It is our view that, as the new millenium gets under way amid a dramatic increase in globalization, every student must have a conscious awareness of “things international.” Whether one is studying, for example, political science, sociology, chemistry, art, history, or economics, developments worldwide impinge upon the subject matter of the chosen discipline. Such developments may take the form of the discovery of a new compound in Germany, an unexpected election result in India, an archeological find in Cyprus, a new awareness of AIDS in Sierra Leone, or a startling new political/terrorist/military development in Afghanistan, Iraq, or Israel. And, because information now gets transmitted instantaneously across continents and oceans, scientists, governments, firms, and households all react quickly to new information by altering behavior in laboratories, clinics, legislative processes, production and marketing strategies, consumption and travel decisions, and research projects. Without keeping track of international developments, today’s student will be unable to understand the changing nature of the world and of the material that he or she is studying.

In addition to perceiving the need for international awareness on the part of students in general, we think it is absolutely mandatory that students with an interest in economics recognize that international economic events and the international dimensions of the subject surround us every day. As we prepared to launch this fifth edition of International Economics, we could not help noting how much had changed since the initial writing for our first edition. The world has economically internationalized even faster than we anticipated 16 years ago, and the awareness of the role of international issues in our lives has increased substantially. Almost daily, headlines focus on developments such as the European Union and the increased economic integration efforts that have fostered monetary union and the euro; policy issues related to reducing trade barriers and the effects of threatened retaliatory actions such as the United States has experienced with its recent steel tariffs; increased integration efforts such as the ongoing negotiations of the Free Trade Agreement for the Americas; and the tensions accompanying growth, structural change, and globalization that surfaced at meetings of international economic organizations such as the World Bank and the World Trade Organization. Beyond these broad issues, headlines also trumpet news of the U.S. trade deficit, rising (or falling) gasoline prices, Chinese clothing, and outsourcing to call centers in India.

The growing awareness of the importance of international issues is also in evidence in increased student interest in such issues, particularly those related to employment, international working conditions, and equity. It is thus increasingly important that individuals have a practical working knowledge of the economic fundamentals underlying international actions to find their way through the myriad arguments, emotions, and statistics that bombard them almost daily. Young, budding economists need to be equipped with the framework, the tools, and the basic institutional knowledge that will permit them to make sense of the increasingly interdependent economic environment. Further, there will be few jobs that they will later pursue that will not have an international dimension, whether it be ordering components from a Brazilian firm, traveling to a trade show in Malaysia, making a loan for the transport of Caspian Sea oil, or working in an embassy in Quito or in a medical mission in Burundi.

Thus, the motive for writing this edition is much the same as in earlier editions: to provide a clear and comprehensive text that will help students move beyond simple recognition and interest in international issues and toward a level of understanding of current and future international issues that will be of use to them in analyzing the problem at hand and selecting a policy position. In other words, we seek to help these scholars acquire the necessary human capital for dealing with important questions, for satisfying their intellectual curiosity, and for providing a foundation for future on-the-job decisions.

We have been very flattered by the favorable response to the first four editions of our book. In this fifth edition, we continue to build upon the well-received features to develop a text that is even more attuned to our objectives. We have also, in a number of instances, attempted to simplify our presentation of some of the more difficult concepts and models in order to be more student-friendly.

Improvements

In addition to updating a large number of the boxes and adding new ones, we have expanded coverage of the transition economies in several places. As an indication of other material new to this edition, there is discussion of the most recent developments in U.S. trade policy at the time of writing, of outsourcing, of the 10 new members of the European Union, of currency boards, and of the behavior of the euro. We should note that, in the monetary material, we continue to maintain our reliance on the IS/LM/BP framework for analyzing macroeconomic policy because we believe that the framework is effective in facilitating student understanding and because that material was favorably received by users of the earlier editions. We also continue to incorporate key aspects of the asset approach into the IS/LM/BP model.

