International economics a heterodox approach 3rd edition

International Economics
Now in its third edition, Hendrik Van den Berg’s International Economics: A Heterodox
Approach covers all of the standard topics taught in undergraduate international economics courses.
Written in a friendly and approachable style, this new edition is unique in that it presents the key
orthodox neoclassical models of international trade and investment, while supplementing them with a
variety of heterodox approaches. This pluralist approach is intended to give economics students a
more realistic understanding of the international economy than standard textbooks can provide.
Changes to the new edition include:
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updates throughout to reflect recent world events, including coverage of trade negotiations and the
Greek crisis;
expanded discussion of pluralist approaches with more coverage of alternative schools of
thought;
discussions of the growing financialization of global economic activity;
additional real-world examples;
increased coverage of environmental issues; transnational corporations and their behavior in the
international economy; the difference between international investment and international finance;
and monetary history;
a consolidated and updated chapter on international banking.

This book also maintains a broad perspective that links economic activity to the social and natural
spheres of human activity, with emphasis on the distributional and environmental effects of

international trade, investment, finance, and migration. Chapter summaries, key terms and concepts,
problems and questions, and a glossary are included in the book. A Student Study Guide and an
Instructor’s Manual are available online.
Hendrik Van den Berg is Professor Emeritus at the University of Nebraska, and he continues
teaching at Mount Holyoke College in Massachusetts, USA.


International Economics
A Heterodox Approach
Third Edition

Hendrik Van den Berg


Third edition published 2017
by Routledge
711 Third Avenue, New York, NY 10017
and by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2017 Taylor & Francis
The right of Hendrik Van den Berg to be identified as author of this work has been asserted by him in accordance with sections 77 and
78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other
means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without
permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and
explanation without intent to infringe.
First edition published by M.E. Sharpe 2012
Second edition published by Routledge 2015

Library of Congress Cataloging in Publication Data
Names: Van den Berg, Hendrik, 1949- author.
Title: International economics : a heterodox approach / Hendrik van den Berg.
Description: 3rd edition. | New York, NY : Routledge, 2017.
Identifiers: LCCN 2016022783| ISBN 9781138945043 (hardback) | ISBN 9781138945050 (pbk.) | ISBN 9781315671611 (ebook)
Subjects: LCSH: International trade. | Protectionism. | Investments, Foreign.| International finance. | International economic relations. |
Emigration and immigration.
Classification: LCC HF1379 .V36 2017 | DDC 337–dc23
LC record available at />ISBN: 978-1-138-94504-3 (hbk)
ISBN: 978-1-138-94505-0 (pbk)
ISBN: 978-1-315-67161-1 (ebk)
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Visit the companion website: www.routledge.com/vandenberg


Contents

List of figures
List of tables
Preface
Acknowledgments
PART I

INTRODUCTION TO INTERNATIONAL ECONOMICS

1 Interdependence!
1.1
1.2

Introduction
The Bigger Picture
1.2.1
The Gains from Dealing with Strangers
1.2.2
The Three Benefits of Human Interaction Are Intertwined
1.2.3
Dependence on Strangers Is Inherently Problematic
1.2.4
The Crucial Role of Institutions
1.2.5
Institutions Evolve Slowly and Unevenly
1.3
The Evolution of International Economic Integration
1.3.1
The Growth of International Trade
1.3.2
The Growth of International Investment and Finance
1.3.3
International Migration
1.4
International Economic Integration Is Far from Complete
1.4.1
Economic Integration Is Not Inevitable
1.4.2
New Concerns about International Economic Integration
1.5
The Field of International Economics
1.5.1
The Bias of Mainstream Economic Analysis

1.5.2
The Spheres of Human Existence
1.5.3
The Natural Environment
1.5.4
Social Stress
1.6
How Economists Deal with Complexity
1.6.1
Economic Models
1.6.2
The Dangers Lurking Behind Economic Models
1.6.3
The Tyranny of Models and Paradigms
1.6.4
The Pro-Globalization Culture of International Economics
1.6.5
Heterodoxy
1.7
Summary and Conclusions
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes


2 Introduction to Heterodoxy
2.1

Holism and Economics

2.1.1
The System Versus the Parts
2.1.2
Do Systems Move Toward Stable Equilibria?
2.1.3
Holism and Science
2.1.4
Can the Scientific Method Ever Uncover Absolute Truth?
2.2
Economists and Complex Systems
2.2.1
Economists’ Embrace of Scientific Reductionism
2.2.2
The Neoclassical School
2.2.3
The Unbelievable Assumptions Behind Neoclassical Models
2.3
The Common Themes of Heterodoxy
2.3.1
Some Heterodox Ideas that Differ from Orthodox Economic Thinking
2.3.2
Heterodoxy and Economic Policy
2.4
A Sociological Justification for Heterodoxy
2.4.1
Institutions and Culture
2.4.2
Pierre Bourdieu’s Analysis of Cultures
2.4.3
Symbolic Violence

