International Economics Robert J. Carbaugh BBA

About This Course

International
Economics
Robert J. Carbaugh
13th Edition
INTERNATIONAL
ECONOMICS
Robert J. Carbaugh
Professor of Economics Central Washington University
13th Edition
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially
affect the overall learning experience. The publisher reserves the
right to remove content from this title at any time if subsequent
rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword
for materials in your areas of interest.
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
52609_00_fm_pi-pxxvi.indd ii 2/1/10 11:37:43 PM

International Economics, 13th Edition
Robert J. Carbaugh
Vice President of Editorial, Business: Jack W. Calhoun
Vice President/Marketing: Bill Hendee
Publisher: Joe Sabatino
Executive Editor: Michael Worls
Supervising Developmental Editor: Katie Yanos
Executive Marketing Manager: Keri Witman
Associate Marketing Manager: Betty Jung
Content Project Management: PreMediaGlobal
Manager of Technology, Editorial: Emily Gross
Media Editor: Deepak Kumar
Senior Manufacturing Coordinator: Sandee Milewski
Production Service: PreMediaGlobal Copyeditor: Jonathan Moore
Senior Art Director: Michelle Kunkler Cover Designer: Rose Alcorn
Main Image: © Manuel Velasco/ iStockphoto
Secondary Image: © byphotography/ Shutterstock
Permissions Acquisitions Manager, Text: Mardell Glinski Schultz
Permissions Acquisitions Manager, Images: Deanna Ettinger
© 2011, 2005 South-Western, a part of Cengage Learning
ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced, transmitted, stored or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribu- tion, information networks, or information storage and retrieval sys- tems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher.
ExamView® is a registered trademark of eInstruction Corp. Windows is a registered trademark of the Microsoft Corporation used herein under license. Macintosh and Power Macintosh are registered trademarks of Apple Computer, Inc. used herein under license.
© 2008 Cengage Learning. All Rights Reserved.
Cengage Learning WebTutorTM is a trademark of Cengage Learning.
Library of Congress Control Number: 2010933655 Student Edition ISBN 13p:a9rt7. 81439ri0gh3ts8,949content at Student Edition ISBN 10: 1-4390-3894-5
Instructor’s Edition ISBN 13: 978-1-4390-4076-8 Instructor’s Edition ISBN 10: 1-4390-4076-1
South-Western Cengage Learning
5191 Natorp Boulevard Mason, OH 45040 USA
Cengage Learning products are represented in Canada by Nelson Education, Ltd.
For your course and learning solutions, visit school.cengage.com
Preface
My belief is that the best way to motivate students to learn a subject is to demon- strate how it is used in practice. The first twelve editions of International Economics reflected this belief and were written to provide a serious presentation of interna- tional economic theory with an emphasis on current applications. Adopters of these editions strongly supported the integration of economic theory with current events.
The thirteenth edition has been revised with an eye toward improving this presentation and updating the applications as well as toward including the latest theoretical developments. Like its predecessors, this edition is intended for use in a one-quarter or one-semester course for students who have no more of a background than the principles of economics. This book’s strengths are its clarity, organization, and applications, which demonstrate the usefulness of theory to students. The revised and updated material in this edition emphasizes current applications of economic theory and incorporates recent theoretical and policy developments in international trade and finance.
International Economics Themes
This edition highlights six current themes that are at the forefront of international economics:
• The Global Economic Downturn of 2007–2009
• Anatomy of the economic crisis—Ch. 1
• Trade protectionism intensifies as economies fall into recession—Ch. 4
• U.S. fiscal stimulus and “Buy American” legislation—Ch. 5
• Do government subsidies to automakers weaken the World Trade
Organization?—Ch. 6
• Falling commodity prices squeeze the economies of developing nations—Ch. 7
• Does the U.S. tax code send American jobs offshore?—Ch. 9
• The paradox of capital flows from developing countries to advanced
countries—Ch. 10
• Globalization of economic activity
• Waves of globalization—Ch. 1
• Has globalization gone too far?—Ch. 1
• Putting the H-P Pavilion together—Ch. 1
• Soaring transportation costs hinder globalization—Ch. 3
• Constraints imposed by capital flows on the choice of an exchange rate
system—Ch. 15
xv
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xvi Preface
• Free trade and the quality of life issues
• Does the principle of comparative advantage apply in the face of job
outsourcing?—Ch. 2
• Boeing outsources work, but protects its secrets—Ch. 2
• Does trade make the poor even poorer?—Ch. 3
• Does wage insurance make free trade more acceptable to workers?—Ch. 6
• The environment and free trade—Ch. 6
• Trade conflicts between developing and advanced nations
• Is international trade a substitute for migration?—Ch. 3
• Economic growth strategies—import substitution versus export-led
growth—Ch. 7
• Does foreign aid promote the growth of developing countries?—Ch. 7
• How to bring developing countries in from the cold—Ch. 7
• The Doha Round of multilateral trade negotiations—Ch. 6
• China’s export boom comes at a cost: how to make factories play fair—Ch. 7
• Do U.S. multinationals exploit foreign workers?—Ch. 9
• Liberalizing trade: the WTO versus regional trading arrangements
• Does the WTO reduce national sovereignty?—Ch. 6
• Regional integration versus multilateralism—Ch. 8
• Is Europe really a common market?—Ch. 8
• French and Dutch Voters Sidetrack European Integration—Ch. 8
• From NAFTA to CAFTA—Ch. 8
• Will the Euro Fail?—Ch. 8
• The dollar as a reserve currency
• Paradox of foreign debt: how the United states has borrowed without
cost—Ch. 10
• Why a dollar depreciation may not close the U.S. trade deficit—Ch. 14
• Preventing currency crises: currency boards versus dollarization—Ch. 15
• China lets Yuan rise against dollar—Ch. 15
• Should the Special Drawing Right replace the dollar as the world’s reserve
currency?—Ch. 17
Besides emphasizing current economic themes, the thirteenth edition of this text contains many new contemporary topics such as outsourcing and the U.S. auto industry, U.S. safeguards limit imports of textiles from China, bailout fund for the Eurozone, bike imports force Schwinn to downshift, and currency markets draw day traders. Faculty and students will appreciate how this edition provides a contem- porary approach to international economics.
Organizational Framework: Exploring Further Sections
Although instructors generally agree on the basic content of an international econom- ics course, opinions vary widely about which arrangement of material is appropriate. This book is structured to provide considerable organizational flexibility. The topic of international trade relations is presented before international monetary relations, but the order can be reversed by instructors who choose to start with monetary theory. Instructors can begin with Chapters 10–17 and conclude with Chapters 2–9. Those who do not wish to cover all the material in the book can easily omit all or parts of Chapters 6–9 and Chapter 13, and Chapters 15–17 without loss of continuity.
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