Particular mention should be made of the fact that, throughout the text, we have introduced a special new feature that we hope readers will find attractive. This new feature is that, at the start of almost every chapter, we have incorporated an opening vignette or case study. This opening case introduces, in an applied setting, concepts and relationships that will be developed in the chapter itself. These vignettes are designed to stimulate student interest and inquisitiveness about the forthcoming material. As the chapter unfolds, the opening case will come into clearer focus, and the manner in which economic theory has relevance to the “real world” will become evident.

Perhaps the most significant change with this new edition is that we have added a new co-author. Professor Steven L. Cobb is a former graduate student of both Professors Appleyard and Field, and we are delighted that he has brought his energy and knowledge to this project. Professor Cobb is currently Chair of the Economics Department at the University of North Texas, and he has also served as the Director of the Center for Economic Education at the University of North Texas since 1992. We especially welcome his expertise in two areas—economic education and the transition economies. He has published extensively on the teaching of economics, and he has conducted numerous education seminars in the United States. In addition, he is a former president of the National Association of Economic Educators. Further, he has written about and conducted programs for economics teachers in countries of Central/Eastern Europe and the former Soviet Union, including Estonia, Poland, and Ukraine. It is with pleasure that we welcome Steve’s new perspectives, ideas, and viewpoints.

Our book follows the traditional division of international economics into the trade and monetary sides of the subject. Although the primary audience for the book will be students in upper-level economics courses, we think that the material can effectively reach a broad, diversified group of students—including those in political science, international studies, history, and business who may have fewer economics courses in their background. Having taught international economics ourselves in specific nonmajors’ sections and Master’s of Business Administration sections as well as in the traditional economics department setting, we are confident that the material is accessible to both noneconomics and economics students. This broad audience will be assisted in its learning through the fact that we have included separate, extensive review chapters of microeconomic (Chapter 5) and macroeconomic (Chapter 24) tools.

International Economics presents international trade theory and policy first. Introductory material and data are found in Chapter 1, and Chapters 2 through 4 present the Classical model of trade, including a treatment of pre-Classical Mercantilism. A unique feature is the devotion of an entire chapter to extensions of the Classical model to include more than two countries, more than two goods, money wages and prices, exchange rates, and transportation costs. The analysis is brought forward through the modern Dornbusch-Fischer-Samuelson model including a treatment of the impact of productivity improvements in one country on the trading partner. Chapter 5 provides an extensive review of microeconomic tools used in international trade and can be thought of as a “short course” in intermediate micro. Chapters 6 through 9 present the workhorse neoclassical and Heckscher-Ohlin trade theory, including an examination of the assumptions of the model. Chapter 6 focuses on the traditional production possibilities–indifference curve exposition. We are unabashed fans of the offer curve because of the nice general equilibrium properties of the device and because of its usefulness in analyzing trade policy and in interpreting economic events, and Chapter 7 extensively develops this concept. Chapter 8 explores Heckscher-Ohlin in a theoretical context, and Chapter 9 is unique in its focus on testing the factor endowments approach, including empirical work on the trade-income inequality debate in the context of Heckscher-Ohlin.

Continuing with theory, Chapters 10 through 12 treat extensions of the traditional material. Chapter 10 discusses various post-Heckscher-Ohlin trade theories that relax standard assumptions such as international factor immobility, homogeneous products, constant returns to scale, and perfect competition. An important focus here is upon imperfect competition and intra-industry trade. Chapter 11 explores the comparative statics of economic growth and the relative importance of trade, and it includes material on endogenous growth models and on the effects of growth on the offer curve. Chapter 12 examines causes and consequences of international factor movements, including both capital movements and labor flows.

Chapters 13 through 17 are devoted to trade policy. Chapter 13 is exclusively devoted to presentation of the various instruments of trade policy. Chapter 14 then explores the welfare effects of the instruments, including discussion of such effects in a “smallcountry” as well as a “large-country” setting. In this new edition, we have consolidated the previous Chapter 15 “Traditional Arguments for Protection”) and 16 (“Strategic Approaches to Trade Policy, Intervention”) into one chapter. The strategic approaches are now commonplace in policy discussions, and the old division seemed artificial. The two previous chapters are now one coherent whole. Chapter 16 begins with a discussion of the political economy of trade policy, followed by a review of various trade policy actions involving the United States as well as issues currently confronting the WTO. Chapter 17 is a separate chapter on economic integration. We have updated the discussion of the transition economies, the European Union, and the North American Free Trade Agreement. The trade part of the book concludes with Chapter 18, which provides an overview of how international trade influences growth and change in the developing countries. Further, in this fifth edition, we have moved the discussion of developing countries’ external debt problems, formerly in the last chapter of the book, to Chapter 18.