2.4.4
A Sociology of International Economics
2.5
Conclusions and Further Thoughts
Key Terms and Concepts
Problems and Questions
Notes
PART II

INTERNATIONAL TRADE THEORY

3 Orthodox International Trade Theory: Why Mainstream Economists Like Free Trade
3.1

3.2

3.3

A Simple Version of the Heckscher–Ohlin Model of International Trade
3.1.1
The Production Possibilities Frontier
3.1.2
Consumer Demand and Indifference Curves
3.1.3
Individual Indifference Curves and Society’s Indifference Curve
3.1.4
Combining the Supply and Demand Sides
3.1.5
The Gain from International Trade
3.1.6

The Gain from International Specialization
Do All Nations Gain from Trade?
3.2.1
Why Production Possibilities Frontiers Differ from Country to Country
3.2.2
A Two-Country Model of Trade
3.2.3
The Principle of Comparative Advantage
3.2.4
David Ricardo’s Example of Comparative Advantage
International Trade and the Distribution of Income
3.3.1
International Trade and Factor Returns
3.3.2
The Heckscher–Ohlin Theorem
3.3.3
The Stolper–Samuelson Theorem


3.3.4
The Factor Price Equalization Theorem
3.3.5
Estimating the Precise Distributional Effects of Trade
3.4
Evaluating the Heckscher–Ohlin Model
3.4.1
Evaluating the HO Model and the Gains from Trade
3.4.2
Some Especially Dangerous Assumptions of the HO Model
3.4.3

How Important Is the Welfare Gain from Trade?
3.5
Supply and Demand Analysis of Trade
3.5.1
Producer and Consumer Surplus
3.5.2
From the HO Model to the Partial Equilibrium Model
3.5.3
From the Supply and Demand Diagram to the Gains from Trade
3.5.4
Comparing the Partial and General Equilibrium Models
3.6
Conclusions
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
4 International Trade: Beyond the Neoclassical Perspective
4.1

4.2

4.3

4.4

Transport and Transactions Costs
4.1.1
Transport Costs
4.1.2

The History of Transport Costs
4.1.3
Case Study: Afghan Warlords and Transport Costs
4.1.4
Network Effects and Trade
4.1.5
Transactions Costs and the Gravity Model of Trade
4.1.6
Tentative Conclusions
The Costs of Adjusting to Free Trade
4.2.1
Costly Economic Adjustments to Free Trade
4.2.2
The Fixed-Factors Model
4.2.3
Trade and Jobs
International Trade, Income Inequality, and Welfare
4.3.1
A Simple Model of the Distribution of Trade’s Welfare Effects
4.3.2
In Search of a More Accurate Welfare Function
4.3.3
Psychology and Life Satisfaction
4.3.4
Evidence from Neuroscientific Research
4.3.5
Happiness Surveys
Externalities, Prices, and International Trade
4.4.1
Modeling Externalities

4.4.2
Shifting GHG Emissions to Developing Countries
4.4.3
Externalities Associated with Transport
4.4.4
GHGs Embedded in U.K. Trade
4.4.5
Another Example of Embedded GHGs
4.4.6
Policies for Adjusting Trade for Embedded GHGs


4.5
Conclusions
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
5 International Trade: Imperfect Competition and Transnational Corporations
5.1

Increasing Returns to Scale and International Trade
5.1.1
Intra-Industry Trade
5.1.2
Modeling Increasing Returns to Scale
5.1.3
An Example of Two Identical Countries
5.1.4
Krugman’s Model of Variety, Increasing Returns, and Trade

5.1.5
Some Further Implications of the Model
5.2
Another Implication of Imperfect Competition: Transnational Corporations
5.2.1
Foreign Direct Investment
5.2.2
Vertical and Horizontal Foreign Direct Investment
5.2.3
A Brief History of Transnational Corporations
5.2.4
TNCs and International Trade
5.3
Explaining the Growth of Transnational Corporations
5.3.1
Why Transnational Corporations Dominate the Economic Sphere
5.3.2
Transnational Corporations Are Controversial
5.4
Comparative Advantage and International Marketing
5.4.1
Comparative Advantage and Competitive Advantage
5.4.2
Marketing and the Perceived Value of a Product
5.4.3
Customers Are Not All the Same
5.4.4
Should the Product Look Local or Foreign?
5.4.5
Market Segmentation

5.4.6
Marketing and Transnational Corporations
5.5
The Implications of the Growth of Transnational Corporations
5.5.1
Managed Trade
5.5.2
Transnational Corporations and Economic Policy
5.5.3
Transnational Corporations and National Sovereignty
5.6
Conclusions
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
6 International Trade and Economic Development
6.1

The Growth of International Trade
6.1.1
Why Growth Matters: The Power of Compounding
6.1.2
Statistical Evidence on Trade and Growth


