-arbitrage condition, 454 Nominal anchors, 509 exchange rate regimes and, 512t monetary regimes and, 510–512, 512t monetary regimes with choice of, 511–512 OCAs with monetary policy and, 818–819, 818f in theory and practice, 512–514, 513t Nominal convergence, 838–839, 838t Nominal exchange rate, 701, 868–869 Nominal interest rates changes in money supply and, 531–532 changes in real income and, 534 forecasting, 868–869 inflation (1995–2005) and, 505f money market equilibrium and determining, 528–530 neutral level of, 542n2 Nominal rigidity, 529 Nonbank financial institutions, 452 Nongovernmental organizations (NGOs), 385 Non-maquiladoras, productivity for, 181n6, 183, 184 Nontraded goods, 482, 865–867 Normal trade relations, 235n2 North Africa, 129, 130 North America, 9, 128–129 cross-border finance and, 654f prosperity in, 430f North American Agreement on Labor Cooperation (NAALC), 381–382 North American Free Trade Agreement (NAFTA), 73–74, 168, 194, 211 Canada with gains and adjustment costs under, 178–179 with Canada-U.S Free Trade Agreement, 179 labor side agreement under, 381–382 Mexico with gains and adjustment costs under, 179–184, 182f population growth influenced by, 159 summary of, 187 tariffs, 179–180, 179n4, 203 U.S and Mexican, 180, 181 U.S with gains and adjustment costs under, 184–187, 184t workers displaced with, 186 North American Free Trade Area, North Sea, 635 Northern Sea Route, Norway banking crisis in, 763t Big Mac index and, 485t exchange rate quotations and, 437t foreign aid from, 579 labor productivity and wages in, 108f oil boom in, 635, 636f passport-free travel in, 130 sovereign wealth fund in, 630 steel tariffs and, 251 trade/GDP ratio for, 11t, 13f Notes, euro, 813f No-trade equilibrium HO model and, 92–94 in home and foreign, 93f for home firms, 214f indifference curves and, 93 perfect competition comparison with, 282–283, 282f PPF and, 92–93 price, 94 Novy, NUT See Net unilateral transfers O Obama, Barack, 19, 74, 123, 125, 234 free-trade agreement and, 370n2 GSP and, 385, 387 ITC and, 252 job stimulus bill and, 187 NAFTA and, 180–181 output gap and, 705n4 Solyndra loan and, 309 on tax reform, 197, 199, 222–223, 224 tire tariffs and, 233, 246–247, 248, 251, 252, 255 Trade Enforcement Unit and, 279, 280 Obstfeld, Maurice, 797 OCAs See Optimum currency areas ODA See Official development assistance OECD See Organisation for Economic Co-operation and Development Official development assistance (ODA), 577 Official market, 453 Offshoring, 4, 18, 28, 30 with Caterpillar and “onshoring” trend, 225 with change in relative wages across countries, 205 with costs of trade and changes, 203–205, 203f, 204f with destruction of U.S jobs, 224 domestic outsourcing and, 198n3 equilibrium with, 215–216, 215f foreign outsourcing and, 198, 198n2, 199 with future of U.S comparative advantage, 225–226 gains from, 212–222 India and, 225–227 of medical services, 225–226 model, 200–212, 213 politics and future of, 222–226 R&D and, 200, 213 with relative wages Mexico and changes, 211–212, 211f with relative wages U.S and changes, 206–210, 206f, 207f, 208f, 210t value chain and, 200–203, 200f, 202f, 203f Offshoring of American Jobs (Bhagwati and Blinder), 197 Oganes, Luis, 631 Ohlin, Bertil, 88 Oil, boom in Norway, 635, 636f Okanagan Valley, 31 On the Principles of Political Economy and Taxation (Ricardo), 27, 165 O’Neill, Jim, 874 O’Neill, Paul, 435–436 “Onshoring” trends, 225 I-24 OPEC See Organization of Petroleum Exporting Countries Open economy See also IS-LM-FX model of open economy consumption and, 665–666, 665f demand in, 664–676, 665f, 667f, 670f, 672f, 673t, 674f, 675f with exogenous changes in demand, 675–676, 675f flow of payments in, 570–572, 571f government and, 666–667, 667f investment, 666 with investment and permanent shock, 633t investment function, 667f marginal effects, 666 no shocks with closed or, 624t no shocks with closed versus, 624 preliminaries and assumptions in, 664–665 shocks with closed versus, 624–626 small, 612 TB and, 667–671, 670f with TB and real exchange rate, 671–674, 672f, 674f temporary shocks with, 625t Opportunity cost, 34 of apparel, 40 PPF and, 34f, 34n3 prices and, 36, 62–64 specific-factors model and, 62–64 Optimal tariff formula, 260–261, 260f for large importing country, 259–260 for steel, 261–263 for steel products, 262t Optimum currency areas (OCAs) changes in other criteria for, 818f criteria as self-fulfilling, 822–824 criteria for Europe and U.S., 820f economic symmetry and stability costs of, 814 Europe versus U.S with euro and, 819–822, 820f, 822f fiscal transfers and, 817–818, 821–822, 822f with goods market integration within EU, 819–821, 820f labor market integration and, 817 with labor mobility within EU, 821 market integration and efficiency benefits with, 814 monetary policy and nominal anchoring with, 818–819 other criteria for, 817–819, 818f political objectives, 819 with self-fulfilling criteria, 823f simple criteria for, 815, 815f stylized view of EU and U.S., 822f with symmetry of shocks within EU, 821 theory of, 814 Options, 451 Orations (Libanius), 87 Organisation for Economic Co-operation and Development (OECD), 16, 16n7, 17, 20, 155, 576, 579 Organization of Petroleum Exporting Countries (OPEC), 53, 347–348, 635 Original sin fixed exchange rates and, 736–738 with foreign currency denominated debt and costs of crises, 736f measure of, 737t Output See also Industrial output contraction, 735–736, 735f costs of fixed exchange rates, 730f debt, default and increase in volatility of, 890–891, 890f gap, 705n4 manufacturing, 61f volatility, 628f, 729–730, 730f Outright Monetary Transaction, 854 Outside lag, 699 Outsourcing See also Offshoring domestic, 198n3 foreign, 198, 198n2, 199 Overharvesting, of fish, 397 Overshooting, 548–550 Overvaluations of peso, 182–184, 870 undervaluations, productivity growth and, 867–869, 867f Overvalued, 477 Ozone layer, 388, 400, 402 P Pakistan Big Mac index and, 485t debt default and, 422 Green Revolution in, 645 labor productivity and wages in, 108f, 109 MFA quota and, 269 shrimp-turtle case and, 389t, 390 trade/GDP ratio for, 11t Panama free-trade agreement and, 370n2 labor productivity and wages in, 108f Mercosur and, 370 risk premiums in, 644f Panizza, Ugo, 737 Paper Tiger, 576f Paraguay, 370, 645 Parallel markets See Black markets Parity conditions See Covered interest parity; Interest parity; Purchasing power parity; Uncovered interest parity Passports, 130–131 Pass-through, 673, 701 Patriotic Bond, 783 Paur, Klaus, 318 Payments See also Balance of payments; Balance of payments accounts circular flow of, 568 with earnings of capital and land, 74–77 income, 575 total wage, 209, 209n8 Payoff matrix Airbus, foreign subsidy and, 356f Boeing, cost advantage and, 357f Boeing, foreign subsidy and, 358f high-technology export subsidies and, 352–353, 354f multilateral trade agreements and, 371–372 between two firms, 354f Pearson, Steven, 874 Pegged currency blocs, 701–702 Pegged exchange rates See Fixed exchange rates Pegs See Fixed exchange rates Penalties, financial market, 886, 896–897 Pengö, Hungarian, 497, 497f People’s Bank of China, 786, 786f People’s currency See Renminbi People’s Republic of China, 11n3 See also China Per capita income, 18, 45–46 Perfect competition free-trade equilibrium