Preface xv
Introduction 1
What Is International Economics About? 3
The Gains from Trade 4
The Pattern of Trade 5
How Much Trade? 5
Balance of Payments 6
Exchange Rate Determination 6
International Policy Coordination 7
The International Capital Market 8
International Economics： Trade and Money 8
Part 1 Exchange rates and Open-Economy Macroeconomics 11
National Income Accounting and the Balance
of Payments 11
The National Income Accounts 13
National Product and National Income 14
Capital Depreciation and International Transfers 15
Gross Domestic Product 15
National Income Accounting for an Open Economy 16
Consumption 16
Investment 16
Government Purchases 17
The National Income Identity for an Open Economy 17
An Imaginary Open Economy 18
The Current Account and Foreign Indebtedness 18
Saving and the Current Account 21
Private and Government Saving 22
box： The Mystery of the Missing Deficit 23
The Balance of Payments Accounts 24
Examples of Paired Transactions 25
The Fundamental Balance of Payments Identity 27
The Current Account, Once Again 27
The Capital Account 28
The Financial Account 29
Net Errors and Omissions 30
Official Reserve Transactions 30
case study： The Assets and Liabilities of the Worlds Biggest Debtor 32
Summary 35
Exchange Rates and the Foreign Exchange Market：
An Asset Approach 40
Exchange Rates and International Transactions 41
Domestic and Foreign Prices 42
Exchange Rates and Relative Prices 43
The Foreign Exchange Market 44
The Actors 44
box： Exchange Rates, Auto Prices, and Currency Wars 45
Characteristics of the Market 46
Spot Rates and Forward Rates 48
Foreign Exchange Swaps 49
Futures and Options 49
The Demand for Foreign Currency Assets 50
Assets and Asset Returns 50
box： Nondeliverable Forward Exchange Trading in Asia 51
Risk and Liquidity 53
Interest Rates 54
Exchange Rates and Asset Returns 55
A Simple Rule 56
Return, Risk, and Liquidity in the Foreign Exchange Market 58
Equilibrium in the Foreign Exchange Market 59
Interest Parity： The Basic Equilibrium Condition 59
How Changes in the Current Exchange Rate Affect
Expected Returns 60
The Equilibrium Exchange Rate 61
Interest Rates, Expectations, and Equilibrium 64
The Effect of Changing Interest Rates on the Current Exchange Rate 64
The Effect of Changing Expectations on the Current Exchange Rate 65
case study： What Explains the Carry Trade? 66
Summary 68
Appendix： Forward Exchange Rates and Covered Interest Parity 74
Money, Interest Rates, and Exchange Rates 77
Money Defined： A Brief Review 78
Money as a Medium of Exchange 78
Money as a Unit of Account 78
Money as a Store of Value 79
What Is Money? 79
How the Money Supply Is Determined 79
The Demand for Money by Individuals 80
Expected Return 80
Risk 81
Liquidity 81
Aggregate Money Demand 81
The Equilibrium Interest Rate： The Interaction of Money Supply
and Demand 83
Equilibrium in the Money Market 83
Interest Rates and the Money Supply 85
Output and the Interest Rate 86
The Money Supply and the Exchange Rate in the Short Run 87
Linking Money, the Interest Rate, and the Exchange Rate 87
U.S. Money Supply and the DollarEuro Exchange Rate 89
Europes Money Supply and the DollarEuro Exchange Rate 90
Money, the Price Level, and the Exchange Rate in the Long Run 92
Money and Money Prices 92
The Long-Run Effects of Money Supply Changes 93
Empirical Evidence on Money Supplies and Price Levels 94
Money and the Exchange Rate in the Long Run 95
Inflation and Exchange Rate Dynamics 96
Short-Run Price Rigidity versus Long-Run Price Flexibility 96
box： Money Supply Growth and Hyperinflation in Zimbabwe 98
Permanent Money Supply Changes and the Exchange Rate 99
Exchange Rate Overshooting 101
case study： Can Higher Inflation Lead to Currency Appreciation? The Implications
of Inflation Targeting 103
Summary 106
Price Levels and the Exchange Rate in the Long Run 111
The Law of One Price 112
Purchasing Power Parity 113
The Relationship between PPP and the Law of One Price 113
Absolute PPP and Relative PPP 114
A Long-Run Exchange Rate Model Based on PPP 115
The Fundamental Equation of the Monetary Approach 115
Ongoing Inflation, Interest Parity, and PPP 117
The Fisher Effect 118
Empirical Evidence on PPP and the Law of One Price 121
Explaining the Problems with PPP 123
Trade Barriers and Nontradables 123
Departures from Free Competition 124
Differences in Consumption Patterns and Price Level Measurement 125
box： Some Meaty Evidence on the Law of One Price 125
PPP in the Short Run and in the Long Run 128
case study： Why Price Levels Are Lower in Poorer Countries 129
Beyond Purchasing Power Parity： A General Model of Long-Run Exchange
Rates 130
The Real Exchange Rate 131
Demand, Supply, and the Long-Run Real Exchange Rate 133
