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International
Economics
Eighteenth Edition
Robert J. Carbaugh
Professor of Economics, Central Washington University
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International Economics, © 2019, © 2017, © 2015
Eighteenth Edition
Copyright © 2023 Cengage Learning, Inc. ALL RIGHTS RESERVED.
Robert J. Carbaugh
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Brief Contents
Preface ���������������������������������������������������������������������������������������������������������������� xi
About the Author������������������������������������������������������������������������������������������� xviii
Chapter 1 The International Economy and Globalization����������������������������� 1
iii
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Contents
Preface ������������������������������������������������������������������������������������������������������������������ xi
About the Author ��������������������������������������������������������������������������������������������� xviii
Chapter 1
Chapter 2
iv
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Chapter 3
Chapter 4
Tariffs�������������������������������������������������������������������������������������������������������� 91
The Tariff Concept��������������������������������������������������������������������� 92 How a Tariff Burdens Exporters�������������������������������������������� 115
Types of Tariffs��������������������������������������������������������������������������� 93 Tariffs and the Poor: Regressive Tariffs�������������������������������� 117
Specific Tariff������������������������������������������������������������������������ 93 Could a Higher Tariff Put a Dent
Ad Valorem Tariff���������������������������������������������������������������� 94
in the Federal Debt?�������������������������������������� 119
Compound Tariff����������������������������������������������������������������� 94
Arguments for Trade Restrictions����������������������������������������� 120
Effective Rate of Protection������������������������������������������������������ 95
Job Protection��������������������������������������������������������������������� 120
Trade Protectionism Intensified as Global Protection against Cheap Foreign Labor������������������������ 121
Economy Fell into the Great Recession�������� 97 Fairness in Trade: A Level Playing Field������������������������� 123
Tariff Escalation������������������������������������������������������������������������� 98 Maintenance of the Domestic Standard
of Living������������������������������������������������������������������������� 124
Outsourcing and Offshore-Assembly Provision�������������������� 99
Equalization of Production Costs������������������������������������ 124
Dodging Import Tariffs: Tariff Avoidance and Infant-Industry Argument������������������������������������������������ 125
Tariff Evasion���������������������������������������������������������������������� 100 Noneconomic Arguments������������������������������������������������� 125
Postponing Import Tariffs������������������������������������������������������ 102 The Political Economy of Protectionism������������������������������ 127
Bonded Warehouse������������������������������������������������������������ 102 A Supply and Demand View of
Foreign-Trade Zone����������������������������������������������������������� 103 Protectionism���������������������������������������������������������������� 128
Tariff Effects: An Overview���������������������������������������������������� 104 Was the U.S. Trade War with China
Tariff Welfare Effects: Consumer Surplus Worth It?������������������������������������������������������������������������ 129
and Producer Surplus�������������������������������������������������������� 105 Petition of the Candle Makers��������������������� 131
Tariff Welfare Effects: Small-Nation Model������������������������� 106 Summary����������������������������������������������������������������������������������� 131
Tariff Welfare Effects: Large-Nation Model������������������������� 109 Key Concepts and Terms�������������������������������������������������������� 132
The Optimal Tariff and Retaliation��������������������������������� 113 Study Questions������������������������������������������������������������������������ 132
Examples of U.S. Tariffs���������������������������������������������������������� 113 Exploring Further��������������������������������������������������������������������� 134
Contents v
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Chapter 5
Chapter 6
vi Contents
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Chapter 7
Chapter 8
Chapter 9
Contents vii
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Will Manufacturers Exit China for Vietnam? Multinational Enterprises as a Source of Conflict������������������� 273
It Is Difficult to Do������������������������������������������������ 263 Employment������������������������������������������������������������������������ 273
Supplying Products to Foreign Buyers: National Sovereignty���������������������������������������������������������� 274
Whether to Produce Domestically or Abroad��������������� 264 Transfer Pricing������������������������������������������������������������������ 274
Direct Exporting versus Foreign Direct International Labor Mobility: Migration������������������������������ 275
Investment/Licensing��������������������������������������������������� 264 The Effects of Migration���������������������������������������������������� 275
Foreign Direct Investment versus Licensing������������������ 266 Immigration as an Issue���������������������������������������������������� 278
Country Risk Analysis������������������������������������������������������������� 267 U.S. Immigration Laws������������������������������������������������������ 279
Is International Trade a Substitute for
Foreign Auto-Assembly Plants in the United States����������� 268 Migration?��������������������������������������������������������������������� 281
International Joint Ventures��������������������������������������������������� 269 Summary����������������������������������������������������������������������������������� 281
Welfare Effects�������������������������������������������������������������������� 270
Key Concepts and Terms�������������������������������������������������������� 282
Harley Sends Some of Its Production
Study Questions������������������������������������������������������������������������ 282