The international monetary material begins with Chapter 19, which introduces balanceof- payments accounting. In contrast to the approach in some texts, balance-of-payments accounting is discussed prior to the foreign exchange market, which is considered in Chapter 20. We think this sequence makes more sense than the reverse, since the demand and supply curves of foreign exchange reflect the debit and credit items, respectively, in the balance of payments. A differentiating feature of the presentation of the foreign exchange market is the extensive development of various exchange rate measures, for example, nominal, real, and effective exchange rates. Chapter 21 then describes characteristics of “real-world” international financial markets in detail, and discusses a (we hope not too-bewildering) variety of international financial derivative instruments. Chapter 22 presents in considerable detail the monetary and portfolio balance (or asset market) approaches to the balance of payments and to exchange rate determination. The difficult discussion of empirical testing of these approaches is in an appendix. The chapter concludes with an examination of the phenomenon of exchange rate overshooting. In Chapters 23 and 24, our attention turns to the more traditional price and income adjustment mechanisms. In Chapter 23, we have added to the discussion of the “pass-through” of exchange rate changes that appeared in previous editions. Chapter 24 is in effect a review of basic Keynesian macroeconomic analysis.

Chapters 25 through 27 are concerned with macroeconomic policy under different exchange rate regimes. As noted earlier, we continue to utilize the IS/LM/BP Mundell- Fleming approach rather than employ exclusively the asset market approach. The value of the IS/LM/BP model is that it can embrace both the current and the capital/financial accounts in an understandable and perhaps familiar framework for many undergraduates. This model is presented in Chapter 25 in a manner that does not require previous acquaintance with it but does constitute review material for most students who have previously taken an intermediate macroeconomic theory course. The chapter concludes with an analysis of monetary and fiscal policy in a fixed exchange rate environment. These policies are then examined in a flexible exchange rate environment in Chapter 26, and the analysis is broadened to the aggregate demand–aggregate supply framework in Chapter 27. The concluding chapters, Chapters 28 and 29, focus on particular topics of global concern. Chapter 28 considers various issues related to the choice between fixed and flexible exchange rates. In this chapter, we have added new material on currency boards in particular. Chapter 29 then traces the historical development of the international monetary system from Bretton Woods onward and examines proposals for reform such as target zone proposals.

Because of the length and comprehensiveness of the International Economicstext, it is not wise to attempt to cover all of it in a one-semester course. For such a course, we recommend that material be selected from Chapters 1 to 3, 5 to 8, 10, 13 to 15, 19 and 20, 22 to 26, and 29. If more emphasis on international trade is desired, additional material from Chapters 17 and 18 can be included. For more emphasis on international monetary economics, we suggest the addition of selected material from Chapters 21, 27, and 28. For a two-semester course, the entire International Economics book can be covered. Whatever the course, occasional outside reading assignments from academic journals, current popular periodicals, and a readings book can further help to bring the material tolife. The “References for Further Reading” section at the end of the book, which is organized by chapter, can hopefully give some guidance. If library resources are limited, the text contains, both in the main body and in boxes, summaries of some noteworthy contributions.

PEDAGOGICAL DEVICES

To assist the student in learning the material, we have included a variety of pedagogical devices. We like to think of course that the major device in this edition is again clear exposition. Although all authors stress clarity of exposition as a strong point, we continue to be pleased that many reviewers praised this feature. Beyond this general feature, more specific devices are described herein.

Opening Vignettes These opening vignettes or cases were discussed earlier. The intent of each case is to motivate the student toward pursuing the material in the forthcoming chapter as well as to enable to student to see how the chapter’s topics fit with actual applied situations in the world economy.