6.1.3
Cross-Section Studies
6.1.4
Time-Series Studies

6.1.5
The Relationship between International Trade and Institutions
6.1.6
The Stolper–Samuelson Theorem and Long-Run Economic Change
6.2
The Solow Growth Model
6.2.1
Technological Progress and Factor Accumulation
6.2.2
Increased Investment Brings Only Medium-Run Growth
6.2.3
Does International Trade Only Create Medium-Run Growth Too?
6.2.4
Technological Change and Permanent Growth
6.3
Technology and Technological Progress
6.3.1
Human Technology
6.3.2
Technological Progress Is a Combinatorial Process
6.3.3
Technological Change Is Path Dependent
6.3.4
Not All New Technology Constitutes Progress
6.3.5
Technological Change and Agglomeration
6.4
Joseph Schumpeter’s Model of Creative Destruction
6.4.1
Fundamental Ideas Behind Schumpeter’s Model

6.4.2
Recent “Schumpeterian” Models of Technological Progress
6.4.3
The Cost of Innovation
6.4.4
The Gains from Innovation Depend on the Speed of Innovation
6.4.5
The Equilibrium Rate of Technological Progress
6.5
International Trade and Economic Development
6.5.1
The Combinatorial Process and International Trade
6.5.2
The Geographic Diffusion of Technology
6.6
Economic Growth, Trade, and the Environment
6.6.1
The Clash Between Economic Growth and the Environment
6.6.2
Are There Limits to Growth?
6.6.3
Optimists, Skeptics, and Scientists
6.6.4
We Should Be Concerned
6.6.5
Must We Stop Economic Growth to Survive?
6.7
Conclusions and Implications
Chapter Summary
Key Terms and Concepts

Problems and Questions
Notes
7 International Trade, Human Happiness, and Inequality
7.1

Income Inequality
7.1.1
Measuring Inequality
7.1.2
The Lorenz Curve
7.1.3
The Distribution of Income in Distant History
7.1.4
Global Measures of Income Inequality


7.1.5
The Distribution of Wealth
7.2
Is there an Optimal Level of Equality?
7.2.1
Elements of a Just Society
7.2.2
Rawls’s Veil of Ignorance
7.2.3
The Psychological Basis for Economic Equality
7.2.4
The Relationship between Social and Economic Justice
7.3
International Trade’s Effect on the Distribution of Income

7.3.1
Vernon’s Product Cycle Model
7.3.2
More Leader–Follower Models
7.3.3
International Trade and Technology Diffusion
7.3.4
Geographic Concentration of Innovative Activity
7.3.5
The Agglomeration of Innovative Activity
7.3.6
Changing Patterns of Economic Activity
7.3.7
Specialized Agglomeration
7.4
Transnational Corporations, Agglomeration, and Technology
7.4.1
Foreign Direct Investment, Trade, and Technology Flows
7.4.2
Reassessing the Gains from Trade When It Diffuses Technology
7.4.3
Immiserizing Growth
7.4.4
The Long-Run Dynamics of International Investment and Knowledge Transfers
7.5
Trade and the World Distribution of Income: A Conclusion
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes

PART III

INTERNATIONAL TRADE POLICY

8 Tariffs, Quotas, and Other Trade Restrictions
8.1

8.2

Tariffs
8.1.1
8.1.2
8.1.3
8.1.4
8.1.5
8.1.6
8.1.7
8.1.8
Quotas
8.2.1
8.2.2
8.2.3
8.2.4
8.2.5

The Welfare Gains and Losses of a Tariff
Who Effectively Pays the Tariff?
A Numerical Example of a Specific Tariff
A Tariff in the Heckscher–Ohlin Model
The Lerner Symmetry Theorem

Summarizing the Welfare Effects of a Tariff
How Much Protection Does a Tariff Really Provide?
Average Tariff Rates
A Quota in the Supply and Demand Model of Trade
The Welfare Effects of a Quota
Who Gets to Import and Collect the Quota Rent?
A Numerical Example of a Quota
Voluntary Export Restraints (VERs)


8.2.6
Auction Quotas
8.2.7
Are Tariffs and Quotas Equivalent?
8.3
Other Trade Barriers
8.3.1
Export Bans to Insure Against Domestic Shortages
8.3.2
Using Bureaucratic Procedures to Impede International Trade
8.3.3
“Buy Domestic” Regulations
8.3.4
Local Restrictions on Foreign Trade
8.4
Export Taxes and Subsidies
8.4.1
Export Taxes
8.4.2
Price Elasticity and Export Taxes

8.4.3
Why Doesn’t the United States Tax Exports?
8.4.4
Export Subsidies
8.5
Antidumping Procedures, Surge Protection, and Sanctions
8.5.1
Defining Dumping
8.5.2
How the U.S. Government “Proves” Dumping
8.5.3
Price Discrimination Does Not Necessarily Imply Dumping
8.5.4
Countervailing Duties and Surge Protection
8.5.5
Trade Sanctions
8.5.6
National Security
8.6
Conclusions
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
Appendix: The Complete Analysis of a Tariff in a General Equilibrium HO Model
9 The History of Trade Policy
9.1

