International economics combines the excitement of world events and the incisiveness of economic analysis. We are now deeply into the second great wave of globalization, in which product, capital, and labor markets are becoming more integrated across countries. This second wave, which began in about 1950 and picked up steam in the 1980s, has now lasted at least as long as the first, which began in about 1870 and ended with World War I (or perhaps with the onset of the Depression in 1930).

As indicators of the current process of globalization, we see that international trade, foreign direct investment, cross-border lending, and international portfolio investments are growing faster than world production. Information, data, and rumors now spread around the world instantly through the Internet and other global electronic media.

As the world becomes more integrated, countries become more interdependent. Increasingly, events and policy changes in one country affect many other countries. Also increasingly, companies make decisions about production and product development based on global markets.

My goal in writing and revising this book is to provide the best blend of events and analysis, so that the reader builds the abilities to understand global economic developments and to evaluate proposals for changes in economic policies. The book is informed by current events and by the latest in applied international research. My job is to synthesize all of this to facilitate learning. The book

• Combines rigorous economic analysis with attention to the issues of economic policy that are alive and important today.
• Is written to be concise and readable.
• Uses economic terminology when it enhances the analysis, but avoids jargon for jargon's sake.

I follow these principles when I teach international economics to undergraduates and master's degree students. I believe that the book benefits as I bring into it what I learn from the classroom.

CURRENT EVENTS AND NEW EXAMPLES

It is a joy and a challenge for me to incorporate the events and policy changes that continue to transform the global economy, and to find the new examples that show the effects of globalization (both its upside and its downside). Here are some of the current and recent events and issues that are included in this edition to provide new examples that show the practical use of our economic analysis:

• International outsourcing of services continues to be controversial, as this new form of international trade affects workers who previously thought that their jobs were insulated from international competition.
• New free trade areas continue to appear. Since 2004 the United States has implemented the Central American Free Trade Area and bilateral agreements with Bahrain, Morocco, Oman, and Peru.
• Romania and Bulgeria joined the European Union in 2007, bringing membership to 27 countries.
• The Doha Round of multilateral trade negotiations has stalled over the inability of industrialized countries to offer sufficient liberalizations of their protectionist agricultural policies. The outlook is murkey for achieving substantial agreement.
• Rising since the late 1990s, the price of crude oil doubled during 2007 and into 2008. Oil exporting countries have remerged as large financial investors in the rest of the world, with the governments of several of these countries using sovereign wealth funds to channel their investments.
• In 2007, the United States and Canada reached a settlement of their long-running dispute over lumber. The Canadian government agreed to impose an export tax whenever the price of its lumber exported to the United States is too low.
• The price of illegal ivory has risen dramatically, creating an incentive for increased poaching of elephants and for increased illegal trade in ivory.
• In 2006 the Venezuelan and Bolivian governments nationalized the investments of foreign-owned energy firms in their countries.
• China has refined its policy toward direct investments by foreign firms. It has moved away from encouraging foreign-owned firms in basic, low-skill production and assembly of products like toys and electronics.
• Immigration has become more controversial in the United States and a number of European countries. An effort for comprehensive reform of U.S. laws failed in 2007 over provisions that were attacked by opponents as amnesty for illegal immigrants. In Europe political parties that support anti-immigrant policies gained votes in various elections.
• After rising during 1991–2006, the U.S. current account deficit shrank in 2007 and 2008. We seem finally to be seeing the delayed effects of the depreciation of the exchange rate value of the U.S. dollar that began in 2002.
• The amount of trading in the world foreign exchange market, the market in which currencies are traded for each other, doubled between 2001 and 2007, to a staggering $3.2 trillion of trading per day.
• In 2007 Slovenia joined the euro area, and in 2008 Cyprus and Malta joined, bringing to15 the number of countries that use the euro as their currency.
• Starting in 2005 the Chinese government began to allow a gradual appreciation of the exchange rate value of its currency. To prevent more rapid appreciation, the Chinese government has continued to sell its currency and to buy dollars in the foreign exchange market. By 2008 the government's official holdings of dollar and other foreign-currency assets reached more than $1.5 trillion. In 2007 the Chinese government set up its own sovereign wealth fund to seek higher returns on its foreign financial investments.
• In 2007 and 2008, Saudi Arabia and several other Middle East oil exporting countries saw their economies overheating and inflation pressures rising, as income from oil exports surged. The fixed exchange rates of their currencies to the U.S. dollar prevented them from tightening their domestic monetary policies. Instead, the fixed exchange rate pushed them to follow the U.S. shift toward lower interest rates and expansionary monetary policy.
• In December 2007 and early 2008, the U.S. Federal Reserve, the European Central Bank, and the central banks of three other countries launched coordinated offerings of unusual loans to financial institutions, to attempt to encourage bank lending that had been nearly frozen by the credit crunch brought on by losses to those holding mortgage-backed securities.
• The price of gold shot up during 2007–2008, driven in part by fears about the financial system during the credit crunch.