comparison with, 284 home tariff comparison with, 285 no-trade equilibrium comparison with, 282–283, 282f Peri, Giovanni, 130–131, 158 Perpetual loan, 615–616 Perri, Fabrizio, 735 Perry, Matthew, 66 Personal consumption expenditure, 573 Peru, 369 crisis of 1986, 792–796, 793f, 794f debt default and, 422 expectations and critical level of reserves in, 795–796 García’s inconsistent policies and crisis in, 794f perfect-foresight case, 793f PPP and hyperinflation in, 498f risk premiums in, 644f Peso, Argentine, 415, 497, 870 Peso, Mexican devaluation, 182–183 overvaluation, 184 Peso problem, 874–877, 876f, 877f Peugeot, 317 Philippines ASEAN and, 369, 376 Big Mac index and, 485t cell phone industry in, 197 currency crash in, 416f currency depreciation in, 735, 735f debt default and, 422 exchange rate crisis in, 415 MFA quota and, 269 with remittances received, 155 risk premiums in, 644f Philips, 31 Phillip II (King of Spain), 884 I-25 PIGS group, 916 See also Greece; Ireland; Portugal; Spain Pinto, Mark R., 105 Poland, 8n2, 30 austerity and, 697–699 Big Mac index and, 485t credit rating for, 423 EU and, 158n16 per capita income of, 18 risk premiums in, 644f snowboard exports, 28t, 30 stabilization policy with Latvia and, 700–701, 700f Policies See also Monetary policy; Monetary policy autonomy with asset approach and short-run policy analysis, 537–540, 538f, 539f, 541f beggar thy neighbor, 347, 362, 745 CAP, 330 China with mineral products and export, 349–351 constraints with trilemma and interest rate correlations, 728–729, 728f cooperative and noncooperative interest rate policies by center country, 741f with Eurozone in crisis, 844–845 fiscal, 689, 693–696, 694f, 695f, 705f, 789–796, 791f, 793f, 794f, 914t government and institutions with performance and, 424–430, 425f, 426f, 428f immigration, 129 independence and monetary, 426–427, 426f infant industry protection, solar panels and government, 308–310 inflation target plus interest rate, 511, 512t IS-LM-FX model of open economy with unchanged expectations and temporary, 690–691 macroeconomics, 412, 702–705, 703f, 705f response to dumping, 298–304, 302f, 303t solar panels and strategic trade, 300–301 stabilization, 697–705, 698f, 700f, 703f, 705f strategic trade, 298, 300–301 too-easy monetary, 909 trade, 234 Politics cost of political crises, 761, 761f exchange rate forecasts and, 544 OCAs and political objectives, 819 offshoring and, 222–226 Pollution, international agreements on, 400 global pollutants, 401 multilateral agreements, 402 Nash equilibrium, 401–402 payoff matrix, 401 payoffs in environmental game, 401f Ponzi, Charles, 612n1 Ponzi game, 612, 615n2 Poor countries benchmark model and identical productivity levels, 639–640 Big Mac price levels in rich and, 863–864, 864f different productivity levels among countries and, 640–641 financial globalization and gains for, 637–641, 638f, 642t Lucas paradox and why capital doesn’t flow from rich to, 640 with production function approach, 637–638 why capital doesn’t flow to, 638f, 642t Population growth in EU countries, 158, 158n16 in U.S and Canada, 159 Portfolios Hong Kong Monetary Authority Investment Portfolio, 630n11 risk diversification and home, 647 risk diversification and world, 647–649, 648t, 649f with undiversifiable risks and capital income, 662f Portugal, 8n2, 9, 18n10, 27, 33, 53, 55 absolute advantage and, 32 austerity in, 697 banking crisis in, 763t EU and, 158n16 labor productivity and wages in, 108f PIGS group and, 916 Poverty, 430f PPF See Production possibilities frontier PPP See Purchasing power parity Prebisch, Raúl, 52 Prebisch-Singer hypothesis, 52–53, 80 Precautionary saving, 629–630 Predatory dumping, 301 Preferential trade agreements, 374, 387 Premiums country, 772, 774f currency, 772, 774f, 797 forward, 464 risk, 644f, 772–775, 774f Present value, 614 Price discrimination, 296 Prices See also Earnings of capital and land; Factor prices; Relative price absolute PPP, nominal exchange rate and, 478 of automobiles in China (1995–2001) with markups in, 319f benefits measured by price convergence, 727 Big Mac, 863–864, 864f China and consumer cost of automobiles, 317–318 coffee, 80–83, 436n1, 439, 864 common currency with exchange rates to compare, 441–443, 442t computer, 111–113, 111f, 112f, 314f, 315 exchange rates and, 474–485, 478f, 480f, 481f, 485t with factor price insensitivity, 140 free trade and equilibrium, 97 free-trade world equilibrium, 97f fundamental equation of the monetary model of the price level, 489 international, 47–53 levels, 476, 478, 478f, 481f, 489, 863–864, 864f LOOP, 474, 475–476, 476n1, 727, 861 with money and exchange rates in long run, 486–492, 487f, 490f with money and interest rates in long run, 499–509, 502f, 505f, 506f, 508f of nontraded goods determined by wages, 865 no-trade equilibrium, 94 opportunity cost and, 36, 62–64 service, 220 simple monetary model of, 489–490, 490f sticky, 443, 483–484, 550, 664, 667–668 tariffs and influence on home, 291–292 terms of trade and fall in price of components, 217, 217f, 217n12 terms of trade and fall in price of R&D, 218–219, 218f U.S and merchandise, 219–220, 219n13 of U.S cars, 289f, 290, 290f of U.S imports of Japanese automobiles, 288–289, 289f world price line, 43 Primary commodities international prices with terms of trade for, 52–53 relative price of, 54f Prisoner’s dilemma, 372–373, 401, 404 Private actors, 452 Private saving, 584, 585f “Privilege, exorbitant,” 617–618 Producer surplus with computers in Brazil, 315 gains from trade and, 236, 238–239, 238f motorcycles and future gain in, 312–313, 312t tariffs and influence on, 244 Product See also Gross domestic product approach, 573 income, expenditure and, 573–587, 576f, 578f, 580t, 581f, 582f, 584f, 585f, 587f MPK, 635, 638–641, 640n18 MPL, 33, 33n2, 61f national income and product accounts, 568–570, 569f value chain of, 200f Production in absence of offshoring, 213–216, 214f, 215f China and automobile, 317 with consumption changes, 41–43 I-26 Production (continued) factors of, 30 home equilibrium with trade and, 42f migration with shift in possibilities curve for home, 134f trade, environment and negative production externalities, 393–394 Production function, 637 Production function approach, 637–638, 638f Production loss, 245–246, 334 Production possibilities frontier (PPF), 35–36 foreign country and, 37–38, 38f home country and, 33–34, 34f migration and, 135f no-trade equilibrium and, 92–93 opportunity cost and, 34f, 34n3 specific-factors model and, 62, 62f wheat, 38n5, 43n9 Production subsidies, 340 home welfare and, 342 in large home country, 343 in small home country, 341–343, 341f targeting principle and, 342–343 Productivity, 637 growth with overvaluations and undervaluations, 867–869, 867f labor, 108–109, 108f for maquiladoras and nonmaquiladoras, 181n6, 183, 184 in Mexico, 181–182, 182f wages and, 10 wages and labor, 46–47, 46f, 48f, 108f, 109 Productivity across countries with arable land, 102–103, 105–106, 106t augmented model and differing, 640–641, 642t benchmark model and differing, 639–640 differing, 102–106 with factor abundance measured, 103 R&D scientists and, 102, 103–105, 103n5, 104f Profits with dumping, 297–298 efficient markets hypothesis and actual, 878–880, 879f efficient markets hypothesis and