9.2

9.3

The Political Economy of International Trade
9.1.1
The Median Voter Model
9.1.2
The Uninformed Voter Model
9.1.3
Case Study: The U.S. Sugar Quota
9.1.4
The Endogenous Tariff Model
9.1.5
The Adding Machine Model
9.1.6
Rent-Seeking Behavior
Trade Policy Before the Twentieth Century
9.2.1
The Ups and Downs of Trade Policy
9.2.2
Mercantilism
9.2.3
The Intellectual Attack on Mercantilism
9.2.4
U.S. Trade Policy before World War I
9.2.5
Forced Trade Liberalization in the Far East
9.2.6
Europe Reverses Course in the Late 1800s
Destroying Trade During the Interwar Period

9.3.1
The Treaty of Versailles
9.3.2
The Smoot–Hawley Tariff
9.3.3
Another Policy Reversal
9.4
Trade Policy After World War II: The General Agreement on Tariffs and Trade
9.4.1
The Key Provisions of the General Agreement on Tariffs and Trade
9.4.2
The GATT Rounds
9.4.3
The U.S. Reluctance to Open Its Market
9.4.4
Trade Without Injury: Further Analysis
9.4.5
The Emergence of New Forms of Protection: Nontariff Barriers
9.4.6
The Kennedy and Tokyo Rounds
9.4.7
The Effectiveness of Trade Adjustment Assistance
9.4.8
Evaluating the GATT Rounds through Tokyo
9.5
The Uruguay Round
9.5.1
More Players and More Issues
9.5.2

Intellectual Property Rights
9.5.3
Replacing the GATT with the World Trade Organization
9.6
The Doha Round
9.6.1
The Agenda of the Doha Round
9.6.2
The Role of the Developing Countries
9.7
The Shift to Trade Blocs
9.7.1
Defining Regional Economic Integration
9.7.2
Trade Creation versus Trade Diversion
9.7.3
Regional Free Trade Is Not Necessarily Welfare Increasing
9.8
Conclusions and Comments
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
10 International Trade Policy: A Holistic Perspective
10.1

10.2

Mercantilism and the Colonial System
10.1.1 Colonialism Is a Form of Mercantilism

10.1.2 The Case of Colonial Brazil
10.1.3 Mercantilism after Brazil’s Independence
10.1.4 The Coffee Economy
10.1.5 From Accidental to Planned Industrialization
10.1.6 Comparing the Law of Similars and the Infant Industry Argument
10.1.7 Interpreting Brazil’s Colonial and Postcolonial Experiences
Import Substitution Industrialization
10.2.1 ISI Gets a Life of Its Own
10.2.2 Prebisch’s Development Model
10.2.3 An Assessment of ISI Policies


10.2.4 An Example of ISI Failure
10.2.5 Lessons from ISI
10.3 Mercantilism, Agglomeration, and the International Economy
10.3.1 Agglomeration and TNCs
10.3.2 The Reappearance of Mercantilism
10.3.3 TNCs and the Power to Set Policy
10.3.4 Dramatic Examples of Mercantilism
10.4 Strategic Trade Policy
10.4.1 Strategic Competition: Boeing vs. Airbus
10.4.2 Strategic Trade Policy Can Reduce National Welfare
10.5 Conclusions
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
PART IV

INTERNATIONAL INVESTMENT AND FINANCE

11 International Investment and International Finance
11.1

11.2
11.3
11.4

11.5

11.6

The Balance of Payments
11.1.1 The Circular Flow of Economic Activity
11.1.2 Adding the Financial Sector and Government to the Circular Flow
11.1.3 The Circular Flow in an Open Economy
The Design of the Balance of Payments Account
11.2.1 The Basics
The Current Account and the Financial Account
11.3.1 The Current Account
Finance
11.4.1 The Financial Sector of the Economy
11.4.2 Financial Instability
11.4.3 Why Financial Transactions Are Not Always Completed
11.4.4 An Example of Rampant Moral Hazard, Adverse Selection, and Fraud
11.4.5 What Does Finance Contribute to Human Provisioning?
Orthodox Models of International Investment
11.5.1 A Traditional Model of International Investment
11.5.2 Risk and Diversification
11.5.3 The Dynamic Gains from International Investment

11.5.4 The Long-Run Welfare Effects of International Financial Flows
Financialization
11.6.1 The Manifestations of Financialization
11.6.2 Growing Influence of Finance on the Real Economy
11.6.3 The Separation of Finance from Provisioning
11.6.4 Is Financialization a Necessary Evil in a Modern Complex Economy?


