International Economics: Policy Approach SECOND EDITION MORDECHAI E. KREININ Michigan State University HARCOURT BRACE JOVANOVICH, INC. New York Chicago San Francisco Atlanta
1. ^Foreign Trade in the American Economy. 1 Part 1 International Financial Relations Introduction: The Alleged Mystique of International Finance 7 2. The Balance of International Payments \ n The Meaning of Deficit and Surplus 11 Uses and Misuses of Balance-of-Payments Statistics 18 3. The International Financial System and How It Functions 26 Market-Determined Exchange Rates 27 Exchange Stabilization under the Gold Standard 31 Exchange Stabilization under the Bretton Woods System: 1944 to 1973 33 Market Forces and the Determination of Fixed Exchange Rates 35 4 The Foreign Exchange Market 38 The Role of the Dollar in the Bretton Woods System 44 The International Currency System Since March 1973 50 xi
4. Balance-of-Payments Adjustment Policies under Fixed Exchange Rates Short-Run Imbalances 56 "Automatic" Processes 58 Summary of the "Automatic" Balance-of-Payments Adjustment 79 Government Policy 80 Foreign Repercussions 87 The Balance of Payments in the Context of General Policy Objectives 91 5. Exchange-Rate Adjustment 97 Relative Price Effect 98 Domestic Income and Price Effects 109 Redistribution of Domestic Resources 111 Another View of Devaluation The Absorption Approach 112 A Third Approach Emphasis on Money 115 Summary 116 Balance-of-Payments Adjustment under Fluctuating Exchange Rates 120 6. Further Analysis of the Adjustment Process and Some Unanswered Questions v 126 Domestic Policies 127 Exchange-Rate Adjustment 131 7. Exchange Control and Currency Inconvertibility 13E Exchange Control 135 Bilateral Clearing Agreements 140 Concepts of Currency Convertibility 142 The European Payments Union (EPU) 143 Historical Survey 146 8. Steps Taken to Increase International Liquidity 15< Ad Hoc Measures 156 Gold Policy 157 Special Drawing Rights 161
xiii 9. From the Smithsonian Agreement to the Collapse of Bretton Woods.168 Events Leading to the U.S. Measures of August 15, 1971 168 Policy Measures Announced on August 15, 1971 171 The Smithsonian Agreement 178 Post-Smithsonian Developments 181 The Second Devaluation of the Dollar 184 March 1973 The Collapse of Bretton Woods 187 10. Proposals for Reform of the International Monetary System 193 A Dollar Exchange Standard 193 Centralization of Reserves and Establishment of an Inter-. national Reserve-Creating Institution 195 Freely Fluctuating (Floating) Exchange Rates 198 Conclusion 209 Part 2 International Trade Relations Introduction: Data on International Commodity Trade 213 11. Why Nations Trade ' 217 The Principle of Comparative Advantage 218 Comparative Opportunity Cost 225 Absolute Advantage and Wage Rates 236 Summary of Policy Implications 237 Dynamic Gains from International Trade 238 More Advanced Analysis of the Static Gains from Trade 242 12. The Commodity Composition of Trade 256 Introduction 256 The Factor Proportions Theory 258,> Empirical Testing 263 Alternative Theories 265 Economic Adjustment to Changing Circumstances 269
xiv Contents 13. Protection of Domestic Industries: The Tariff 272 Some Institutional Considerations 272 Economic Effects of the Tariff 276 How Protective is the Tariff? 294 Arguments for Protection 303 Approaches to Free Trade 306 14. U.S. Commercial Policy 313 Political Considerations in U.S. Commercial Policy 313 y Reciprocal Trade Agreements Legislation 314 The 1962 Trade Expansion Act 320 The Trade Reform Act of 1973 321 15. Other Barriers to Trade 325 Import Quotas 325 International Commodity Agreements 330 Administrative, Technical, and Other Regulations 335 Cartels 337 Dumping 340 16. International and Regional Trade Organizations among Developing Countries 345 The European Communities 347 The European Free Trade Association 356 Special Trading Arrangements of the EEC with Developing Countries 359 The General Agreement on Tariff and Trade 361 Some Issues in East-West Trade 368 17. Selected Trade Problems of Developing Countries 373 j Alternative Trade Approaches to Development 373 The United Nations Conference on Trade and Development (UNCTAD) 375 The Generalized System of Preferences (GSP) 380 Regional Integration among Developing Nations 384 International Currency Reform 387
xv 18. International Mobility of Productive Factors 388 Introduction 388 Motives for Direct Investments Abroad 390 Foreign Investments and Economic Welfare (Real Income) 394 Effect on the U.S. Balance of Payments 402 International Trade Theory and the Multinational Corporation 403 International Migration of Labor 407 Appendix I r 409 A Formal Proof of the Domestic Multiplier Formula 409 Foreign-Trade Multiplier with Foreign Repercussions 410 Appendix II 414 Stability of the Foreign Exchange Market 414 Elasticity Conditions with Less Than Infinite Supply Elasticities 417 Effect of Devaluation on the Terms of Trade 424. Appendix III v 428 Elasticity of Import Demand and the Domestic Demand and Supply Elasticities 428 Elasticity of Export Supply and the Domestic Demand and Supply Elasticities 428 A Country's Share in World Export Markets and the Elasticity of Demand for its Exports 429 Import-Demand and Export-Supply Elasticities and the Incidence of a Tariff 430 Economic Cost of the Tariff 431 Static Effects of a Customs Union 433 Appendix IV 435 * U.S. Balance of Payments, 1972 and 1973 435 U.S. International Investment Position in Selected Years, 1950 to 1972 437
xvi Contents Appendix V 438 Forums for Trade and Monetary Talks 438 Appendix VI 440 The Factor Proportions Theory 440 A Domestic Monopolist Under a Tariff and a Quota 443 Bibliography 445 Index 461