expected, 878 Mexico and profit-sharing, 183n7 monopoly, 172, 239, 239n3 Shanghai and GM, 318 Prosperity, 430f Protection See also Infant industry protection of China and automobile industry, 316–319, 319f import protection cases in U.S (1980–2011), 303t import quotas and annual cost of U.S import, 268t U.S., heavyweight motorcycles and, 313–314 Protests Chile and student, 631 euro, 722f farmers and WTO, 328f IMF, 807 peso problems, 877f Save Malaysia Stop Lynas group, 351f Seattle and WTO, 367–368, 368f, 388, 391 Proximity, 28, 29–30 Public debt levels, sovereign ratings and, 621f Public saving, 585, 585f Purchasing power parity (PPP), 504n10 absolute, 476–478 Big Mac index and, 484, 485t in Canada and U.S., 473–474, 521–522 convergence to, 481–482, 481f deviations from, 482–485, 485t exchange rate depreciation, inflation and relative, 478–479, 478f exchange rates and relative price levels with, 481f exchange rates in long run with deviations from, 860–871, 862f, 864f, 867f goods market equilibrium and, 474–485, 478f, 480f, 481f, 485t in hyperinflations, 497–498, 498f imperfect competition and legal obstacles with, 482–483 long and short run with evidence for, 480–481, 480f LOOP and, 474, 475–476, 476n1, 727, 861 nominal exchange rate, prices and absolute, 478 nontraded goods and, 482 price levels and exchange rates in long run with theory of, 478f price stickiness with, 483–484 real exchange rate and, 477 transaction costs and, 482 Put See Sell Puzzles equity premium, 883 risk diversification and home bias, 652–654, 652f, 654f Sharpe ratio and puzzles in finance, 881–883, 882f, 883n10 UIP, 880 Pyramid scheme, 612, 612n1 Q Qatar, 630 Quantitative easing (QE), 533, 920 Quantity theory of money, 488, 499 Quantum Fund, 803–804 Quota Law of 1921, 152 Quota licenses, 265 Quota rents, 265, 289 Quotas, 193 See also Import quotas auctions, 267, 267n15 export, 347–351, 348f home, 286–288, 287f MFA, 269–272, 270f with tariffs and home monopoly, 281–291 Quotations, exchange rates, 437n3, 437t R Radiology, 225–226 Rajan, Raghuram, 646 “Rare earth” minerals, 2, 327, 349–351, 350n6, 352, 400 Rate of return, 461 Rates See also Exchange rates; Interest rates cross, 455–456, 456f forward, 450f, 458, 467f lending, 887 spot, 450f, 463, 467f Ratings, credit, 423 Ratio backing, 771, 771n11 Sharpe, 881–883, 882f, 883n10 Rational expectations hypothesis, 880 R&D See Research and development Reagan, Ronald, 311, 311f Real appreciation, 477 Real depreciation, 477 Real effective exchange rate, 671, 672f Real exchange rate, 477, 483, 701, 702 in EM, 869–871 equilibrium, 867 forecasting, 868 J curve and, 673–674, 674f TB and, 667–668, 670f, 671–674, 672f, 673t, 674f TB in U.S (1975–2012) with, 672f trade dollarization and, 673–674, 673t Real interest parity, 504–505 Real interest rates differentials (1970–1999), 506f expected, 666 world, 504, 612 Real money demand function, 501 Real rental change in, 113–114 with general equation for long-run change in factor prices, 117 migration and determining real wage and, 136–137 numerical example of, 115–117 real wage and, 113–117, 136–137, 149t Singapore with real wages and, 149–151, 149t Stolper-Samuelson theorem, real wage and, 114–115 Real value-added, 140, 141f Real wage, 113–117, 136–137, 149t Mexico with incomes and, 182–183 relative price of manufactures and influence on, 68–69, 69n5, 69n6 Recessions crisis in Eurozone with, 917f Great, 620, 705f, 903, 914t monetary policy with peg credible in large, 800 monetary policy with peg credible in small, 800 monetary policy with peg not credible in large, 800–801 U.S crisis and, 915f I-27 Redenomination, of currency, 497 Reebok, 91 Reflexivity, 803, 804 Reforms currency, 497 economic windfall and migration, 131 immigration, 130, 131 on tariffs, 197, 199, 222–223, 224 Refugees, 17n9, 123–124, 126, 142 See also Mariel boat lift Regimes, 424, 805 See also Exchange rate regimes; Monetary regimes Regional trade agreements, 236, 369, 373, 374–375 Rehn, Olli, 853 Reinhart, Carmen, 622 Relative PPP, 478–479, 478f Relative price of assets, 414–415 of computers, 111–113, 111f, 112f equation, 475 of goods, 414 levels with exchange rates, 481f manufactures and change in, 68–70, 68f manufactures and increase in, 63f of manufactures and influence on real wage, 68–69, 69n5, 69n6 of primary commodities, 54f of wheat, 37, 41n8 Remittances of migrants, 155 with workers’ remittances and net foreign aid (2010), 155t Renminbi (people’s currency), Chinese, 413n1, 414f Rent seeking, 266–267 Rental capital stock increase and influence on, 147f computer prices and influence on wages and, 112f FDI and influence on, 146–147 real wage and real, 113–117, 136–137, 149t with rent seeking and import quotas, 266–267 trade and influence on wage and home, 110–113 Rental on capital earnings of capital and land with change in, 78–79 earnings of capital and land with change in real, 76–77 migration and, 133 Rental on land, 76 earnings of capital and land with change in, 79 earnings of capital and land with change in real, 77 migration and, 133 Rents, quota, 265, 289 Repayment, default versus, 887–889, 888f Repayment threshold, 887 Research and development (R&D) fall in price of component and, 217f, 217n12 offshoring model and, 200, 213 scientists, 102, 103–105, 103n5, 104f terms of trade and fall in price of, 218–219, 218f Reserve currency system, 740 Reserves, 765 accumulation, 786–787, 787f central bank and, 766n8 fixing, floating and role of, 766 foreign, 629 pegs and adjustment of, 767 requirements, 784 sovereign wealth funds, precautionary savings and, 629–630 Resource endowments, 428 Resources, 28, 30 Responsibility, for labor issues consumer, 382–383, 383t corporate, 383–384 country, 384–385, 387 Rest of the world (ROW), 596–597, 623 cross-border finance and, 654f financial crisis of (2007–2009) and, 918–919, 919f Restrictions, trade, 394–395 Retaliatory tariffs, 263 Returns correlations and gains from diversification, 650f diminishing, 34, 61–62 on EM debt (1970s–2000s), 892f ex ante and ex post, 892 excess, 881 expected rate for, 461 FX market equilibrium and changes in domestic and foreign, 526–528, 527f with increasing returns to scale, 167, 171f interest rates with FX market equilibrium, exchange rates and expected, 525t risk-adjusted foreign, 772 Revaluation, 743 Revenue marginal, 168, 282 tariffs and influence on government, 244 Reversal of factor intensities, 92 Reverse-vertical FDI, 22 Revolutionary War, 885n17 Ricardian model, 9, 10, 28–29, 88, 586 comparative advantage in apparel, textiles, wheat and, 38–40 foreign country and, 37–38 home country and, 33–37 Ricardo, David, 27, 28, 32, 32f, 53, 165, 178 Rice, 330, 376 Rich countries Big Mac price levels in poor and, 863–864, 864f capital flow lacking between poor and, 638f, 640, 642t foreign aid and, 579 Rigidity, nominal, 529 Risk avoidance See Hedging Risk diversification, 646, 650f, 655 home bias puzzle and, 652–654, 652f, 654f numerical example and generalization, 647–651 portfolio diversification and capital income, 649f portfolio diversification choices, 648t Risk premiums, 644f, 772–775, 774f Risk taking See Speculation Risk-adjusted foreign return, 772 Risks asset, 461 of banking with exchange rate crisis and macroeconomic costs, 897–899, 898f, 899t country, 423 diversifiable, 661 exit, 