11.7 International Financial Flows: Some Conclusions
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
12 The Foreign Exchange Market
12.1

The Evolution of the Foreign Exchange Market
12.1.1 The Real History of Money
12.1.2 The Emergence of Finance Occurred Before the Emergence of Money
12.1.3 The Foreign Exchange Market in Ancient Times
12.1.4 The Development of Banking and Bankers’ Role in Money Creation
12.1.5 Fiat Money and Exchange Rates
12.2 Contemporary Foreign Exchange Markets
12.2.1 The Over-the-Counter Market
12.2.2 A Worldwide Market
12.2.3 Online Trading
12.2.4 Centralization of the Market
12.2.5 Retail Currency Exchange
12.3 The Supply and Demand Model of Foreign Exchange
12.3.1 A Simple Example of a Foreign Exchange Market

12.3.2 Arbitrage Integrates Markets
12.3.3 Triangular Arbitrage
12.3.4 An Example of Triangular Arbitrage
12.4 Effective Exchange Rates
12.4.1 The Effective Value of a Currency
12.4.2 Recent Behavior of Effective Exchange Rates
12.5 Intertemporal Arbitrage and the Interest Parity Condition
12.5.1 Intertemporal Arbitrage
12.5.2 A Simple Example of Intertemporal Arbitrage
12.5.3 The Covered Interest Parity Condition
12.5.4 A More General Form of the Interest Parity Condition
12.5.5 An Exercise in Interest Parity
12.5.6 Further Evidence on Interest Parity
12.5.7 A Modern Case Study of Expectations: The Carry Trade
12.5.8 Exchange Rate Futures
12.6 Explaining the $4 Trillion Per Day Volume
12.6.1 Arbitrage Trades
12.6.2 Hot Potato Process
12.6.3 Explaining the $5 Trillion Daily Volume
12.7 Summary and Conclusions
Chapter Summary


Key Terms and Concepts
Problems and Questions
Notes
13 International Banking and Financial Markets
13.1

Stocks and Flows in International Finance

13.1.1 The Net International Investment Position
13.1.2 From the Balance of Payments to the Net Investment Position
13.1.3 Asset Stocks and Asset Returns
13.1.4 Is the Growth of the Net Investment Deficit Sustainable?
13.2 The Growth of International Banking
13.2.1 Shifts in the Ranks of the Transnational Financial Firms
13.2.2 The Eurocurrency Markets
13.3 Portfolio Investment
13.3.1 Defining Portfolio Investment
13.3.2 International Equity Markets
13.3.3 American Depository Receipts
13.3.4 Some Unintended Consequences of the Globalization of Financial Markets
13.4 Financial Innovation
13.4.1 The International Marketing of U.S. Collateralized Debt Obligations
13.4.2 Credit Default Swaps Insured the CDOs
13.5 Deregulation and Financial Fraud
13.5.1 The Glass–Steagall Act
13.5.2 Globalization and Financial Deregulation
13.5.3 The Great Monetary Expansion
13.5.4 Financial Crisis to Recession
13.5.5 Summary
13.6 Financial Instability
13.6.1 Neoclassical Analysis Cannot Explain Crises
13.6.2 Back to Keynes
13.6.3 The Separation of Finance and Investment
13.6.4 Minsky’s Three Categories of Finance
13.6.5 The Financial Instability Hypothesis
13.6.6 Back to the 2007–2009 Financial Collapse
13.7 Conclusions and Final Comments
Chapter Summary

Key Terms and Concepts
Problems and Questions
Notes
14 Exchange Rate Crises
14.1

The Economics of Exchange Rate Crises


14.1.1 Fixing the Exchange Rate under Rational Expectations
14.1.2 Using Intervention to Stabilize the Exchange Rate
14.1.3 Intervention Is Not a Long-Run Tool
14.2 Fixed Exchange Rates and Economic Crises
14.2.1 Policy Choices
14.2.2 The Options When Policy Independence Is the Priority
14.2.3 Two Dilemmas Equal One Trilemma
14.3 The 1982 Debt Crisis
14.3.1 Recycling Petrodollars
14.3.2 The Macroeconomics of International Financial Flows
14.3.3 What Changed in 1982?
14.3.4 Dealing with the 1982 Debt Crisis
14.3.5 The Three Sides of the Negotiations
14.3.6 The Role of the International Monetary Fund
14.4 Further Foreign Exchange Crises
14.4.1 The Mexican Peso Crisis in 1994
14.4.2 The Asian Crisis of 1997
14.4.3 The Russian Crisis
14.4.4 Common Threads in 1990s Exchange Rate Crises
14.4.5 Exchange Rate Crises Are Very Damaging
14.5 Brazil’s 2004 Tightrope Walk

14.5.1 Sustainability of Public Sector Debt
14.5.2 Tracing Brazil’s Public Sector Debt
14.6 Conclusions
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
PART V

THE HISTORY OF THE INTERNATIONAL MONETARY SYSTEM

15 Early Monetary History: Ancient Times Through the End of the Gold Standard
15.1

15.2

The Emergence of Modern Money
15.1.1 Finance and Debt Came Before Money
15.1.2 The Development of Physical Representations of Money
15.1.3 The Growing Complexity of International Finance
The Origins of the Gold Standard
15.2.1 Why Britain Had a Gold Standard and Not a Silver Standard
15.2.2 The International Gold Standard
15.2.3 The Order of the International Gold Standard
15.2.4 The Gold Standard’s Fixed Exchange Rates
15.2.5 How the Gold Standard Really Worked
15.2.6 International Investment in the Late Nineteenth Century