box： Sticky Prices and the Law of One Price： Evidence from Scandinavian
Duty-Free Shops 133
Nominal and Real Exchange Rates in Long-Run Equilibrium 136
International Interest Rate Differences and the Real Exchange Rate 138
Real Interest Parity 139
Summary 141
Appendix： The Fisher Effect, the Interest Rate, and the Exchange Rate under
the Flexible-Price Monetary Approach 146
Output and the Exchange Rate in the Short Run 149
Determinants of Aggregate Demand in an Open Economy 150
Determinants of Consumption Demand 150
Determinants of the Current Account 151
How Real Exchange Rate Changes Affect the Current Account 152
How Disposable Income Changes Affect the Current Account 153
The Equation of Aggregate Demand 153
The Real Exchange Rate and Aggregate Demand 153
Real Income and Aggregate Demand 154
How Output Is Determined in the Short Run 155
Output Market Equilibrium in the Short Run： The DD Schedule 156
Output, the Exchange Rate, and Output Market Equilibrium 156
Deriving the DD Schedule 157
Factors that Shift the DD Schedule 157
Asset Market Equilibrium in the Short Run： The AA Schedule 160
Output, the Exchange Rate, and Asset Market Equilibrium 161
Deriving the AA Schedule 162
Factors that Shift the AA Schedule 163
Short-Run Equilibrium for an Open Economy： Putting the DD and AA
Schedules Together 164
Temporary Changes in Monetary and Fiscal Policy 166
Monetary Policy 166
Fiscal Policy 167
Policies to Maintain Full Employment 168
Inflation Bias and Other Problems of Policy Formulation 169
Permanent Shifts in Monetary and Fiscal Policy 170
A Permanent Increase in the Money Supply 171
Adjustment to a Permanent Increase in the Money Supply 172
A Permanent Fiscal Expansion 173
Macroeconomic Policies and the Current Account 175
Gradual Trade Flow Adjustment and Current Account Dynamics 176
The J-Curve 176
Exchange Rate Pass-Through and Inflation 178
The Current Account, Wealth, and Exchange Rate Dynamics 179
The Liquidity Trap 179
case study： How Big Is the Government Spending Multiplier? 182
Summary 183
Appendix 1： Intertemporal Trade and Consumption Demand 188
Appendix 2： The Marshall-Lerner Condition and Empirical Estimates
of Trade Elasticities 190
Fixed Exchange Rates and Foreign Exchange
Intervention 193
Why Study Fixed Exchange Rates? 194
Central Bank Intervention and the Money Supply 195
The Central Bank Balance Sheet and the Money Supply 195
Foreign Exchange Intervention and the Money Supply 197
Sterilization 198
The Balance of Payments and the Money Supply 198
How the Central Bank Fixes the Exchange Rate 199
Foreign Exchange Market Equilibrium under a Fixed Exchange Rate 200
Money Market Equilibrium under a Fixed Exchange Rate 200
A Diagrammatic Analysis 201
Stabilization Policies with a Fixed Exchange Rate 202
Monetary Policy 203
Fiscal Policy 204
Changes in the Exchange Rate 205
Adjustment to Fiscal Policy and Exchange Rate Changes 206
Balance of Payments Crises and Capital Flight 207
Managed Floating and Sterilized Intervention 210
Perfect Asset Substitutability and the Ineffectiveness of Sterilized Intervention 210
case study： Can Markets Attack a Strong Currency? The Case of Switzerland 211
Foreign Exchange Market Equilibrium under Imperfect Asset Substitutability 213
The Effects of Sterilized Intervention with Imperfect Asset Substitutability 213
Evidence on the Effects of Sterilized Intervention 215
Reserve Currencies in the World Monetary System 216
The Mechanics of a Reserve Currency Standard 216
The Asymmetric Position of the Reserve Center 217
The Gold Standard 218
The Mechanics of a Gold Standard 218
Symmetric Monetary Adjustment under a Gold Standard 218
Benefits and Drawbacks of the Gold Standard 219
The Bimetallic Standard 220
The Gold Exchange Standard 220
case study： The Demand for International Reserves 221
Summary 225
Appendix 1： Equilibrium in the Foreign Exchange Market with Imperfect
Asset Substitutability 230
Demand 230
Supply 231
Equilibrium 231
Appendix 2： The Timing of Balance of Payments Crises 233
Part 2International Macroeconomic Policy 236
International Monetary Systems： An Historical Overview 236
Macroeconomic Policy Goals in an Open Economy 237
Internal Balance： Full Employment and Price Level Stability 238
External Balance： The Optimal Level of the Current Account 239
box： Can a Country Borrow Forever? The Case of New Zealand 241
Classifying Monetary Systems： The Open-Economy Monetary Trilemma 245
International Macroeconomic Policy under the Gold Standard, 18701914 246
Origins of the Gold Standard 246
External Balance under the Gold Standard 247
The Price-Specie-Flow Mechanism 247
The Gold Standard Rules of the Game： Myth and Reality 248
Internal Balance under the Gold Standard 249