845 finance with defaults and other, 422–423 with limits to arbitrage, 881, 882f problem of, 457 undiversifiable, 661, 662f Romania, 8n2, 18, 251, 812 Rome, Treaty of, 827 Roodman, David, 579 Rose, Andrew, 825 Rotterdam, Roubini, Nouriel, 735 ROW See Rest of the world Rules, in Eurozone, 838–843, 838t, 839n13, 839n14, 840f, 841f Rules of origin, 374 Russia, banking crisis in, 763t Big Mac index and, 485t bonds, 738f cross-border finance and, 654f currency crash in, 416f debt default and, 422 exchange rate crisis in, 415 G8 and, 339n4 risk premiums in, 644f shares of world trade, 8t sovereign wealth fund in, 630 trade with, 10 Russian Federation, 11t Russian Jews, 124 Rybczynski, T N., 139, 139n8 Rybczynski theorem, 139–142 S Sachs, Jeffrey D., 500 Safeguard provision, 236, 247 Safeguard tariffs, 233 antidumping duties versus, 301, 302–304, 303t Bush, George W., and, 268 small country and, 247 solar panels comparison with, 301 Saint Barthélemy, 812n2 Saint Pierre, 812n2 Samoa, 155, 578f Samsung, Samuelson, Paul, 27, 33, 114, 212–213, 216, 218–219, 867 See also BalassaSamuelson effect; StolperSamuelson theorem San Marino, 812n2 Sánchez de Lozada, Gonzalo, 59 São Tomé and Príncipe, 578f Sarkozy, Nicolas, 130, 850f Saudi Arabia, 157, 757n1 Big Mac index and, 485t sovereign wealth fund in, 630 I-28 Save Malaysia Stop Lynas group, 351f Savings government, 585 investments and delinking, 635–637, 636f national, 582 precautionary, 629–630 private, 584, 585f public, 585, 585f for rainy day, 627 Savings glut, 905 Saxena, Sanchita, 384 Scale See Increasing returns to scale Scandium, 350n6 See also “Rare earth” minerals Scarce in that effective factor, 100, 103 Schengen agreement, 130, 829t, 831, 832 Scientists, R&D, 102, 103–105, 103n5, 104f Scott, Lee, 384 SD See Statistical discrepancy Seattle, 367–368, 368f, 388, 391 “Seattle Was a Riot,” 367 “Second golden age” of trade, 14–16 Second-general crisis model, 797 Seigniorage, 730–733, 732t Self-confirming equilibrium, 802 Self-insurance, 807 Sell (put), 451 September 11, 2001, 540, 909 Serbia in EU, 812 hyperinflation in, 497 Service prices, 220 Service trade, in U.S., 220–222, 221t, 222f Services, 71 business, 219, 222f export of, GDP to GNI and accounting for trade in factor, 574–575 GDP with trade in goods and, 13f GNE to GDP and accounting for trade in goods and, 573–574 industries in U.S with job losses in manufacturing, 73t with TAA for services workers, 75 U.S terms of trade and, 219–222, 220f, 221t, 222f WTO and trade in industrial goods and, 331 Sfr See Swiss francs SGP See Stability and Growth Pact Shakespeare, William, 411–412 Shambaugh, Jay, 726, 728, 729 Shanghai, 318 Sharpe, William Forsyth, 882 Sharpe ratio, 881–883, 882f, 883n10 Sherman, William Tecumseh, 560 Shipping containers, 14, 15, 15f Shock See also Hurricanes; Wartime in Argentina (1993–1994), 775–776, 776f asymmetric, 723 balance of payments with common versus idiosyncratic, 661–662 closed economy with temporary, 625f closed or open economy with no, 624t closed versus open economy with, 624–626 closed versus open economy with no, 624 destabilizing wealth, 734 exogenous shocks to investment, TB and consumption, 675f foreign money supply and temporary, 539–540 in Germany with exchange rate regime, 718–719 home money supply and permanent, 544–545 home money supply and temporary, 537–539 money demand, 769–770, 770f money supply and domestic credit, 777–779 open economy with investment and permanent, 633t open economy with temporary, 625t permanent, 626–627 symmetric, 732, 821 Shoe industry in China and Vietnam, 299 computers in comparison to, 115–117, 135–136, 135f, 136f Short-run equilibrium cost information for firms and, 172t short-run monopolistic competition equilibrium without trade and, 173f with trade, 175–176, 175f without trade, 172–173, 172t, 173f Short-run policy analysis asset approach and, 537–540, 538f, 539f, 541f with temporary expansion of foreign money supply, 539f with temporary expansion of home money supply, 538f with temporary shock to foreign money supply, 539–540 with temporary shock to home money supply, 537–539 Shrimp-turtle case, 389t, 390 Shuanghui International, 22 Siberia, Sierra Leone, 579 Similarity, economic, 722–723 Simplified offshoring model, 213 Sin, original, 736–738, 736f, 737t Singapore ASEAN and, 369, 376 Big Mac index and, 485t cell phone industry in, 197 FDI and influence on rentals and wages in, 149–151 foreign capital in, 149n12 FX market in, 449 golf club trade and, 166t household workers in, 157 labor productivity and wages in, 108f real rental and wages in, 149t sovereign wealth fund in, 630 trade/GDP ratio for, 11t Trans-Pacific Partnership and, 369 Singer, Hans, 52 See also Prebisch-Singer hypothesis Skill-biased technological change, 209 Slaughter, Matthew, 223 Slovakia, 8n2, 556, 870–871 EU and, 158n16 as Eurozone member, 813, 832 per capita income of, 18 trade dollarization and, 67f Slovenia, 8n2, 30 EU and, 158n16 as Eurozone member, 813, 832 per capita income of, 18 snowboard exports, 28t Small country consumer surplus and, 244 consumption loss and, 246 export tariff in, 344–345, 344f free trade and, 242 free trade for, 239–240, 242 government revenue and, 244 import quotas in, 263–268, 264f, 268t import tariffs for, 242–256, 243f, 245f, 249t, 253f, 255f influence of, 242–246 producer surplus and, 244 production loss and, 245–246 safeguard tariffs and, 247 tariff application whys and hows, 246–248 tires and, 253f U.S imports of tires and, 233–234, 255f U.S ITC recommended and actual tariffs for steel, 249t with U.S tariffs on steel and tires, 248–256, 249t, 253f, 255f welfare influenced by, 244–245, 245f Small home country, export subsidies, 331 home welfare influenced by, 333–334 influence of, 332–334, 332f Small open economy, 612 Smallpox, 645 Smith, Adam, 32, 36, 429 Smithfield Foods, 22 Smoot, Reed, 12 Smoot-Hawley Tariff Act, 12–13, 280 Snechma, 198 Snowboards, 27, 28, 28t, 29, 30–31, 33 Social efficiency, 643 Solar flares, 310 Solar panels antidumping duty and, 301–302 dumping with U.S imports of, 299–302 government policies in, 308–310 with home loss due to threat of duty, 302f ITC and, 299–300 safeguard tariff comparison with, 301 strategic trade policy and, 300–301 trade, 399–400 U.S imports from China, 299–302, 302f I-29 SolarCity Corp., 300 SolarWorld Industries America, 299, 309 Solyndra, 309 Soros, George, 452n9, 803f, 804 South Africa Big Mac index and, 485t currency crash in, 416f debt default and, 422 golf club trade and, 166t trade/GDP ratio for, 11t South America migration to, 128–129 OPEC and, 348 trade in, South Korea, 1, 16n7 automobile industry in, 295 banking crisis in, 763t Big Mac index and, 485t cell phone industry in, 197 cell-phone components manufactured in, currency crash in, 416f currency depreciation in, 735, 735f exchange rate behavior, 445, 446f exchange rate crisis in, 415 exports, 269 free-trade agreement and, 370n2 golf club trade and, 166t, 167 labor productivity and wages in, 46f, 47, 48f Mercosur and, 370 steel tariffs and, 251 trade dollarization and, 67f trade with, Trans-Pacific Partnership and, 369 U.S foreign aid to, 646 US-Korea Free Trade Agreement and, 295 Sovereign debts, 885–886 ratings and public debt levels, 621f Sovereign debt crisis See Default crisis Sovereign default, 