15.3

The United States and the Gold Standard
15.3.1 Social Conflict and the Gold Standard
15.3.2 Bimetallism and William Jennings Bryan
15.3.3 The United States Remains on the Gold Standard
15.3.4 Evaluating the International Gold Standard
15.4 War War I Ended the Gold Standard
15.4.1 The Futile Attempt to Get Back to “Normal” after World War I
15.4.2 The Costs of the War
15.4.3 Reviving the Gold Standard Under Changed Circumstances
15.4.4 The Treaty of Versailles
15.4.5 Isolationist Tendencies in the United States
15.5 The Failed Return to the Gold Standard
15.5.1 Not Quite a Gold Standard
15.5.2 Did the Gold Standard Cause the Great Depression?
15.5.3 Exporting the U.S. Financial Shock
15.5.4 Some Further Consequences of the Economic Decline
15.6 A Change of Order
15.6.1 Reversing the Financial Chaos
15.6.2 Competitive Devaluations
15.6.3 The Tripartite Agreement
15.7 Assessing the Gold Standard During the Interwar Period
15.7.1 A Bad Report Card
15.7.2 The Trilemma Between the Wars
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
Appendix: William Jennings Bryan’s “Cross of Gold” Speech, July 9, 1896
16 The International Monetary System: Bretton Woods to the End of the Twenty-First

Century
16.1

16.2

The Bretton Woods Conference
16.1.1 A Holistic Perspective of Bretton Woods
16.1.2 Harry Dexter White and John Maynard Keynes
16.1.3 Agreement on the IMF and the World Bank
16.1.4 The Bretton Woods Order
16.1.5 The Marshall Plan and European Economic Integration
16.1.6 The Performance of the Bretton Woods System
16.1.7 The 1960s Reveal the System’s Inconsistencies
16.1.8 The Collapse of the Bretton Woods System
16.1.9 Evaluating the Bretton Woods System
After Bretton Woods


16.2.1 Many Meetings, No Agreement
16.2.2 Exchange Rate Volatility
16.2.3 The Plaza Accord
16.2.4 The Bretton Woods Institutions
16.2.5 Evaluating the Post-Bretton Woods Period
16.3 The Euro
16.3.1 The Early Steps toward Economic Union
16.3.2 Enlarging the EEC
16.3.3 The EEC and the Collapse of Bretton Woods
16.3.4 The Trilemma Again!
16.3.5 Establishing the Monetary Union
16.3.6 Further Expansion of the European Union

16.3.7 Trade Effects of the European Monetary Union (EMU)
16.3.8 Fiscal Policy in the European Union Countries: Some Potential Problems
16.3.9 Financial Instability in Europe: The Greek Crisis
16.4 Some Tentative Conclusions
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
17 Another Bretton Woods Conference?
17.1

17.2

17.3

17.4

Economic Instability
17.1.1 Inflation
17.1.2 Developing Countries’ Accumulation of Dollar Reserves
To Fix or to Float?
17.2.1 The Case for Pegged Exchange Rates
17.2.2 The Case for Floating Exchange Rates
17.2.3 So, Which Exchange Rate Regime Provides a Higher Living Standard?
17.2.4 The Historical Context of Today’s Regime Choices
17.2.5 Why the Reluctant Fiscal Response?
Modern Money Theory
17.3.1 Personal Debt versus Aggregate Debt
17.3.2 A Simple Example of a Monetary Free Lunch
17.3.3 The Fallacy of Composition

17.3.4 Summarizing Modern Money Theory
17.3.5 MMT and the Case for Flexible Exchange Rates
Restoring Financial Regulation and Oversight
17.4.1 Do We Need a New Bretton Woods Conference?
17.4.2 Keynes’ Bancor
17.4.3 An International Bankruptcy Court?
17.4.4 Some New Proposals


17.4.5 Alternative Monetary Regimes: Islamic Finance
17.5 Some Conclusions and Predictions
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
PART VI

IMMIGRATION

18 Immigration: The International Movement of People
18.1

International Migration
18.1.1 Early Migrations
18.1.2 Recent Immigration
18.1.3 Why Do People Immigrate?
18.1.4 Many Types of Immigrants
18.2 A Labor Market Model of Immigration
18.2.1 Who Gains from Immigration?
18.2.2 The Effect of Immigration on Domestic Product Demand