case study： The Political Economy of Exchange Rate Regimes： Conflict
over Americas Monetary Standard during the 1890s 250
The Interwar Years, 19181939 251
The Fleeting Return to Gold 251
International Economic Disintegration 252
case study： The International Gold Standard and the Great Depression 253
The Bretton Woods System and the International Monetary Fund 254
Goals and Structure of the IMF 255
Convertibility and the Expansion of Private Financial Flows 256
Speculative Capital Flows and Crises 257
Analyzing Policy Options for Reaching Internal and External Balance 258
Maintaining Internal Balance 258
Maintaining External Balance 260
Expenditure-Changing and Expenditure-Switching Policies 260
The External Balance Problem of the United States under Bretton Woods 262
case study： The End of Bretton Woods, Worldwide Inflation, and
the Transition to Floating Rates 263
The Mechanics of Imported Inflation 264
Assessment 265
The Case for Floating Exchange Rates 266
Monetary Policy Autonomy 266
Symmetry 267
Exchange Rates as Automatic Stabilizers 268
Exchange Rates and External Balance 270
case study： The First Years of Floating Rates, 19731990 270
Macroeconomic Interdependence under a Floating Rate 274
case study： Transformation and Crisis in the World Economy 275
What Has Been Learned since 1973? 281
Monetary Policy Autonomy 281
Symmetry 282
The Exchange Rate as an Automatic Stabilizer 283
External Balance 283
The Problem of Policy Coordination 284
Are Fixed Exchange Rates Even an Option for Most Countries? 284
Summary 285
Appendix： International Policy Coordination Failures 292
Financial Globalization： Opportunity and Crisis 295
The International Capital Market and the Gains from Trade 296
Three Types of Gain from Trade 296
Risk Aversion 298
Portfolio Diversification as a Motive for International Asset Trade 298
The Menu of International Assets： Debt versus Equity 299
International Banking and the International Capital Market 300
The Structure of the International Capital Market 300
Offshore Banking and Offshore Currency Trading 301
The Shadow Banking System 303
Banking and Financial Fragility 303
The Problem of Bank Failure 303
Government Safeguards against Financial Instability 306
Moral Hazard and the Problem of Too Big to Fail 308
box： The Simple Algebra of Moral Hazard 309
The Challenge of Regulating International Banking 310
The Financial Trilemma 310
International Regulatory Cooperation through 2007 312
case study： The Global Financial Crisis of 20072009 313
box： Foreign Exchange Instability and Central Bank Swap Lines 316
International Regulatory Initiatives after the Global Financial Crisis 318
How Well Have International Financial Markets Allocated Capital and Risk? 320
The Extent of International Portfolio Diversification 320
The Extent of Intertemporal Trade 322
Onshore-Offshore Interest Differentials 323
The Efficiency of the Foreign Exchange Market 323
Summary 327
Optimum Currency Areas and the Euro 332
How the European Single Currency Evolved 334
What Has Driven European Monetary Cooperation? 334
The European Monetary System, 19791998 335
German Monetary Dominance and the Credibility Theory of the EMS 336
Market Integration Initiatives 337
European Economic and Monetary Union 338
The Euro and Economic Policy in the Euro Zone 339
The Maastricht Convergence Criteria and the Stability and Growth Pact 339
The European Central Bank and the Eurosystem 340
The Revised Exchange Rate Mechanism 341
The Theory of Optimum Currency Areas 341
Economic Integration and the Benefits of a Fixed Exchange
Rate Area： The GG Schedule 342
Economic Integration and the Costs of a Fixed Exchange
Rate Area： The LL Schedule 344
The Decision to Join a Currency Area： Putting the GG and LL Schedules
Together 346
What Is an Optimum Currency Area? 348
Other Important Considerations 348
case study： Is Europe an Optimum Currency Area? 349
The Euro Crisis and the Future of EMU 353
Origins of the Crisis 353
Self-Fulfilling Government Default and the Doom Loop 358
A Broader Crisis and Policy Responses 360
ECB Outright Monetary Transactions 361
The Future of EMU 362
Summary 363
Developing Countries： Growth, Crisis, and Reform 368
Income, Wealth, and Growth in the World Economy 369
The Gap between Rich and Poor 369
Has the World Income Gap Narrowed Over Time? 370
Structural Features of Developing Countries 372
Developing-Country Borrowing and Debt 375
The Economics of Financial Inflows to Developing Countries 375
The Problem of Default 377
Alternative Forms of Financial Inflow 379
The Problem of Original Sin 380
The Debt Crisis of the 1980s 382
Reforms, Capital Inflows, and the Return of Crisis 383
East Asia： Success and Crisis 386
The East Asian Economic Miracle 386