884, 899t Sovereign wealth funds, 629–630, 631 Soviet Union, 151 S&P See Standard & Poor’s Spain, 8n2, 18n10 airline industry in, 359 austerity in, 697 EU and, 158n16 interwar period and tariffs in, 12 labor productivity and wages in, 108f PIGS group and, 916 radiology in, 226 snowboard exports, 28t trade dollarization and, 67f trade/GDP ratio for, 11t Species, endangered, 388, 390, 397–399 Specific-factors model, 60, 124 coffee prices and, 83 with diminishing MPL, 61f earnings of capital and land with, 74–82 earnings of labor and, 66–74 FDI in short run and, 145–147, 145f, 147f foreign country and, 64 gains from trade, 65–66 home country and, 61–64 home labor increase and, 127f, 127n4, 127n5 home labor market and, 126f with increase in relative price of manufactures, 63f manufacturing output and, 61f migration and, 125–127, 126f, 127f with opportunity cost and prices, 62–64 overall gains from trade and, 64–65 PPF and, 62, 62f unemployment in, 70 Speculation (risk taking), 451 Speculative attack, 792 Speed of convergence, 481 See also Convergence Spiegel, 414 Spot contract, 449–450, 449n8 Spot exchange rate, 449, 453–456, 454f, 456f Spot rates determining, 463 forward and, 450f, 467f Spread, 450 Sputnik, 151 Sri Lanka Big Mac index and, 485t labor productivity and wages in, 108f, 109 MFA quota and, 269 Srinivasan, T N., 381 Stability fixed exchange rates and diminishing monetary autonomy and, 727–730, 728f, 730f OCAs with economic symmetry and stability costs, 814 Stability and Growth Pact (SGP), 829t, 842–843, 853 Stabilization policy austerity and, 697–699, 698f constraints with, 699 incomplete information and inside lag with, 699 long-horizon plans and, 699, 701 with macroeconomic policies in liquidity trap, 702–705, 703f, 705f pegged currency blocs and, 701–702 Poland and Latvia with, 700–701, 700f with policy design and implementation problems, 699–702, 700f response and outside lag with, 699 with weak links from nominal to real exchange rates, 701 with weak links from real exchange rate to TB, 702 Stadelmann, Hans, 414 Standard & Poor’s (S&P), 423, 621f, 652 Standards dollar, 716, 752 gold, 715–716, 745–747, 746f, 747–750, 752, 828t labor, 381–387 Wal-Mart, China suppliers and raising of, 384 Starbucks, 864, 864f Statistical discrepancy (SD), 595, 595n13 Staudigl, Rudolf, 310 Steel deadweight loss and, 250 tariffs on, 233–234, 236, 246, 246n5, 248–256, 249t, 251n10, 253f, 255f, 261–263, 262t U.S tariffs on, 248–256, 249t, 253f, 255f, 261–263, 262t U.S tariffs on tires and, 248–256, 249t, 253f, 255f WTO’s dispute settlement procedure and, 251, 251n10 STEM workers, 158 Sterilization, 778, 778f, 786f Sterilization bonds, 785–786, 786f Sterling Shopping, 670 Stern Commission, 403 Steventon, John, 670 Sticky prices, 443, 483–484, 550, 664, 667–668 Stocks, 312 capital, 107, 145f, 147f, 148f FDI, 19f, 20, 21, 22 Stolper, Wolfgang, 114 Stolper-Samuelson theorem, 114–115, 118–119 Stops, sudden, 622, 622f Strategic advantage, 352 Strategic trade policy, 280, 300–301 Subramanian, Arvind, 646 Subsidies See also Hightechnology export subsidies; Large home country, export subsidies; Small home country, export subsidies agricultural export, 329–331, 329t Airbus, 354, 355–357, 356f Boeing, 354, 357–358, 357f, 358f to commercial aircraft, 358–361, 360t cotton, 330 export, 234, 329–340, 329t, 332f, 335f, 338f, 351–361, 354f, 356f, 357f, 358f, 360t indirect, 330, 336 production, 340–343, 341f Sudan, 155, 155t, 337 Sudden stops, 622, 622f Sugar import quotas and, 266 U.S trade restrictions in ethanol and, 394–395 Suharto, 761 Summers, Lawrence, 757 Suntech Power Holdings, 300, 309 Suomela, John, 279 Superjumbo aircraft, 359–360 Supply, 208f, 532f See also Home money supply; Money supply demand and, 676 foreign export, 256–257, 256f foreign money, 539–540, 539f home export supply curve, 47–51, 48f, 49f, 50f loan, 893–896, 894f, 895f Suriname, 416f Surplus, 419, 585–586, 667 See also Consumer surplus; Producer surplus; Trade surplus I-30 SUVs, 295, 295n9 Suzuki, 311 Swaps, 451 Sweatshops, 383f, 385 Sweden, 8n2, 18n10 banking crisis in, 763t Big Mac index and, 485t with change in relative wage of skilled workers, 205 EU and, 158n16 exchange rate quotations and, 437t labor productivity and wages in, 46f, 47, 48f, 108f with opting out of Eurozone, 813 trade/GDP ratio for, 11t, 13f Swiss francs (Sfr), 414–415 Switzerland banking crisis in, 763t Big Mac index and, 485t exchange rate quotations and, 437t interwar period and tariffs in, 12 labor productivity and wages in, 108f passport-free travel in, 130 snowboard exports, 28t, 30 steel tariffs and, 251 trade/GDP ratio for, 11t Sydney, 449 Symmetric shock, 723, 821 Symmetry-integration diagram, 724, 724f System of National Accounts, 588n9 T TAA See Trade Adjustment Assistance Taiwan, 310 Big Mac index and, 485t cell phone industry in, 197 exports, 269 golf club trade and, 165, 166t, 167 labor productivity and wages in, 46f, 47, 48f snowboard exports, 28t, 30 trade with, U.S foreign aid to, 646 Tajikistan NUT/GNI per person (2001–2010) in, 578f with remittances received, 155 trade with, 10 Takao, Hiroshi, 875 Tan Bun Teet, 351 Targeting principle, 342 Targets, 386 exchange rate, 510, 512t inflation, 511, 512t money supply, 510–511, 512t with production subsidies and targeting principle, 342–343 Tariff equilibrium, 306 future of, 307–308 infant industry protection and, 307f today, 307 welfare influenced by, 308 Tariff war, 251 Tariffs, 32, 193, 575n3, 666 See also Import tariffs; Tariffs under imperfect competition; Tariffs under perfect competition in agriculture, 328, 331 application of, 246–248 average worldwide (1860–2010), 14f in China, 251, 280 consumer surplus and influence of, 244 consumption loss and influence of, 246 deadweight loss and, 250, 254–256, 285–286 discriminatory, 252, 253–254, 255, 255n12, 263, 265 with dumping, 235, 237, 296–304, 297f, 302f, 303t equivalent import, 264 export, 343–347, 344f, 346f government revenue and influence of, 244 home, 284–286, 285f home welfare and influence of, 258–259, 293 industrial deaths in Bangladesh and U.S., 384, 386, 387 inflation, 731 influence of, 242–246, 243f, 245f, 257–261, 258f, 260f interwar period, 12–14 for large country in multilateral trade agreement, 370–371, 371f on motorcycles, 281, 310–314, 312t multilateral trade agreement, 370–372, 371f NAFTA, 179–180, 179n4, 203 optimal, 259–263, 260f, 262t producer surplus and influence of, 244 production loss and influence of, 245–246 with quotas and home monopoly, 281–291 reform, 197, 199, 222–223, 224 retaliatory, 263 safeguard, 233, 247, 268, 301, 302–304, 303t steel, 233–234, 236, 246, 246n5, 248–256, 249t, 251n10, 253f, 255f, 261–263, 262t steel and tires, 248–256, 249t, 253f, 255f terms of trade and influence of, 258 on tires, 233–234, 246–248, 251–256, 253f on U.S imposed by Mexico, 181n5 welfare and influence of, 244–245, 245f Tariffs under imperfect competition, 279–280 dumping, 296–298, 297f dumping and policy response, 298–304, 302f, 303t with foreign monopoly, 291–295, 292f infant industry protection, 304–319, 307f, 312t, 314f, 315t, 319f quotas with home monopoly, 281–291, 282f, 283f, 285f, 287f, 289f, 290f Tariffs under perfect competition, 233–234 gains from trade, 236–242, 238f, 240f, 241f import quotas, 263–272, 264f, 268t, 270f for large