18.2.3 Immigrant Remittances
18.2.4 Externalities in the Destination Country
18.2.5 The Costs of Government Services for Immigrants
18.2.6 Are U.S. Immigrants More Costly Today Than in the Past?
18.2.7 Tentative Conclusions from the Static Supply and Demand Model
18.3 Immigration’s Long-Run Effects on Economic Growth
18.3.1 Immigration’s Dynamic Effects
18.3.2 The Brain Drain
18.3.3 Can Remittances Mitigate the Brain Drain?
18.3.4 Replacing the Brain Drain with Service Exports?
18.4 Unauthorized (Illegal) Immigration
18.4.1 Unauthorized Immigration as Labor Market Segmentation
18.4.2 Unauthorized Immigration Can Be Deadly
18.5 Conclusions
18.5.1 The Economic Significance of Immigration
18.5.2 A More Holistic Perspective on Immigration
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
19 Immigration Policy
19.1

The Purpose of Immigration Policy
19.1.1 Individual Rights and Community


19.1.2 Classifying Immigration Policies
19.2 United States Immigration Policy in the Nineteenth Century
19.2.1 Early Immigration Policy

19.2.2 The Latter Half of the Nineteenth Century
19.2.3 The Chinese Exclusion Act
19.2.4 Securing the Border
19.2.5 Pro-Immigration Forces Kept Immigration Open
19.2.6 Assessing the Early Policies
19.3 The Shift in U.S. Policy in the Early Twentieth Century
19.3.1 The Major Shift in U.S. Immigration Policy
19.3.2 Some Immigration Horror Stories During the Great Depression
19.3.3 Immigration Policy during World War II
19.4 Post-World War II Immigration Policy
19.4.1 Slow Shifts in Immigration Law
19.4.2 A New Immigration Law in 1965
19.4.3 Unauthorized Immigration Has Grown Rapidly
19.5 Recent United States Immigration Policy
19.5.1 The 1986 Immigration Reform and Control Act
19.5.2 After IRCA
19.5.3 Temporary Work Visas
19.5.4 U.S. Policy at the Start of the Twenty-First Century
19.5.5 Immigration Reform Stalls
19.6 Immigration Policy in Canada
19.6.1 The Early Years
19.6.2 Canada’s Treatment of Chinese Immigrants
19.6.3 Summary of Nineteenth-Century Policy
19.6.4 The Twentieth-Century Shift in Policy
19.6.5 Canadian Policy Shifts after World War II
19.6.6 Canada’s Immigration Policy in the Twenty-first Century
19.7 European Immigration Policy
19.7.1 European Migration During the Colonial Era
19.7.2 The Nineteenth Century
19.7.3 European Emigration in the Twentieth Century

19.7.4 The Post-Soviet Era
19.7.5 Recent EU Immigration Policy
19.8 Conclusions
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
20 The Evolving International Economy in an Ecologically Constrained World


20.1

Economic Growth and the Ecosystem
20.1.1 Global Warming
20.1.2 Scientific Evidence on Global Warming
20.1.3 Biodiversity
20.1.4 Nature’s Services Crucial to Human Existence
20.1.5 No Sense of Urgency among Policy Makers
20.2 Policy Making under Uncertainty
20.2.1 Risk vs. Uncertainty
20.2.2 The Cost of Controlling Global Warming
20.2.3 The Cost of Stopping Biodiversity Loss
20.2.4 Why Is It So Hard to Insure Against Environmental Disaster?
20.3 Economic Growth and the Environment
20.3.1 Nature as the Next Source of Diminishing Returns
20.3.2 A Two-Sector Solow Growth Model
20.3.3 The Need for Technological Change in Both Spheres
20.3.4 The Two-Sector Model’s Insights
20.3.5 Environmental Costs and Economic Growth
20.3.6 Policy Options

20.3.7 Taxes Versus Quantitative Restrictions
20.3.8 The Political Economy of Environmental Policy
20.4 The Case for Globalization Taking the Environment into Consideration
20.4.1 National Policies and Global Problems
20.4.2 Support Local Commerce
20.4.3 International Economics and Growth Again
Chapter Summary
Key Terms and Concepts
Problems and Questions
Notes
Glossary
Bibliography
Name Index
Subject Index


Figures

Figures
1.1
1.2
1.3
1.4
2.1
3.1
3.2
3.3
3.4
3.5
3.6

3.7
3.8
3.9
3.10
3.11
3.12
3.13
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
5.1
5.2
5.3
5.4

The Economy’s Position in Society and the Natural Environment
Humanity’s Ecological Footprint, 1960–2005
A Linear Hypothesis?
A More Complex Relationship 2.1 Yin and Yang

Yin and Yang
The Production Possibilities Frontier: Scarcity Requires Choices
Indiference Curves
Equilibrium in the Closed Economy
The Gain from Exchange
The Gains from Exchange and Specialization
The Two-Country Model: Equilibria with No Trade
The Two-Country Model: Equilibria with Free Trade
Trade and Factor Demand
Market Equilibrium
Producer Surplus
Consumer Surplus
Two-Country Model: Equilibria with Free Trade
National and World Markets for Guns with Free Trade
The Market without Transport Costs
Decreasing Transport Costs Permit Increased Trade
Decreasing Transport Costs Permit Increased Trade
Adjusting to Free Trade
The Short-Run PPF
Trade between Joe and Mary
Trade between José and María
Trade between Joe and María
Trade between José and Mary
Summary: The Gains from Trade
Happiness and Real Per Capita GDP in Japan, 1958–1991
Average Happiness for a Cross-Section of Countries
National and World Markets for Steel with Free Trade
GHG Emissions from National Production and Consumption
The Direction of Trade in 1998
The PPF with Increasing Returns

