Henry Thompson national n;< Economics arkets ajKTCompetition 2nd Edition International Global Markets and Competition 2nd Edition Henry Thompson Auburn University I ® ( ntGrri3tiori3i flngmjHffff ^ShW TfflnBr^ aw fiS ^HfffttiiT*^ ffll ffl( |s jfl| ^ffitifff &u&r Global Markets and Competition 2nd Edition 1||| World Scientific NEW JERSEY • LONDON • SINGAPORE • BEIJING • SHANGHAI • HONG KONG • TAIPEI • CHENNAI Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. INTERNATIONAL ECONOMICS (2nd Edition) Global Markets and Competition Copyright © 2006 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher. For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher. ISBN 981-256-346-6 (pbk) Printed by Fulsland Offset Printing (S) Pte Ltd, Singapore Preface for the Student International economics will affect your private and business life. International economics has moved center stage as countries become more integrated with trade, foreign investment, and migration. The world is shrinking with better transportation and telecommunication. The foreign exchange market is simply the largest market in the world. Industries expand and collapse in the face of international markets and competition. The World Trade Organization (WTO), North American Free Trade Agreement (NAFTA), and European Union (EU) have become a fundamental form of government. Protection eases pressures of international competition. Industries seek the protection of tariffs and quotas, securing their own profit at your expense. Governments hinder international trade and investment. Government central banks interfere with the foreign exchange market. Such maneuvers impede international commerce and lower income. This text focuses on international markets. An economy is a collection of interdependent markets, and in international economies are linked across borders. Comparative advantage is the most important tool for predicting international production and trade. International supply is based on underlying production capacity. International trade is the arbitrage of products from countries where prices are low and products unique. Arbitrage makes traders profit and distributes products more economically. The interaction of international supply and de mand determines production and trade. The effects of trade depend on the types of industries, from competition to monopoly. Trade policy is designed to redistribute income toward favored industries and groups. Costs of protection outweigh benefits but industry and labor groups lobby for protection because they gain at everyone's expense and politicians respond to political support. The graphs, examples, applications, and problems in the text are essential. There are hints for even numbered problems. Good luck. I think you will enjoy International Economics: Global Markets and Competition. Visit the website at www.auburn.edu/~thomphl where you can find analysis of current events and links. Contact me at [email protected]. v Preface for the Instructor International Economics: Global Markets and Competition is unique: • a one-term text for students with principles background • microeconomic models stress positive theory • advocates free trade, skeptical about government trade policy • theory advances through partial and general equilibrium • over 250 boxed examples from the literature • problems lead students through theory This text applies the tools of microeconomics and general equilibrium. The foreign exchange market and balance of payments are integrated throughout the text. Open economy macroeconomic models are included in the final chapter stressing micro foundations. The text does not assume intermediate theory or calculus. Numerous boxed examples are a central component, introducing tools and concepts. Technical points are made with examples and graphs, avoiding "formulas" and algebraic symbols. Classroom presentations should be more general, using diagrams and algebra. Problems are designed for learning and were developed in the classroom. Hints for even numbered problems are in an appendix. Students can be called on to work problems at the board, increasing their capacity to absorb the material. You will be surprised at how well your students learn using International Economics: Global Markets and Competition. The website at www.auburn.edu/ -thomphl can be integrated into classwork. There is analysis of current events and links to resources. Contact me at [email protected]. Thanks Numerous students and colleagues have provided suggestions and comments. Sonja Langby uncovered logical slips, Lijun Chen carefully rechecked Problems, and Mostafa Malki updated Examples. The excellent staff at World Scientific Publishing made putting the text together a pleasure. vii Contents Preface for the Student v Preface for the Instructor vii MARKETS AND TRADE 1. Markets, Trade, and Comparative Advantage 3 A. International markets 4 B. Excess supply and demand 13 C. The balance of trade 21 D. Comparative advantage and specialization 27 2. Trade with Constant Costs 37 A. Constant opportunity costs of production 38 B. Specialization and gains from trade 47 C. Extensions of constant cost trade theory 53 D. Applications of constant cost trade theory 62 TRADE: GAINS, PROTECTION, AND TERMS 3. Gains from Trade 73 A. Production possibilities and real income 74 B. Specialization and the gains from trade 82 C. Growth and trade 89 D. Industrial trade policy 97 4. Protection 106 A. Tariffs: Taxes on imports 107 B. Quotas and other nontariff barriers 116 C. Protection and production 123 D. Political economy of protection 127 5. Terms of Trade 136 A. Offer curves 137 B. Tariffs and the terms of trade 149 C. Tariff games 156 D. Trade in nonrenewable natural resources 163