country, 256–263, 256f, 258f, 260f, 262t for small country, 242–256, 243f, 245f, 249t, 253f, 255f WTO and, 235–236 Taxes, 666, 731 See also Tariffs TB See Trade balance Teak wood, 343 Technical efficiency, 643 Technical methods, exchange rate forecasts and, 544 Technology, 28, 31 Tequila crisis, in Argentina banking crisis (1995) and, 782–783 central bank operations (1993–1997) and, 776f Convertibility Plan after, 782–784 Convertibility Plan before, 775–777, 776f with help from IMF and recovery, 783 money demand shocks (1993–1994) and, 775–776, 776f Terbium, 350 See also “Rare earth” minerals Terms of trade, 51, 216, 334 with fall in price of components, 217, 217f, 217n12 with fall in price of R&D, 218–219, 218f international trade equilibrium and, 51–52 for primary commodities with international prices, 52–53 tariffs and influence on, 258 U.S service exports and, 219–222, 220f, 221t, 222f Terms-of-trade gain, 259, 369 Terrorist attacks, 540, 909 Textiles with apparel and wheat in U.S and China, 40t comparative advantage in apparel, wheat and, 38–40 Thailand ASEAN and, 369, 376 banking crisis in, 763t Big Mac index and, 485t cell phone industry in, 197 currency crash in, 416f currency depreciation in, 735, 735f exchange rate behavior, 445, 446f, 447n6 exchange rate crisis in, 415 with export subsidy gains, 336 golf club trade and, 165, 166t, 167 labor productivity and wages in, 108f, 109 shrimp-turtle case and, 389t, 390 steel tariffs and, 251 teak wood in, 343 trade dollarization and, 67f trade with, trade/GDP ratio for, 11t Thorium, 351 Threat of duty, 302f Tigers Asian, 576, 645–646 Celtic, 575–577, 646 Paper, 576f Tinbergen, Jan, 189 I-31 Tires tariffs and deadweight loss, 254–256 tariffs on, 233–234, 246–248, 251–256, 253f tariffs on steel and, 248–256, 249t, 253f, 255f U.S import of, 233–234, 255f Tommy Hilfiger, 386 Tonga, 155, 578f Too-easy monetary policy, 909 Torii, Mayumi, 875, 875f Toshiba, Total wage payments, 209, 209n8 Total wealth, 607–608 Tourism, Toyota Motor Corporation, 20 A Tract on Monetary Reform (Keynes), 521 Trade See also International trade; Terms of trade absolute advantage and, 30–31 adjustment costs from, 177 balanced, 32 benefits measured by trade levels, 725–726, 726f buffalo, 397–399, 398f in Canada, 9, 192–193 carry, 871–874, 873f, 882f changing costs of, 203–205, 203f China and unfair trading practices, 279, 280 comparative advantage and, 31, 32–33 costs of capital and, 201 currency unions and, 825 curry, 670 distortion with iPhone, 4, 5, 5f embargo, 65 environment influenced by, 391–394, 393f equilibrium without, 172–174, 172t, 173f, 174f fish, 388–390, 389t fixed exchange rate as promoter of, 725–727, 726f food, 106t frictionless, 475 gravity equation in, 189–190 home welfare and no, 239 index of intra-industry, 188–189, 188t intra-industry, 168 with Japan, 9, 10, 66 under monopolistic competition, 170–177 most favored nation principle with, 235n2, 237, 370 proximity, 29–30 in rare earth minerals, 400 reasons for, 29–33 resources, 30 restrictions, 394–395 service, 220–222, 222f, 222t in solar panels, 399–400 Trade Act of 1974, U.S., 247–248 Trade Act of 2002, U.S., 187 Trade Adjustment Assistance (TAA), 70, 73–75, 83, 186–187 Trade agreements See also North American Free Trade Agreement free, 168, 179, 295, 370, 370n2 international, 370–380, 371f, 372f, 377t, 378f multilateral, 369, 370–373, 371f, 372f preferential, 374, 387 regional, 236, 369, 373–375 Trade balance (TB), 3, 570, 574 bilateral, 4, currency war and, 669 curry trade and, 670 exogenous shocks to investment, consumption and, 675f income levels and role in, 668, 669, 671 J curve and, 673–674, 674f marginal effects, 671 real exchange rate and, 667–668, 670f, 671–674, 672f, 673t, 674f real exchange rate in U.S (1975–2012) with, 672f trade dollarization and, 673–674, 673t weak links from real exchange rate to, 702 Trade barriers, 12 Trade cost, 861, 862–863, 880–881 Trade creation Canada with trade diversion and, 380 numerical example of trade diversion and, 375–377, 377t trade diversion and, 375 Trade deficit, 4, Trade diversion Canada with trade creation and, 380 in graph, 377–380, 378f numerical example of trade creation and, 375–377, 377t Trade Enforcement Unit, 279, 280 Trade equilibrium See International trade equilibrium Trade in Civil Aircraft Agreement of 1992, 359, 360t Trade patterns, 29 free-trade equilibrium and, 97, 97f in international trade, 40–47 international trade equilibrium with gains and, 43–44 Trade policy, 234 Trade promotion authority, 246n5 Trade surplus, 3, 222f Trade weights, currencies and, 440 Traders forex, 455f, 544 homemaker-, 875 TradeSports Exchange, 560, 562 Tragedy of the commons, 397 Transaction costs, 450, 482 Trans-Atlantic Trade and Investment Partnership, 9, 369 TransFair USA, 82, 83 Transfer programs, 666–667 Transfers of income, 577–578, 578f NUT, 572, 578f OCA and fiscal, 817–818, 821–822, 822f unilateral, 572, 582n6 Transmission mechanism, 533, 534 Trans-Pacific Partnership, 9, 266, 369 Treaties China-ASEAN, 376, 396 Constitutional, 829t Maastricht, 811, 812, 827–830, 828t, 829t Schengen, 130, 829t, 831, 832 Treaty of Amsterdam, 829t, 831 Treaty of Rome, 827, 828t Treaty of Schengen, 130, 829t, 831, 832 Trefler, Daniel, 165, 178–179, 380 Trend, convergence and, 868 Triangular arbitrage, 455, 456f Trilemma in action, 728f asset approach to exchange rates and, 551–558, 553f, 556f, 557f definition, 555n5 in Europe, 557–558, 557f of fixed exchange rates, 554–556, 556f interest rate correlations, policy constraints and, 728–729, 728f with solutions before and after World War I, 750f with solutions since World War II, 751f Triple crises, 762, 898f Trumka, Richard, 387 Tsunami, Asian, 579 Tuna-dolphin case, 388–390, 389t Tungsten, 351 See also “Rare earth” minerals Tunisia migration from, 129, 130 snowboard exports, 28t, 30 Turkey banking crisis in, 763t Big Mac index and, 485t credit rating for, 423 currency depreciation in, 735, 735f in EU, 812 migration from, 129 steel tariffs and, 251 trade/GDP ratio for, 11t U.S foreign aid to, 646 Turkmenistan, 10 Turtle-shrimp case, 389t, 390 Twin crises, 762, 898f Two-period budget constraint, 613–615 U UAE See United Arab Emirates UBS, 452 Uganda, 646 UIP See Uncovered interest parity UK See United Kingdom Ukraine Big Mac index and, 485t currency crash in, 416f debt default and, 422 exchange rate crisis in, 415 I-32 UN See United Nations Uncovered interest parity (UIP), 462, 502–503, 504n10 arbitrage and, 463–466 efficient markets hypothesis and, 879f, 880 exchange rates in short run with deviations from, 871–884, 873f, 876f, 879f, 882f with fundamental equation of asset approach, 523f FX market equilibrium and, 522–528, 523f, 524f, 525t, 527f puzzle, 880 risky arbitrage and, 460–463, 462f Undervalued, 477, 867–869, 867f Undervalued exchange rates, 909 Undiversifiable risk, 661, 662f Unemployment, 70 Unilateral transfers, 572, 582n6 Unions, 233, 247 See also European Union; specific unions currency, 447, 811, 816, 825, 836–837 customs, 236, 237, 374 EPU, 827 labor, 234 Unit of account, money as, 486 United Airlines, 361 United Arab Emirates (UAE), 485t United Automobile Workers, 288, 293–294 United Kingdom (UK), 8n2, 18, 18n10 airline industry in, 359, 361 arbitrage between Germany and, 459–460, 460f banking