Preface xv Introduction 1 What Is International Economics About? 3 The Gains from Trade 4 The Pattern of Trade 5 How Much Trade? 5 Balance of Payments 6 Exchange Rate Determination 6 International Policy Coordination 7 The International Capital Market 8 International Economics: Trade and Money 8 Part 1 Exchange rates and Open-Economy Macroeconomics 11 National Income Accounting and the Balance of Payments 11 The National Income Accounts 13 National Product and National Income 14 Capital Depreciation and International Transfers 15 Gross Domestic Product 15 National Income Accounting for an Open Economy 16 Consumption 16 Investment 16 Government Purchases 17 The National Income Identity for an Open Economy 17 An Imaginary Open Economy 18 The Current Account and Foreign Indebtedness 18 Saving and the Current Account 21 Private and Government Saving 22 box: The Mystery of the Missing Deficit 23 The Balance of Payments Accounts 24 Examples of Paired Transactions 25 The Fundamental Balance of Payments Identity 27 The Current Account, Once Again 27 The Capital Account 28 The Financial Account 29 Net Errors and Omissions 30 Official Reserve Transactions 30 case study: The Assets and Liabilities of the World’s Biggest Debtor 32 Summary 35 Exchange Rates and the Foreign Exchange Market: An Asset Approach 40 Exchange Rates and International Transactions 41 Domestic and Foreign Prices 42 Exchange Rates and Relative Prices 43 The Foreign Exchange Market 44 The Actors 44 box: Exchange Rates, Auto Prices, and Currency Wars 45 Characteristics of the Market 46 Spot Rates and Forward Rates 48 Foreign Exchange Swaps 49 Futures and Options 49 The Demand for Foreign Currency Assets 50 Assets and Asset Returns 50 box: Nondeliverable Forward Exchange Trading in Asia 51 Risk and Liquidity 53 Interest Rates 54 Exchange Rates and Asset Returns 55 A Simple Rule 56 Return, Risk, and Liquidity in the Foreign Exchange Market 58 Equilibrium in the Foreign Exchange Market 59 Interest Parity: The Basic Equilibrium Condition 59 How Changes in the Current Exchange Rate Affect Money and Money Prices 92 The Long-Run Effects of Money Supply Changes 93 Price Levels and the Exchange Rate in the Long Run 111 The Law of One Price 112 Purchasing Power Parity 113 The Relationship between PPP and the Law of One Price 113 Absolute PPP and Relative PPP 114 A Long-Run Exchange Rate Model Based on PPP 115 The Fundamental Equation of the Monetary Approach 115 Ongoing Inflation, Interest Parity, and PPP 117 The Fisher Effect 118 Empirical Evidence on PPP and the Law of One Price 121 .......... Optimum Currency Areas and the Euro 332 How the European Single Currency Evolved 334 What Has Driven European Monetary Cooperation? 334 The European Monetary System, 1979–1998 335 German Monetary Dominance and the Credibility Theory of the EMS 336 Market Integration Initiatives 337 European Economic and Monetary Union 338 The Euro and Economic Policy in the Euro Zone 339 The Maastricht Convergence Criteria and the Stability and Growth Pact 339 The European Central Bank and the Eurosystem 340 The Revised Exchange Rate Mechanism 341 The Theory of Optimum Currency Areas 341 Economic Integration and the Benefits of a Fixed Exchange Rate Area: The GG Schedule 342 Economic Integration and the Costs of a Fixed Exchange Rate Area: The LL Schedule 344 The Decision to Join a Currency Area: Putting the GG and LL Schedules Together 346 What Is an Optimum Currency Area? 348 Other Important Considerations 348 case study: Is Europe an Optimum Currency Area? 349 The Euro Crisis and the Future of EMU 353 Origins of the Crisis 353 Self-Fulfilling Government Default and the “Doom Loop” 358 A Broader Crisis and Policy Responses 360 ECB Outright Monetary Transactions 361 The Future of EMU 362 Summary 363 Developing Countries: Growth, Crisis, and Reform 368 Income, Wealth, and Growth in the World Economy 369 The Gap between Rich and Poor 369 Has the World Income Gap Narrowed Over Time? 370 Structural Features of Developing Countries 372 Developing-Country Borrowing and Debt 375 The Economics of Financial Inflows to Developing Countries 375 The Problem of Default 377 Alternative Forms of Financial Inflow 379 The Problem of “Original Sin” 380 The Debt Crisis of the 1980s 382 Reforms, Capital Inflows, and the Return of Crisis 383 East Asia: Success and Crisis 386 The East Asian Economic Miracle 386 box: Why Have Developing Countries Accumulated Such High Levels of International Reserves? 387 Asian Weaknesses 389 box: What Did East Asia Do Right? 390 The Asian Financial Crisis 391 Lessons of Developing-Country Crises 392 Reforming the World’s Financial “Architecture” 394 Capital Mobility and the Trilemma of the Exchange Rate Regime 395 “Prophylactic” Measures 396 Coping with Crisis 397 case study: China’s Pegged Currency 398 Understanding Global Capital Flows and the Global Distribution of Income: Is Geography Destiny? 401 box: Capital Paradoxes 402 Summary 406 Mathematical Postscripts 411 Postscript to Chapter 9: Risk Aversion and International Portfolio Diversification 411 An Analytical Derivation of the Optimal Portfolio 411 A Diagrammatic Derivation of the Optimal Portfolio 412 The Effects of Changing Rates of Return 414 ONLINE APPENDICES (www.pearsonhighered.com/krugman) Appendix A to Chapter 17 in International Economics (Chapter 6 in International Finance): The IS-LM Model and the DD-AA Model Appendix A to Chapter 18 in International Economics (Chapter 7 in International Finance): The Monetary Approach to the Balance of Payments |