The thirteenth edition streamlines its presentation of theory so as to provide greater flexibility for instructors. This edition uses online Exploring Further sections to discuss more advanced topics: They can be found at www.cengage.com/ economics/Carbaugh. By locating the Exploring Further sections online rather than in the textbook, as occurred in previous editions, more textbook coverage can be de- voted to contemporary applications of theory. The Exploring Further sections consist of the following:
• Comparative advantage in money terms—Ch. 2
• Indifference curves and trade—Ch. 2
• Offer curves and the equilibrium terms of trade—Ch. 2
• The specific-factors theory—Ch. 3
• WTO Makes Ruling on Boeing-Airbus Aircraft Subsidy Dispute—Ch. 3
• Offer curves and tariffs—Ch. 4
• Tariff-rate quota welfare effects—Ch. 5
• Export quota welfare effects—Ch. 5
• Welfare effects of strategic trade policy—Ch. 6
• Government procurement policy and the European Union—Ch. 8
• Economies of scale and NAFTA—Ch. 8
• Can the Euro Survive?—Ch. 8
• Techniques of foreign-exchange market speculation—Ch. 11
• A primer on foreign-exchange trading—Ch. 11
• Fundamental forecasting—regression analysis—Ch. 12
• Income adjustment mechanism—Ch. 13
• Exchange rate pass-through—Ch. 14
Supplementary Materials
International Economics Web Site (www.cengage.com/economics/Carbaugh)
In this age of technology, no text package would be complete without Web-based resources. An international economics website is offered with the thirteenth edition. This site, www.cengage.com/economics/Carbaugh, contains many useful pedagogi- cal enrichment features including NetLink Exercises, which draw upon the expanded NetLinks feature at the end of each chapter. While the NetLinks direct the student to an appropriate international economics website to gather data and other relevant in- formation, the NetLink Exercises allow students to access these Web sites to answer pertinent and practical questions that relate to international economics. As an added enrichment feature, a Virtual Scavenger Hunt engages and encourages students to search for international economics answers at various Internet Web sites.
PowerPoint Slides
The thirteenth edition also includes PowerPoint slides created by Andreea Chiritescu of Eastern Illinois University. These slides can be easily downloaded from the Carbaugh Web site (www.cengage.com/economics/Carbaugh). The slides offer pro- fessors flexibility in enhancing classroom lectures. Slides may be edited to meet indi- vidual needs.
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Preface xvii