crisis in, 763t capital abundance in, 101f with change in relative wage of skilled workers, 205 EU and, 158n16 exchange rate behavior, 444, 445f exchange rate quotations and, 437t export of services (2012), FDI stocks in, 21 FX market in, 449 G8 and, 339n4 GDP, 101f golf club trade and, 166t labor productivity and wages in, 108f with opting out of Eurozone, 813 real interest rate differentials (1970–1999), 506f trade dollarization and, 67f trade/GDP ratio for, 11t, 12, 13f, 14, 15 United Nations (UN), 1, 10, 16n8, 17n9, 23, 32, 403, 579 United States (U.S.), 2, 16n7 absolute advantage and, 37, 40 agriculture imports, 184–185 with apparel, textiles and wheat in China and, 40t arable land in, 102, 106 ARRA and, 704–705, 705f Asia and trade with, 9–10 automobile industry in, 20, 21, 209, 288–291, 289f, 290f, 295, 375n4, 377t, 395–396, 396f automobile VER and, 395–396 balance of payments and, 593t, 595, 596f with Bangladesh and suspension of preferential trade status, 385, 387 banking crisis in, 763t Big Mac index and, 485t Boeing aid, EU and, 362 bonds, 738f border control and, 152 CA and components (1990–2012), 582f Canada-U.S Free Trade Agreement, 179, 374 capital abundance in, 100, 101f, 101n4 cell phone industry in, 197 chicken war with West Germany and, 294, 295, 374n3 China and, 4, 5, 105, 270f, 413f, 414, 414n2 crisis and recession in, 915f currency war and, 669 depreciations and appreciations with exchange rate in, 438 destruction of jobs in, 224 dollar, 414f, 441f, 540–541, 541f economic aggregates (2012), 580t employment in, 38–39, 71–73, 71f, 207–208, 207f European trade with, 8–9 exchange rate behavior, 444, 445f exchange rate quotations and, 437t “exorbitant privilege” in, 617–618 with expansion of variety to, 184–185, 184t export of goods, 2, export of services, external wealth and, 421, 422f, 599t, 619f FDI in Europe and, 21 financial crisis (2008), 16, 16n6 food trade and total agricultural trade (2000–2012), 106t footwear industry in, 91–92 foreign aid from, 579, 646 future of comparative advantage in, 225–226, 228 FX market in, 449 G8 and, 339n4 gains from migration in, 156, 157t GDP, 101f, 158, 639n16 GDP (1947) for rest of world and, 107f GNE and components (1990–2012), 581f GNI (2012), 860 gold parity and, 746f golf clubs trade, 165, 166t, 167 gravity equation for Canada and, 190–193, 191f Immigration and Nationality Act Amendments of 1965 and, 152 immigration and wages in, 143t immigration in Europe and, 18–19 import and export changes (1925–2010) in, 6f import quotas and costs in, 268 imports of motorcycles, 312t index of intra-industry trade (2012) for, 188t industrial deaths in Bangladesh and tariffs levied by, 384, 386, 387 interwar period and tariffs in, 12–13 Japan and trade with, with job losses in manufacturing and service industries (2009–2011), 73t Kyoto Protocol and, 403–404 labor productivity and wages in, 46–47, 46f, 48f, 108f, 109 LRBC and favorable situation of, 617–620 “manna from heaven” in, 618 mercantilism in, 32 merchandise prices, 219–220, 219n13 Mexico and, 18, 180–181, 181n5, 184t MFA with reaction from Europe and, 271–272 migration to, 128 migration to Europe and, 129–133 money market in, 535–536, 536f motorcycle tariffs and, 281, 310–314, 312t MPK in, 640n18 NAFTA and, 180, 181, 184–187, 184t news and FX exchange during Civil War (1861–1865), 559–560, 559f normal trade relations and, 235n2 OCAs and Europe versus, 819–820, 820f ODA, 577 population growth in, 159 PPP and, 473–474, 521–522 with price of U.S cars, 289f, 290, 290f prices of computers in Brazil and U.S (1982–1992), 314f Quota Law of 1921 and, 152 radiology in, 226 “rare earth” minerals in, 350, 400 R&D scientists in, 102, 103 with real exchange rate and TB (1975–2012), 672f with relative wages and changes, 205–210, 206f, 207f, 208f, 210t reversal of factor intensities between India and, 92 SD in, 595n13 service trade in, 220–222, 221t, 222f services prices, 220 snowboard imports (2012), 27, 28t, 30–31, 33 solar panel imports from China, 299–302, 302f steel and tires tariffs, 248–256, 249t, 253f, 255f steel tariffs, 248–256, 249t, 253f, 255f, 261–263, 262t I-33 stylized OCA view of EU and, 822f with sugar and U.S Australia Trans-Pacific Trade Talks, 266 tariff war and, 251 terms of trade and service exports, 219–222, 220f, 221t, 222f tire imports, 233–234, 255f too good to be true in, 618–620 trade changes in, 5–7 trade dollarization and, 67f trade embargo and cost to, 65 trade restrictions in ethanol and sugar, 394–395 trade/GDP ratio for, 11t, 12, 13f, 15 Trans-Atlantic Trade and Investment Partnership and, 369 Trans-Pacific Partnership and, 369 unilateral transfers and, 582n6 U.S.-Eurozone interest rates and exchange rates (1999–2004), 541f US-Korea Free Trade Agreement and, 295 workers in, 72f, 132f, 142, 206–209, 206f, 206n7, 207f, 208f, 210t United Steel, 251 United Steelworkers, 233, 247, 251 Universal law of gravitation, 189 See also Gravity equation Uranium, 351 Uruguay, 370 Big Mac index and, 485t currency crash in, 416f debt default and, 422 original sin and, 738 Uruguay Round, 235, 368 See also World Trade Organization U.S See United States U.S Navy, 579f USAID, 577 US-Korea Free Trade Agreement, 295 Utility, 35 Uzbekistan, 10 V Valuation effects, 598 Value money as store of, 486 present, 614 Value chain with costs of capital and trade, 201 offshoring and, 200–203, 200f, 202f, 203f of product, 200f with relative demand for skilled labor, 202–203, 202f with relative wage of skilled workers, 201 slicing, 201–202, 227 Value-added, 4, 11 in Miami, 141f per hour in manufacturing, 46, 46f real, 140, 141f Vatican City, 812n2 Veblen, Thorstein, 427 Vehicle currencies, 456 Velasco, Andres, 631 Venezuela Big Mac index and, 485t currency crash in, 416f gasoline from Brazil and, 389t, 390–391 Mercosur and, 370 risk premiums in, 644f steel tariffs and, 251 trade/GDP ratio for, 11t Ventura, Gustavo, 158, 159 VER See “Voluntary” export restraint Vertical FDI, 20–21 Vietnam ASEAN and, 369 coffee industry in, 81 golf club trade and, 165, 166t, 167 with remittances received, 155t shoe industry in, 299 trade with, Trans-Pacific Partnership and, 369 Vilsack, Tom, 339 Visas, 130–131, 158, 160 Volkswagen, 317 “Voluntary” export restraint (VER), 349 import quotas and, 267–268 U.S automobile, 395–396 “Voluntary” restraint agreement (VRA), 268 Volvo, 21, 22 VRA See “Voluntary” restraint agreement W W See External wealth Wacker Chemie, 310 Wages absolute advantage and, 44 allocation of labor between manufacturing and agriculture, 67f change in relative, 201, 205 computer prices and influence on rental and, 112f determination of, 66–68 with earnings of labor, 66–74, 155, 155t equilibrium, 67–68 in Europe and New World, 128f FDI and, 145, 145f at home and abroad, 152–153, 153f in home country, 36–37 in home influenced by migration, 126–127 home labor demand and relative, 203–204, 203f with increase in relative wage of nonproduction labor (1979–1990) in U.S., 210t labor productivity and, 46–47, 46f, 48f, 108f, 109 living, 387 Mexico and change in relative, 211–212, 211f migrants with remittances and, 155, 155t migration and determining, 125–126 minimum, 385 nonproduction workers and relative, 206–207, 206f, 206n7 with prices of nontraded goods, 865 productivity and, 10 real, 68–69, 69n5, 69n6, 113–117, 