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 masters 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—the offshoring of various business services including call centers and software development—is a new form of international trade that is growing rapidly and that is affecting workers who previously thought that their jobs were insulated from international competition.
• China’s policy of fixing the exchange rate value of its yuan to the U.S. dollar has led to a rapid buildup of China’s holdings of official reserve assets, based on its intervention to defend the fixed exchange rate. The United States and the European Union have pressured China to alter its policy, and in mid-2005 China took a small step by revaluing the yuan by a small amount.
• Ten countries joined the European Union in 2004, and several more are likely to join by 2010.
• The introduction of the euro has led to integration and deepening of Europe’s financial markets, especially the markets for corporate and government bonds.
• The European Union has not been able to enforce the Stability and Growth Pact that attempts to limit fiscal deficits in euro area countries, and in 2005 the pact was revised to add a number of broad exceptions.
• Oil prices began to rise in 1999 and jumped in 2004–2005, as increasing global demand pushed against limited supply capabilities.
• Sony, Nintendo, and Microsoft are an example of a global oligopoly in video game consoles.
• The Doha Round of multicountry negotiations to liberalize international trade policies suffered a major breakdown in Cancun in 2003. The negotiations were subsequently revived, but still face major challenges, especially over changes in protectionist agricultural policies in industrialized countries.
• The use of collective action clauses in international bonds is growing. Collective action clauses can be helpful in resolving future financial crises by making international debt restructuring faster and smoother.
• Massive foreign exchange intervention by the Japanese government in 2003 and 2004 had only a modest apparent effect on the exchange rate value of the yen.
• Since its dollarization in 2000, Ecuador has reduced its inflation rate dramatically and had reasonable economic growth.
• On the funny side, courts in the United States ruled that, for application of international trade rules, children’s Halloween costumes are “fancy dress apparel” and X-Men are not humans.

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.

• China is receiving major attention as a rapidly rising force in the global economy. With this edition I add a series of shaded boxes Focus on China to the other three series, Focus on Labor, Case Study, and Extension. For Focus on China, the box in Chapter 4 examines China’s opening to trade and the shift of production and employment from agriculture to manufacturing. The box in Chapter 5 shows the fast growth of China’s exports and imports, and demonstrates that China’s trade is driven by relative factor endowments in ways consistent with basic trade theory. The box in Chapter 9 looks at China’s entry into membership in the World Trade Organization. The box in Chapter 15 examines China as host country to foreign direct investment, some of the challenges for foreign firms operating in China, and Chinese government policies that include a mix of restrictions on and incentives offered to foreign firms.
• Chapter 3 of the twelfth edition was a rather long chapter. For the thirteenth edition, this chapter is divided into two, with the new Chapter 3 focusing on the concepts of absolute and comparative advantage from Smith and Ricardo, and the new Chapter 4 presenting the Heckscher–Ohlin theory and the tools that economists use to develop this theory. Students often find the trade theory material in Part I to be challenging, and they may gain some comfort because all chapters in this part of the book now come in shorter, more manageable portions.
• Chapter 16 has been streamlined to focus on the use and meaning of balance of payments information. While basic accounting principles underlying the balance of payments are explained, details of posting specific transactions are moved to the new Appendix E. Instructors now have a well-defined option: Cover all material (assign Chapter 16 and Appendix E) or focus on using the balance of payments for financial and macroeconomic analysis (assign only Chapter 16). In addition, the presentation of the U.S. balance of payments as an example is now in a more user friendly format. These U.S. data for 2004 provide an excellent launching base for discussions of the meaning of current account deficits and the link of the overall balance to intervention in the foreign exchange market.
• A growing stream of research on the drivers and effects of international trade uses the gravity model. A new Extension box in Chapter 6 explains this model. It highlights the results of research on U.S.–Canada trade that show surprisingly large effects of the national border in impeding trade between these two countries.
• Students often wonder about the size of the gains from trade. In Chapter 6 I cite recent research that concludes that the gains from importing new products and different varieties of existing products could be as much as $1,000 per person for the United States.
• A new Case Study box in Chapter 9 describes the global web of quantitative limits on trade in clothing and textiles (the Multifibre Arrangement) and the negotiated end to these limits as of January 1, 2005. The box also discusses the new limits imposed during 2005 by the United States and the European Union on imports from China, so that the “temporary” trade restraints have been resurrected.
• Disputes brought to the World Trade Organization are much in the news. A new section in Chapter 9 discusses the WTO’s dispute settlement process.
• A major strength of the book is the in-depth analysis of a range of trade policy issues. For the prominent issues of dumping by foreign exporters and subsidies offered by foreign governments, I have made several additions to further strengthen Chapter 11. First, I describe recent research that documents biases in the methods used by the Department of Commerce in its antidumping investigations. Second, I incorporate recent decisions by the World Trade Organization that U.S. subsidies to its cotton production and EU subsidies to its sugar production violate WTO rules. Third, a new Case Study box brings life to strategic trade policy by presenting the WTO dispute cases in which the U.S. government has accused the European Union of subsidizing Airbus, and the European Union has accused the U.S. government of subsidizing Boeing. As of mid-2005, these are the two largest WTO complaints ever, involving allegations of tens of billions of dollars of subsidies.
• Chapter 13 on trade and the environment continues as a unique and powerful treatment of issues of major interest to many students. It is now even stronger in two ways. First, I describe the final decision by the World Trade Organization on the dispute about shrimp and sea turtles. The decision indicates that WTO rules allow countries to pursue environmental protection using national policies that may reduce international trade, but with strict conditions to prevent countries from using the environment as an unjustified excuse for trade barriers. Second, I discuss the Kyoto Protocol on greenhouse gas emissions, which went into effect in 2005 without the participation of the United States and Australia. Several countries, especially Canada and Japan, will be challenged to meet their commitments under the agreement.
• The experiences of several of the crisis countries of the 1990s and early 2000s shows that devaluations can cause contractions in the national economy. Chapter 23 now has a discussion of how a devaluation or sudden depreciation of a country’s currency can cause adverse balance sheet effects because many firms have net liabilities denominated in foreign currencies (based on previous borrowings of dollars, euros, or yen).
• 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 factor endowments, trends in the relative prices of primary products, patterns of foreign direct investments broadly and by major home country, the sizes of foreign exchange trading and foreign exchange futures, swaps, and options, evidence about relative purchasing power parity, and the exchange rate policies chosen by national governments.
• To assist students in mastering the language of international economics, the material at the end of each chapter now includes a listing of Key Terms presented in the chapter.

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 have added more 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. Most exam-worthy terms appear in boldface in the text, with their definitions usually contiguous. Words and phrases that deserve special emphasis are in italics.