Decreasing Costs and Proft
Increasing Returns


5.5
5.6
5.7
5.8
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
6.10
7.1
7.2
7.3
7.4
7.5
7.6
8.1
8.2
8.3
8.4
8.5
8.6

8.7
8.8
8.9
8.10
8.11
8.12
8.13
8.14
8.15
8.16
8.17
8A.1
8A.2
9.1
9.2
9.3

Specialization with Increasing Returns
Unequal Gains from Specialization with Increasing Returns
Comparative Advantage, Marketing Activity, and Competitive Advantage
Price of Autos with Elastic and Inelastic Demand
The Similarity Between Trade and Growth
The Welfare Gain from Trade versus Economic Growth
World Economic Growth and Trade
Time Lines of Coefcient Values and Their Confdence Intervals from Cross-Section Studies
of International Trade and Economic Growth
A Production Function Subject to Returns to Capital
The Solow Equilibrium
Trade and the Solow Growth Model
The Efect of Increased Saving on the Steady State

Technological Progress
Technological Progress
The Lorenz Curve for Bolivia
The Lorenz Curve for Bolivia and South Korea
Inequality in Modern Korea and Eleventh-Century Ghana
Life Satisfaction: Relative versus Average Happiness
Vernon’s Product Cycle Model: Developed Country Perspective
Immiserizing Growth
The Two-Country Partial Equilibrium Model
An Import Tarif as Viewed by the Importing Country
Homeland’s Tarif as Viewed by Abroad’s Exporters
The Welfare Efects of a Tarif
The Welfare Efects of a Tarif
The Tarif-Inclusive Price Line Faced by Producers
Efective Tarif on Final Output
Efective Protection from Tarif on Inputs
An Import Quota as Viewed by Importing Economy
The Efect of Homeland’s Quota in Abroad
The Welfare Efects of a Quota
The Welfare Efects of a Quota
The Non-Equivalence of Tarifs and Quotas
Welfare-Diminishing Choices under a Quota
The Efect of an Export Tax by Homeland
The Efect of an Export Tax with Inelastic Foreign Demand
The Price of Shirts with Inelastic and Elastic Demand
Consumption Equilibrium with a Tarif
International Trade with a Tarif of t%
The Median Voter Model
The U.S. Sugar Quota
Endogenous Tarifs

9.4
9.5
9.6
9.7
9.8
11.1
11.2
11.3
11.4
11.5
11.6
11.7
12.1
12.2
12.3
12.4
12.5
12.6
14.1
14.2
14.3
15.1
15.2
15.3
15.4
16.1
16.2
17.1

17.2
17.3
17.4
18.1
18.2
18.3
18.4
18.5
19.1
20.1
20.2
20.3
20.4
20.5
20.6

How Much Is a Quota Worth?
The Gain from Exchange without Specialization
The Gain from Exchange and Specialization
Levels of Regional Economic Integration
Trade Diversion versus Trade Creation
The Basic Circular Flow
Circular Flow with a Financial Sector
Circular Flow with Government Added
Circular Flow of an Open Economy
The Market for Loanable Funds
Two-Country Partial Equilibrium Investment Model
Two-Country Partial Equilibrium Investment Model with International Investment
The Foreign Exchange Market
The Foreign Exchange Market

Two Isolated Markets for Cucumbers
Arbitrage and Price Equalization
The Broad Index, 1974–2013
Trade Weighted U.S. Dollar Major Currencies Index
Foreign Exchange Market Intervention
The Foreign Exchange Market Intervention
The Trilemma: Select Any Two Out of Three
Gold Parities and Exchange Rates
Price Levels U.S. and Canada, 1870–1913
The Trilemma During the Gold Standard
The Trilemma During the Interwar Period
The Trilemma: The Bretton Woods Years
Real Exchange Rates, 1975–1989
The Trilemma since 1870
Infation since 1600
The Infow–Outfow Model of an Economy
The Three Defcits in the U.S. since 1950
The Labor Markets after Immigration
Immigration and Demand for Labor
Immigration and Demand for Labor in the Source Country
The Labor Markets after Immigration and Remittances
The Gains and Losses from Immigration with Discrimination
Immigrant Departures as a Percent of Arrivals
The Economy’s Position in Society and the Natural Environment
A Standard Normal Distribution
A Distribution of Normal Distributions
Economic Growth in the Natural Sphere
Economic Growth in the Natural and Economic Spheres
Economic Growth When the Natural Sphere Is Stressed