IMPROVING THE BOOK: ORGANIZATION AND TOPICS

In this edition I introduce and extend a number of improvements to the pedagogical structure and topical coverage of the book.

• The World Trade Organization (WTO) and the International Monetary Fund (IMF) are the key multilateral forums for addressing international economic issues. With this edition I add a series of shaded boxes on Global Governance, to the other four series, Focus on China, Focus on Labor, Case Studies and Extensions. For Global Governance, four boxes examine the WTO and three boxes the IMF. The box in Chapter 8 presents the history of the WTO, its success in lowering tariff rates, and the role of developing countries in the WTO. The box in Chapter 9 looks at the WTO's efforts to liberalize nontariff barriers to trade, its push into agricultural trade, trade in services, and protection of intellectual property rights, and the current Doha Round of trade negotiations. The box in Chapter 11 profiles the WTO dispute cases involving subsidies given to Airbus and Boeing, and the box in Chapter 13 examines WTO decisions about the use of trade policies in pursuit of environmental objectives. For the IMF, the box in Chapter 20 presents the organization's goals and activities, and the first box in Chapter 21 examines IMF lending to countries with international payments problems, including the conditions imposed by the IMF on the borrowing countries. A second box in Chapter 21 summarizes criticism of the IMF by Nobel prize-winner Joseph Stiglitz and the response by the IMF.
• China continues to receive attention as a rapidly rising force in the global economy. In Chapter 8 a new box in the series Focus on China examines what has happened since China joined the WTO in 2001, including how China has changed its policies to meet its WTO obligations and how it has been involved in dispute cases at the WTO. Specific aspects of China's international activities appear throughout the text, including, in Chapter 6, new information on China's intra-industry trade, in Chapter 11, China's rising use of its own antidumping procedures, and, in Chapters 1 and 20, China's rising holdings of official international reserve assets and the foreign pressures on China to allow more appreciation of the exchange rate value of its currency.
• Chapter 6 has been renamed and extensively rewritten. It now has a precise discussion of scale economies, with a new figure that shows the effect of scale economies on cost, as well as real-world examples of different types of scale economies. It now has a clear explanation of intra-industry trade and how to measure it, with new, up-to-date estimates (created just for this book) of the importance of intra-industry trade. It now has an orderly and logical discussion of monopolistic competition. For the basic model the monopoly element for the individual firm is explained first, and then the competitive element enters to affect the position of this firm. With the basics in hand, the analysis then explores the implications of international trade for products that have this market structure. The sections of the chapter on oligopoly and external scale economies have also been reorganized and rewritten to be clear and concise. New end-of-chapter questions correspond to the improved content of the chapter.
• A new Case Study box in Chapter 2 develops the context for studying international trade by showing the growth of world trade and the rising importance of trade to national economies.
• The sections on the North American Free Trade Area (NAFTA) in Chapters 12 and 13 have been revised and rewritten to highlight information on the actual effects of NAFTA since it started in 1994. Research shows a noticeable expansion of trade within the area, some evidence of substantial trade diversion, large increases in direct investments by foreign firms into Mexico, and a lack of progress in addressing environmental problems along the U.S.-Mexico border.
• Chapter 13 on trade and the environment continues as a unique and powerful treatment of issues of interest to many students. The l4th edition has new information on the probable effects of global warming on different countries and areas. It notes the use, especially by the European Union, of tradable rights to emit carbon dioxide to meet obligations under the Kyoto Protocol. It also explains the importance of a global approach to address global warming. It presents a summary of a study by IMF researchers that shows that a global effort to stop the rise of greenhouse gasses in the atmosphere by using a carbon tax would have a manageable cost in that the tax would decrease the growth of global real income by only a small amount.