136–137, 149t, 182–183 relative price of manufactures influencing, 68f across sectors and employment in, 71–73 Singapore with FDI influencing rentals and wages, 149–151, 149t solving for wages across countries, 45 total wage payments, 209, 209n8 trade and influence on rental of home and, 110–113 U.S., migration and, 143t U.S and change in relative, 206–210, 206f, 207f, 208f, 210t Waldman, Cliff, 225 Wal-Mart, 224, 384, 386 Walmsley, Terrie Louise, 158 Wars in Afghanistan, 627 banana, 263, 265, 273 CA and, 627 chicken, 294, 295, 374n3 Gulf War, 582n6 interwar period with “first golden age” of trade, 12–14 Napoleonic, 627 Revolutionary, 885n17 tariff, 251 TB and currency, 669 World War I (1914–1918), 12, 23, 88, 627, 750f, 826, 828t World War II (1939–1945), 12, 23, 107, 627, 751f, 826, 828t Wartime Iraq War (2002–2003) with news and FX market in, 560–562, 561f news and FX market in, 558–562, 559f, 561f U.S Civil War (1861–1865) with news and FX market in, 559–560, 559f Watt, Stanley, 157 “The Way of an Economist” (Samuelson), 27 Wealth destabilizing wealth shocks, 734 evidence based on changes in, 735 exchange rate depreciations and changes in, 735f external, 421–422, 422f, 596–601, 599t, 607–608, 619f income, balance of payments and, 567–602, 607–608 liability dollarization, contractionary depreciations and national, 733–738, 735f, 736f, 737t LRBC and calculating, 613 original sin and, 736–738, 736f, 737t sovereign wealth funds, 629–630, 631 total and external, 607–608 The Wealth of Nations (Smith), 36, 429 I-34 Weder, Beatrice, 891 Weidmann, Jens, 663, 669, 849 Welfare Airbus with European, 356–357, 357n10 Boeing with European, 358 commercial aircraft and national, 360–361 cost of MFA, 271, 271n18 foreign and world, 259, 336 home, 239–241, 240f, 258–259, 293, 333–336, 342 import quotas and influence on, 264, 265 tariff equilibrium and influence on, 308 tariffs and influence on, 244–245, 245f tariffs and welfare for large country, 260f Werner Report (EC), 830 West Bank, 578f West Germany, 74, 129, 294–295, 374n3 reunification and, 830 Treaty of Rome and, 827 Wheat with apparel and textiles in U.S and China, 40t cloth and, 34–35, 34f, 35f, 38f, 45n11 comparative advantage in apparel, textiles and, 38–40 PPF, 38n5, 43n9 relative price of, 37, 41n8 world market for, 52f White, Harry Dexter, 750 White, Shaun, 29f White-collar workers, 71n8, 206 “Why Doesn’t Capital Flow from Rich to Poor Countries?” (Lucas), 640 Wilde, Oscar, 435–436 Wine cloth and, 27, 32–33, 53, 55 “icewine,” 30, 31 Winters, L Alan, 158 Wipro, 218 Wolf, Martin, 852 Women, as household workers, 157 Work visas, 131 Workers blue-collar and white-collar, 71n8, 206 computers in U.S and influence on skilled, 208–209 gastarbeiters, 129 household, 157 Mexico manufacturing and relative wage of nonproduction and production, 211f NAFTA and displacement of, 186 net foreign aid (2010) and remittances of, 155t with productivity for maquiladoras and nonmaquiladoras, 181n6, 183, 184 relative demand for skilled, 202–203, 202f relative employment in U.S of nonproduction and production, 207–208, 207f relative wage in U.S of nonproduction and production, 206–207, 206f relative wage of skilled, 201, 205 STEM, 158 TAA for services, 75 in U.S., 72f, 132f, 142, 206– 209, 206f, 206n7, 207f, 208f, 210t World Bank, 23, 32, 155, 235, 340, 381, 415, 644 with debt defaults, 423 foreign aid from, 646 Mohamad’s speech at, 452n9 purpose of, 645 “World Development Report,” 429–430 Worldwide Governance Indicator, 430f World capital market, 159f “World Development Report” (World Bank), 429–430 World labor market, 153f World market for coffee (1984–2011), 81f for wheat, 52f World portfolios, risk diversification and, 647–649, 648t, 649f World price line, 43 World real interest rate, 504, 612 World trade See International trade World Trade Organization (WTO), 5, 21, 32 agreements made at Hong Kong meeting (Dec 2005), 329t, 330–331 agricultural export subsidies and goals of, 329–331, 329t automobile industry, GATT and, 290–291 China and, 248, 316 Doha Round, 235, 236, 327–328, 329t environmental issues in GATT and, 388–391, 389t farmers and, 327–328, 328f GATT and, 14, 23, 212, 234–237, 235n2, 290–291, 367, 370, 388–391, 389t history of, 235–236 protests, 328f, 367–368, 368f, 388, 391, 406 steel tariffs, dispute settlement procedure and, 251, 251n10 Uruguay Round, 235, 368 World War I (1914–1918), 12, 23, 88, 627, 750f, 826, 828t World War II (1939–1945), 12, 23, 107, 627, 751f, 826, 828t World welfare foreign and, 336 tariffs and influence on, 259 Worldwide Governance Indicator, 430f WTO See World Trade Organization X X-rays, 225–226 Y Yacyreta Dam, 645 Yamaha, 311 Yellow phosphorus, 350 Yttrium, 350, 350n6 See also “Rare earth” minerals Yuan, Chinese, 413n1, 414f, 869–870 Yugoslavia labor productivity and wages in, 108f migration from, 129 PPP and hyperinflation in, 498f Z Zaire, 498f, 645 Zambia, 337 Zero costs of arbitrage, 861, 862f Zero lower bound (ZLB), 533, 703, 704n3 Zettelmeyer, Jeromin, 891 Zimbabwe capitol controls in, 425f currency crash in, 416f dollar in, 497 hyperinflation in, 497, 500 PPP and hyperinflation in, 498f Zinc, 350 ZLB See Zero lower bound Zombie banks, 848 Zurich, 449 Chapter Correlation Guide for Feenstra/Taylor, International Economics, Third Edition, and Three Versions International Economics Chapter number Chapter title International Trade International Macroeconomics Essentials of International Economics Chapter number Chapter number Chapter number Trade in the Global Economy The Global Economy (Essentials) Trade and Technology: The Ricardian Model 2 Gains and Losses from Trade in the Specific-Factors Model 3 Trade and Resources: The Heckscher-Ohlin Model 4 Movement of Labor and Capital between Countries 5 Increasing Returns to Scale and Monopolistic Competition 6 Offshoring of Goods and Services Import Tariffs and Quotas Under Perfect Competition Import Tariffs and Quotas Under Imperfect Competition 10 Export Subsidies in Agriculture and High-Technology Industries 10 11 International Agreements: Trade, Labor, and the Environment 11 12 The Global Macroeconomy 13 Introduction to Exchange Rates and the Foreign Exchange Market 10 14 Exchange Rates I: The Monetary Approach in the Long Run 11 15 Exchange Rates II: The Asset Approach in the Short Run 12 16 National and International Accounts: Income, Wealth, and the Balance of Payments 13 The Gains from Financial Globalization 18 Output, Exchange Rates, and Macroeconomic Policies in the Short Run 14 19 Fixed Versus Floating: International Monetary Experience 15 20 Exchange Rate Crises: How Pegs Work and How They Break 21 The Euro 10 22 Topics in International Macroeconomics 11 17 16 ... of international economics With this book, we have expanded the vision of international economics to encompass the latest theories and events in the world today In decades past, international economics. .. intentionally left blank third edition international economics This page intentionally left blank third edition international economics ROBERT C FEENSTRA ALAN M TAYLOR University of California, Davis... since 1986, where he holds the C Bryan Cameron Distinguished Chair in International Economics Taylor teaches international macroeconomics, growth, and economic history at UC Davis, where he also