xviii Preface
Instructor’s Manual
Study Guide
To assist instructors in the teaching of international economics, I have written an Instructor’s Manual with Test Bank that accompanies the thirteenth edition. It contains: (1) brief answers to end-of-chapter study questions; (2) multiple-choice questions for each chapter; and (3) true-false questions for each chapter. The Instructor’s Manual with Test Bank is available for download for qualified instructors from the Carbaugh Web site (www.cengage.com/economics/Carbaugh).
To accompany the thirteenth edition of the international economics text, Professor Jim Hanson of Willamette University has prepared an online Study Guide for stu- dents. This guide reinforces key concepts by providing a review of the text’s main topics and offering practice problems, true-false and multiple-choice questions, and short-answer questions.
Acknowledgments
I am pleased to acknowledge those who aided me in preparing the current and past editions of this textbook. Helpful suggestions and often detailed reviews were provided by:
• Burton Abrams, University of Delaware
• Richard Adkisson, New Mexico State University
• Richard Anderson, Texas A&M
• Brad Andrew, Juniata College
• Richard Ault, Auburn University
• Mohsen Bahmani-Oskooee, University of Wisconsin—Milwaukee
• Kevin Balsam, Hunter College
• Kelvin Bentley, Baker College Online
• Robert Blecker, Stanford University
• Scott Brunger, Maryville College
• Jeff W. Bruns, Bacone College
• Roman Cech, Longwood University
• John Charalambakis, Asbury College
• Mitch Charkiewicz, Central Connecticut State University
• Xiujian Chen, California State University, Fullerton
• Miao Chi, University of Wisconsin—Milwaukee
• Howard Cochran, Jr., Belmont University
• Charles Chittle, Bowling Green University
• Christopher Cornell, Fordham University
• Elanor Craig, University of Delaware
• Manjira Datta, Arizona State University
• Ann Davis, Marist College
• Firat Demir, University of Oklahoma
• Gopal Dorai, William Paterson College
• Veda Doss, Wingate University
• Seymour Douglas, Emory University
• G. Rod Erfani, Transylvania University
• Carolyn Fabian Stumph, Indiana University-Purdue University Fort Wayne
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

