Instructor’s Manual - University of São Paulo
Instructor's Manual
to accompany Krugman & Obstfeld
International Economics: Theory and Policy
Sixth Edition
Linda S. Goldberg
Federal Reserve Bank of New York
Michael W. Klein
Tufts University The Fletcher School of Law and Diplomacy
Jay C. Shambaugh
Dartmouth College
The views presented in this book are those of the authors and need not reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System.
Contents
Chapter 1
Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7
Chapter 8 Chapter 9 Chapter 10 Chapter 11
Chapter 12 Chapter 13
Chapter 14 Chapter 15 Chapter 16 Chapter 17
Chapter 18 Chapter 19
Chapter 20 Chapter 21 Chapter 22
page
Contents
iii
Introduction
1
Overview of Section I: International Trade Theory
3
Labor Productivity and Comparative Advantage: The Ricardian Model 7
Specific Factors and Income Distribution
13
Resources and Trade: The Heckscher-Ohlin Model
21
The Standard Trade Model
27
Economies of Scale, Imperfect Competition, and International Trade 35
International Factor Movements
41
Overview of Section II: International Trade Policy
47
The Instruments of Trade Policy
49
The Political Economy of Trade Policy
57
Trade Policy in Developing Countries
65
Controversies in Trade Policy
71
Overview of Section III: Exchange Rates and Open Economy
Macroeconomics
77
National Income Accounting and the Balance of Payments
81
Exchange Rates and the Foreign Exchange Market:
89
An Asset Approach
Money, Interest Rates, and Exchange Rates
101
Price Levels and the Exchange Rate in the Long Run
109
Output and the Exchange Rate in the Short Run
119
Fixed Exchange Rates and Foreign Exchange Intervention
131
Overview of Section IV: International Macroeconomic Policy
141
The International Monetary System, 1870-1973
145
Macroeconomic Policy and Coordination Under
153
Floating Exchange Rates
Optimum Currency Areas and the European Experience
163
The Global Capital Market: Performance and Policy Problems
171
Developing Countries: Growth, Crisis, and Reform
177
Mathematical Postscript
185
ii
CHAPTER 1
INTRODUCTION
Chapter Organization
What is International Economics About? The Gains from Trade The Pattern of Trade Protectionism The Balance of Payments Exchange-Rate Determination International Policy Coordination The International Capital Market
International Economics: Trade and Money
CHAPTER OVERVIEW
The intent of this chapter is to provide both an overview of the subject matter of international economics and to provide a guide to the organization of the text. It is relatively easy for an instructor to motivate the study of international trade and finance. The front pages of newspapers, the covers of magazines, and the lead reports of television news broadcasts herald the interdependence of the U.S. economy with the rest of the world. This interdependence may also be recognized by students through their purchases of imports of all sorts of goods, their personal observations of the effects of dislocations due to international competition, and their experience through travel abroad.
The study of the theory of international economics generates an understanding of many key events that shape our domestic and international environment. In recent history, these events include the causes and consequences of the large current account deficits of the United States; the dramatic appreciation of the dollar during the first half of the 1980s followed by its rapid depreciation in the second half of the 1980s; the Latin American debt crisis of the 1980s and the Mexico crisis in late 1994; and the increased pressures for industry protection against foreign competition broadly voiced in the late 1980s and more vocally espoused in the first half of the 1990s. Most recently, the financial crisis that began in East Asia in 1997
1
and spread to many countries around the globe and the Economic and Monetary Union in Europe have highlighted the way in which various national economies are linked and how important it is for us to understand these connections. At the same time, protests at global economic meetings have highlighted opposition to globalization. The text material will enable students to understand the economic context in which such events occur. Chapter 1 of the text presents data demonstrating the growth in trade and increasing importance of international economics. This chapter also highlights and briefly discusses seven themes which arise throughout the book. These themes include: 1) the gains from trade; 2) the pattern of trade; 3) protectionism; 4), the balance of payments; 5) exchange rate determination; 6) international policy coordination; and 7) the international capital market. Students will recognize that many of the central policy debates occurring today come under the rubric of one of these themes. Indeed, it is often a fruitful heuristic to use current events to illustrate the force of the key themes and arguments which are presented throughout the text.
2
OVERVIEW OF SECTION I: INTERNATIONAL TRADE THEORY
Section I of the text is comprised of six chapters:
Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7
Labor Productivity and Comparative Advantage: The Ricardian Model Specific Factors and Income Distribution Resources and Trade: The Heckscher-Ohlin Model The Standard Trade Model Economies of Scale, Imperfect Competition, and International Trade International Factor Movements
SECTION I OVERVIEW
Section I of the text presents the theory of international trade. The intent of this section is to explore the motives for and implications of patterns of trade between countries. The presentation proceeds by introducing successively more general models of trade, where the generality is provided by increasing the number of factors used in production, by increasing the mobility of factors of production across sectors of the economy, by introducing more general technologies applied to production, and by examining different types of market structure. Throughout Section I, policy concerns and current issues are used to emphasize the relevance of the theory of international trade for interpreting and understanding our economy.
Chapter 2 introduces students to international trade theory through the Ricardian model of trade. This model shows how trade arises when there are two countries, each with one factor of production which can be applied toward producing each of two goods. Key concepts are introduced, such as the production possibilities frontier, comparative advantage versus absolute advantage, gains from trade, relative prices, and relative wages across countries. The Ricardian model is a useful starting point for developing intuition about why countries gain from trading with each other. By using even as simple a framework as the Ricardian model, one can begin to debunk some common misconceptions concerning comparative advantage.
Chapter 3 builds upon the insights from Chapter 2 by developing trade models which allow countries to produce goods when production requires more than one factor of production. One important reason for this addition to the model is that this more general framework highlights the effects of trade on income distribution. The first model presented includes
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