Boxes There are three types of material that appear in boxes (more than 100 of them) in International Economics. Some are analytical in nature, and they explain further some difficult concepts or relationships. We have also included several biographical boxes. These short sketches of well-known economists add a personal dimension to the work being studied, and they discuss not only the professional interests and concerns of the individuals but also some of their less well-known “human” characteristics. Finally, the majority of the boxes are case studies, appearing throughout chapters and supplemental to the opening case studies/ vignettes. These case studies in the chapters serve to illuminate concepts and analyses under discussion, and, as with the opening vignettes, give students an opportunity to see the relevance of the material to current events. The cases also provide a break from the sometimes heavy dose of theory that permeates international economics texts.

Concept Checks These are short “stopping points” at various intervals within chapters (about two per chapter). The concept checks pose questions that are designed to see if basic points made in the text have been grasped by the student.

End-of-Chapter Questions and Problems These are standard fare in all texts. The questions and problems are broader and more comprehensive than the questions contained in the concept checks.

Lists of Key Terms The major terms in each chapter are boldfaced in the chapters themselves and then are brought together at the end of the chapter in list form. A review of each list can serve as a quick review of the chapter.

References for Further Reading These lists occur at the end of the book, organized by chapter. We have provided bibliographicsources that we have found useful in our own work as well as entries that are relatively accessible and offer further theoretical and empirical exploration opportunities for interested students.

Instructor’s Manual This companion publication offers instructors assistance in preparing for and teaching the course. We have included suggestions for presenting the material as well as answers to the end-of-chapter questions and problems. In addition, sample examination questions are provided, including some of the hundreds of multiple-choice questions and problems that we have used for examining our own students.

Web Site This text is accompanied by helpful study and practice material for students at www.mhhe. com/economics/appleyard5e/stu_resources.mhtml. Instructors can access the Instructors Manual and Test Bank at www.mhhe.com/economics/appleyard5e/ir/instr_resources.html.

ACKNOWLEDGMENTS

Our major intellectual debts are to the many professors who taught us economics, but particularly to Robert Stern of the University of Michigan and Erik Thorbecke of Cornell University. We also have found conversations and seminars over the years with faculty colleagues at the University of North Carolina at Chapel Hill to have been extremely helpful. We particularly wish to thank Stanley Black, Patrick Conway, William A. Darity, Jr., Richard Froyen, and James Ingram. Thanks also to colleagues at Davidson College, especially Peter Hess, Vikram Kumar, David Martin, Lou Ortmayer, and Clark Ross and colleagues at the University of North Texas, especially Michael McPherson, David Molina, and Margie Tieslau. We also express our appreciation to Barbara Carmack for her cheerful and very extensive help with the mechanics of manuscript preparation. Timely assistance was also provided by Sarah Borkowski and Bianca Porneala.

We are also indebted to the entire staff at McGraw-Hill Irwin, especially Joyce Chappetto, Mary Christianson, Gina Hangos, Karen Nelson, Martin Quinn, Paul Shensa, and Heila Hubbard. We thank them for their cooperation, patience, encouragement, and guidance in the development of this fifth edition.

In addition, we are grateful to the following reviewers; their thoughtful, prescriptive comments have helped guide the development of these five editions:

We also wish to thank David Ball (North Carolina State University), David Cushman (University of Saskatchewan), Guzin Erlat (Middle East Technical University–Ankara), Dan Friel (Bank of America), Art Goldsmith (Washington and Lee University), Monty Graham (The Institute of International Economics), Michael Jones (Bowdoin College), Joseph Joyce (Wellesley College), and Joe Ross (Goldman Sachs) for their helpful comments on this and earlier editions. Of course, any remaining shortcomings or errors are the responsibility of the authors (who each blame the other). A special note of thanks goes to our families for their understanding, support, and forbearance throughout the time-absorbing process required to complete all five editions.

Finally, we welcome any suggestions or comments that you may have regarding this text. Please feel free to contact us at our e-mail addresses. And thank you for your attention to our book!

Dennis R. Appleyard
deappleyard@davidson.edu

Alfred J. Field, Jr.
afield@email.unc.edu

Steven L. Cobb
scobb@uni.edu