Abroad as Europeans Raise Tariffs������������� 272
Chapter 10
Chapter 11
viii Contents
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Indexes of the Foreign-Exchange Value of the Dollar: Uncovered Interest Arbitrage������������������������������������������� 337
Nominal and Real Exchange Rates�������������������������������������������� 328 Covered Interest Arbitrage (Reducing Currency Risk)������� 339
The Forward Market���������������������������������������������������������� 331 Foreign-Exchange Market Speculation��������������������������������� 340
The Forward Rate��������������������������������������������������������������� 331 Long and Short Positions�������������������������������������������������� 340
Relation between the Forward Rate and the Spot Rate�������� 332 How to Play the Falling (Rising) Dollar�������������������������� 342
Managing Your Foreign-Exchange Risk:
Foreign-Exchange Trading as a Career��������������������������������� 343
Forward Foreign-Exchange Contract������������������������ 333
Foreign-Exchange Traders Hired by Commercial
Case 1����������������������������������������������������������������������������������� 334
Banks, Companies, and Central Banks���������������������� 343
Case 2����������������������������������������������������������������������������������� 334
Do You Really Want to Trade Currencies?���������������������������� 344
Does Foreign Currency Hedging Pay Off?����������������������������� 336
Summary����������������������������������������������������������������������������������� 345
Currency Risk and the Hazards
of Investing Abroad�������������������������������������� 336 Key Concepts and Terms�������������������������������������������������������� 346
Interest Arbitrage, Currency Risk, and Hedging����������������� 337 Study Questions������������������������������������������������������������������������ 346
Exploring Further��������������������������������������������������������������������� 347
Chapter 12
Chapter 13
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Summary����������������������������������������������������������������������������������� 390 Study Questions������������������������������������������������������������������������ 391
Key Concepts and Terms�������������������������������������������������������� 391 Exploring Further��������������������������������������������������������������������� 391
Chapter 14
Chapter 15
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Preface
I believe the best way to motivate students to learn a subject is to demonstrate how it is used
in practice. The first seventeen editions of International Economics reflected this belief and
were written to provide a serious presentation of international economic theory with an
emphasis on current applications. Adopters of these editions strongly supported the inte-
gration of economic theory with current events.
The eighteenth edition has been revised with an eye toward improving this presentation
and updating the applications as well as including the latest theoretical developments. Like
its predecessors, this edition is intended for use in a one-quarter or one-semester course for
students having no more background than principles of economics. This book’s strengths
are its clarity, organization, and applications that 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 inter-
national trade and finance. Here are some examples.
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●● Does trade with China take away blue-collar American jobs?—Ch. 3
●● Would a tariff wall protect American jobs?—Ch. 4
●● Donald Trump’s border tax: How to pay for the wall—Ch. 4
●● Vaughan Basset Furniture and dumping—Ch. 5
●● United States lifts its restrictions on oil exports—Ch. 6
●● U.S. Export-Import Bank avoids shutdown—Ch. 6
●● Whirlpool agitates for antidumping tariffs on clothes washers—Ch. 5
●● Wage increases and China’s trade—Ch. 3
●● Government procurement policies and buy American—Ch. 5
●● Carbon tariffs—Ch. 6
●● Carrier agrees to keep jobs in Indiana—Ch. 6
●● Lumber imports from Canada—Ch. 6
●● Bangladesh’s sweatshop reputation—Ch. 7
●● Does the principle of comparative advantage apply in the face of job
outsourcing?—Ch. 2
●● Trade adjustment assistance—Ch. 6
●● North Korea and economic sanctions—Ch. 6
●● WTO rules against subsidies to Boeing and Airbus—Ch. 6
●● Does wage insurance make free trade more acceptable to workers?—Ch. 6
●● China’s hoarding of rare earth metals declared illegal by WTO—Ch. 6
●● The environment and free trade—Ch. 6
Trade Conflicts between Developing Nations and Industrial Nations
●● Made in China 2025—Ch. 7
●● Forced technology transfer and China—Ch. 7
●● Russia hit by sanctions over Ukraine—Ch. 6
●● U.S. economic sanctions and Iran—Ch. 6
●● China’s economic challenges—Ch. 7
●● U.S.-Mexico tomato dispute—Ch. 8
●● Canada’s immigration policy—Ch. 9
●● 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
●● The globalization of intellectual property rights—Ch. 7
●● Microsoft scorns China’s piracy of software—Ch. 7
●● 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
●● Modernizing NAFTA: The USMCA—Ch. 8
●● Britain’s exit from the European Union—Ch. 8
●● Free-trade agreements bolster Mexico—Ch. 8
●● Does the WTO reduce national sovereignty?—Ch. 6
●● Regional integration versus multilateralism—Ch. 8
●● Will the euro survive?—Ch. 8
Turbulence in the Global Financial System
●● Will crypto currencies lower the dollar’s status as the world’s reserve currency?—Ch. 10
●● Computer software programs and arbitrage—Ch. 11
●● Foreign currency trading becomes automated—Ch. 11
xii Preface
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●● Is Trump’s trade doctrine misguided?—Ch. 10
●● Germany’s current account surplus—Ch. 10
●● Reserve currency burdens for the United States—Ch. 11
●● Exchange rate misalignments—Ch. 12
●● Does currency depreciation stimulate exports?
●● China announces currency independence—Ch. 16
●● People’s Bank of China punishes speculators—Ch. 11
●● Currency manipulation and currency wars—Ch. 15
●● Paradox of foreign debt: How the United States borrows at low cost—Ch. 10
●● Why a dollar depreciation may not close the U.S. trade deficit—Ch. 14
●● Japanese firms send work abroad as yen makes its products less
competitive—Ch. 14
●● Preventing currency crises: Currency boards versus dollarization—Ch. 15
●● Should the United States return to the gold standard?—Ch. 17
Preface xiii
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