• A major strength of the book remains in-depth analyses of a range of trade and trade policy issues. Chapter 7 offers a new example of the international product life cycle, the evolution of production locations for laptop computers. The discussion of international trade and economic growth in Chapter 7 now incorporates recent research that confirms the role of international trade in diffusing foreign technologies. Chapter 8 includes a summary of recent research on the impact of nontariff barriers to trade that shows that nontariff barriers are more important than tariffs in reducing trade. Also in Chapter 8, a new section examines different approaches to resolving international trade disputes, contrasting the declining use of the unilateral approach of U.S. Section 301 with the now prominent use of the multilateral approach through the WTO.
• Throughout Parts Three and Four, we now use the term financial account in place of the older term capital account. This matches the terminology used by the IMF and national governments. Financial account also better describes the items that belong in this part of the balance of payments.
• In Chapter 25 the section on the Exchange Rate Mechanism has been condensed, to shift the focus of this part of the chapter to the euro and European Monetary Union. The discussion now includes estimates of the actual expansion of international trade within the euro area as a result of the adoption of the single currency.
• I have enhanced other discussions of international monetary issues. Chapters 14 and 19 use the new estimates from the World Bank on national income levels per person that are comparable across countries because they use common prices. Among other changes in the new estimates, the average income level in China is not as high as previous, less accurate estimates indicated. Chapter 18 has new charts showing deviations from uncovered interest parity for the time period 1991–2005. Chapter 19 has a new figure with a schematic that shows the key relationships in exchange-rate overshooting. The schematic is intended to assist students to better understand an analysis that they often find challenging because of its complexity. A new figure in Chapter 22 summarizes recent research from the IMF about how economic expansions and recessions in the United States and the euro area spill over to affect production and income in other countries.
• I have used the latest available sources to update the wide range of data and information presented in the figures and text of the book. Among many other updates, the book offers the latest information on international trade in specific products for the United States, China, and Japan; trends in the relative prices of primary products; patterns of foreign direct investments broadly and by major home country; rates of immigration into the United States, Canada, and the European Union; the sizes of foreign exchange trading and foreign exchange futures, swaps, and options; evidence about relative purchasing power parity; the exchange rate policies chosen by national governments; and the flows of international financing to and the outstanding foreign debt of developing countries.

FORMAT AND STYLE

I have been careful to retain the goals of clarity and honesty that have made International Economics an extraordinary success in classrooms and courses around the world. There are plenty of quick road signs at the start of and within chapters. The summaries at the end of the chapters offer an integration of what has been discussed. Students get the signs, "Here's where we are going, here's where we have just been." I use bullet-point and numbered lists to add to the visual appeal of the text and to emphasize sets of determinants or effects. I strive to keep paragraphs to reasonable lengths, and I have found ways to break up some long paragraphs to make the text easier to read.

I am candid about ranking some tools or facts ahead of others. The undeniable power of some of the economist’s tools is applied repeatedly to events and issues without apology. Theories and concepts that fail to improve on common sense are not oversold.

The format of the book is fine-tuned for better learning. Students need to master the language of international economics. Most exam-worthy terms appear in boldface in the text, with their definitions usually contiguous. The material at the end of each chapter includes a listing of these Key Terms, and on-line Glossary has definitions of each term. Words and phrases that deserve special emphasis are in italics.

Each chapter (except for the short introductory chapter) has at least ten questions and problems. The answers to all odd-numbered questions and problems are included in the material at the end of the book. As a reminder, these odd-numbered questions are marked with a *.