box： Why Have Developing Countries Accumulated Such High Levels
of International Reserves? 387
Asian Weaknesses 389
box： What Did East Asia Do Right? 390
The Asian Financial Crisis 391
Lessons of Developing-Country Crises 392
Reforming the Worlds Financial Architecture 394
Capital Mobility and the Trilemma of the Exchange Rate Regime 395
Prophylactic Measures 396
Coping with Crisis 397
case study： Chinas Pegged Currency 398
Understanding Global Capital Flows and the Global Distribution of Income：
Is Geography Destiny? 401
box： Capital Paradoxes 402
Summary 406
Mathematical Postscripts 411
Postscript to Chapter 9： Risk Aversion and International Portfolio Diversification 411
An Analytical Derivation of the Optimal Portfolio 411
A Diagrammatic Derivation of the Optimal Portfolio 412
The Effects of Changing Rates of Return 414
ONLINE APPENDICES www.pearsonhighered.comkrugman
Appendix A to Chapter 17 in International Economics Chapter 6 in International Finance： The IS-LM Model and the DD-AA Model
Appendix A to Chapter 18 in International Economics Chapter 7 in International Finance： The Monetary Approach to the Balance of Payments
內容試閱：
Years after the global financial crisis that broke out in 20072008, the industrial worlds economies are still growing too slowly to restore full employment. Emerging markets, despite impressive income gains in many cases, remain vulnerable to the ebb and flow of global capital. And finally, an acute economic crisis in the euro area has lasted since 2009, bringing the future of Europes common currency into question. This tenth edition therefore comes out at a time when we are more aware than ever before of how events in the global economy influence each countrys economic for- tunes, policies, and political debates. The world that emerged from World War II was one in which trade, financial, and even communication links between countries were limited. More than a decade into the 21st century, however, the picture is very dif- ferent. Globalization has arrived, big time. International trade in goods and services has expanded steadily over the past six decades thanks to declines in shipping and communication costs, globally negotiated reductions in government trade barriers, the widespread outsourcing of production activities, and a greater awareness of for- eign cultures and products. New and better communications technologies, notably the Internet, have revolutionized the way people in all countries obtain and exchange information. International trade in financial assets such as currencies, stocks, and bonds has expanded at a much faster pace even than international product trade. This process brings benefits for owners of wealth but also creates risks of contagious financial instability. Those risks were realized during the recent global financial cri- sis, which spread quickly across national borders and has played out at huge cost to the world economy. Of all the changes on the international scene in recent decades, however, perhaps the biggest one remains the emergence of Chinaa development that is already redefining the international balance of economic and political power in the coming century.
Imagine the astonishment of the generation that lived through the depressed 1930s as adults, had its members been able to foresee the shape of todays world economy! Nonetheless, the economic concerns that continue to cause international debate have not changed that much from those that dominated the 1930s, nor indeed since they were first analyzed by economists more than two centuries ago. What are the merits of free trade among nations compared with protectionism? What causes countries to run trade surpluses or deficits with their trading partners, and how are such imbalances resolved over time? What causes banking and currency crises in open economies, what causes financial contagion between economies, and how should governments handle international financial instability? How can governments avoid unemployment and inflation, what role do exchange rates play in their efforts, and how can countries best cooperate to achieve their economic goals? As always in international economics, the interplay of events and ideas has led to new modes of analysis. In turn, these analyti- cal advances, however abstruse they may seem at first, ultimately do end up playing a major role in governmental policies, in international negotiations, and in peoples everyday lives. Globalization has made citizens of all countries much more aware than ever before of the worldwide economic forces that influence their fortunes, and global- ization is here to stay.
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