• Farideh Farazmand, Lynn University
• Daniel Falkowski, Canisius College
• Patrice Franko, Colby College
• Emanuel Frenkel, University of California—Davis
• Norman Gharrity, Ohio Wesleyan University
• Sucharita Ghosh, University of Akron
• Jean-Ellen Giblin, Fashion Institute of Technology (SUNY)
• Leka Gjolaj, Baker College
• Thomas Grennes, North Carolina State University
• Darrin Gulla, University of Kentucky
• Li Guoqiang, University of Macau (China)
• William Hallagan, Washington State University
• Jim Hanson, Willamette University
• Bassam Harik, Western Michigan University
• John Harter, Eastern Kentucky University
• Seid Hassan, Murray State University
• Phyllis Herdendorf, Empire State College (SUNY)
• Pershing Hill, University of Alaska-Anchorage
• David Hudgins, University of Oklahoma
• Ralph Husby, University of Illinois-Urbana/Champaign
• Robert Jerome, James Madison University
• Mohamad Khalil, Fairmont State College
• Wahhab Khandker, University of Wisconsin—La Crosse
• Robin Klay, Hope College
• William Kleiner, Western Illinois University
• Anthony Koo, Michigan State University
• Faik Koray, Louisiana State University
• Peter Karl Kresl, Bucknell University
• Fyodor Kushnirsky, Temple University
• Edhut Lehrer, Northwestern University
• Jim Levinsohn, University of Michigan
• Benjamin Liebman, St. Joseph’s University
• Susan Linz, Michigan State University
• Andy Liu, Youngstown State University
• Alyson Ma, University of San Diego
• Mike Marks, Georgia College School of Business
• John Muth, Regis University
• Al Maury, Texas A&I University
• Jose Mendez, Arizona State University
• Mary Norris, Southern Illinois University
• John Olienyk, Colorado State University
• Shawn Osell, Minnesota State University—Mankato
• Terutomo Ozawa, Colorado State University
• Peter Petrick, University of Texas at Dallas
• Gary Pickersgill, California State University, Fullerton
• William Phillips, University of South Carolina
• John Polimeni, Albany College of Pharmacy and Health Sciences
• Rahim Quazi, Prairie View A&M University
• Chuck Rambeck, St. John’s University
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Preface xix

xx Preface
• James Richard, Regis University
• Daniel Ryan, Temple University
• Manabu Saeki, Jacksonville State University
• Nindy Sandhu, Claifornia State University, Fullerton
• Jeff Sarbaum, University of North Carolina, Greensboro
• Anthony Scaperlanda, Northern Illinois University
• Juha Seppälä, University of Illinois
• Ben Slay, Middlebury College (now at PlanEcon)
• Gordon Smith, Anderson University
• Robert Stern, University of Michigan
• Paul Stock, University of Mary Hardin-Baylor
• Laurie Strangman, University of Wisconsin—La Crosse
• Manjuri Talukdar, Northern Illinois University
• Nalitra Thaiprasert, Ball State University
• William Urban, University of South Florida
• Jorge Vidal, The University of Texas Pan American
• Adis M. Vila, Esq., Winter Park Institute Rollins College
• Jonathan Warshay, Baker College
• Darwin Wassink, University of Wisconsin—Eau Claire
• Peter Wilamoski, Seattle University
• Harold Williams, Kent State University
• Chong Xiang, Purdue University
• Hamid Zangeneh, Widener University
I would like to thank my colleagues at Central Washington University—Tim Dittmer, David Hedrick, Koushik Ghosh, Tyler Prante, Peter Saunders, Thomas Tenerelli, Chad Wassell—for their advice and help while I was preparing the manuscript. I am also indebted to Shirley Hood who provided advice in the manu- script’s preparation.
It has been a pleasure to work with the staff of South-Western—Mike Worls, Katie Yanos and Lena Mortis—who provided many valuable suggestions and assistance in see- ing this edition to its completion. Thanks also go to Jennifer Ziegler and Jean Buttrom, who orchestrated the production of this book in conjunction with Mary Stone, project manager at PreMediaGlobal. I also appreciate the meticulous efforts that Jonathan Moore did in the copyediting of this textbook. Moreover, Keri Witman and Betty Jung did a fine job in advertising and marketing the thirteenth edition. Finally, I am grateful to my students, as well as the faculty and students at other universities, who provided helpful comments on the material contained in this new edition.
I would appreciate any comments, corrections, or suggestions that faculty or stu- dents wish to make so I can continue to improve this text in the years ahead. Please contact me! Thank you for permitting this text to evolve to a thirteenth edition.
Bob Carbaugh
Department of Economics Central Washington University Ellensburg, Washington 98926 Phone: (509) 963–3443
Fax: (509) 963–1992
Email: [email protected]