1- Discuss the benefits and costs of joining a fixed-exchange area.2- Discuss the effects of the reunification of eastern and western Germany in 1990 on both Germany and its neighboring European countries.3-Discuss the Euro Crisis of 2011. How was the crisis eventually resolved? Does the Italian Debt Crisis of today threaten the stability of the Eurozone?
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International Finance
THEORY & POLICY
ELEVENTH EDITION
GLOBAL EDITION
Paul R. Krugman
Princeton University
Maurice Obstfeld
University of California, Berkeley
Marc J. Melitz
Harvard University
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Brief Contents
Contents
6
Preface
13
Introduction
21
Exchange Rates and Open-Economy Macroeconomics
31
2
National Income Accounting and the Balance of Payments
31
3
Exchange Rates and the Foreign Exchange Market:
An Asset Approach
60
4
Money, Interest Rates, and Exchange Rates
96
5
Price Levels and the Exchange Rate in the Long Run
131
6
Output and the Exchange Rate in the Short Run
169
7
Fixed Exchange Rates and Foreign Exchange Intervention
216
International Macroeconomic Policy
261
8
International Monetary Systems: An Historical Overview
261
9
Financial Globalization: Opportunity and Crisis
324
10
Optimum Currency Areas and the Euro
363
11
Developing Countries: Growth, Crisis, and Reform
402
Mathematical Postscript
446
1
Part 1
Part 2
Postscript to Chapter 9: Risk Aversion and International Portfolio Diversification…………… 446
Index
453
Credits
465
5
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Contents
Preface ……………………………………………………………………………………………………………….. 13
1
Introduction
21
What Is International Economics About?…………………………………………………………………… 23
The Gains from Trade………………………………………………………………………………………………. 24
The Pattern of Trade………………………………………………………………………………………………… 25
How Much Trade?……………………………………………………………………………………………………. 25
Balance of Payments………………………………………………………………………………………………… 26
Exchange Rate Determination…………………………………………………………………………………… 27
International Policy Coordination………………………………………………………………………………. 27
The International Capital Market……………………………………………………………………………….. 28
International Economics: Trade and Money……………………………………………………………….. 29
Part 1
2
Exchange Rates and Open-Economy Macroeconomics
31
National Income Accounting and the Balance of Payments
31
The National Income Accounts………………………………………………………………………………… 33
National Product and National Income……………………………………………………………………….. 34
Capital Depreciation and International Transfers………………………………………………………….. 35
Gross Domestic Product…………………………………………………………………………………………… 35
National Income Accounting for an Open Economy……………………………………………………… 36
Consumption………………………………………………………………………………………………………….. 36
Investment………………………………………………………………………………………………………………. 36
Government Purchases……………………………………………………………………………………………… 37
The National Income Identity for an Open Economy……………………………………………………. 37
An Imaginary Open Economy……………………………………………………………………………………. 38
The Current Account and Foreign Indebtedness…………………………………………………………… 38
Saving and the Current Account………………………………………………………………………………… 40
Private and Government Saving…………………………………………………………………………………. 41
box: The Mystery of the Missing Deficit……………………………………………………………………. 42
The Balance of Payments Accounts…………………………………………………………………………… 44
Examples of Paired Transactions……………………………………………………………………………….. 45
The Fundamental Balance of Payments Identity…………………………………………………………… 46
The Current Account, Once Again……………………………………………………………………………… 47
The Capital Account………………………………………………………………………………………………… 48
The Financial Account……………………………………………………………………………………………… 48
Statistical Discrepancy……………………………………………………………………………………………… 49
Official Reserve Transactions…………………………………………………………………………………….. 50
case study:
The Assets and Liabilities of the World’s Biggest Debtor………………………………. 51
Summary……………………………………………………………………………………………………………… 55
3
Exchange Rates and the Foreign Exchange Market:
An Asset Approach
60
Exchange Rates and International Transactions………………………………………………………….. 61
Domestic and Foreign Prices……………………………………………………………………………………… 61
Exchange Rates and Relative Prices…………………………………………………………………………….. 63
The Foreign Exchange Market…………………………………………………………………………………. 64
6
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The Actors……………………………………………………………………………………………………………… 64
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Contents
box:
7
Exchange Rates, Auto Prices, and Currency Wars………………………………………………… 65
Characteristics of the Market…………………………………………………………………………………….. 66
Spot Rates and Forward Rates…………………………………………………………………………………… 68
Foreign Exchange Swaps…………………………………………………………………………………………… 69
Futures and Options………………………………………………………………………………………………… 69
The Demand for Foreign Currency Assets…………………………………………………………………… 70
Assets and Asset Returns………………………………………………………………………………………….. 70
box:
Offshore Currency Markets: The Case of the Chinese Yuan…………………………………… 71
Risk and Liquidity…………………………………………………………………………………………………… 73
Interest Rates………………………………………………………………………………………………………….. 74
Exchange Rates and Asset Returns…………………………………………………………………………….. 74
A Simple Rule…………………………………………………………………………………………………………. 76
Return, Risk, and Liquidity in the Foreign Exchange Market…………………………………………. 77
Equilibrium in the Foreign Exchange Market……………………………………………………………… 78
Interest Parity: The Basic Equilibrium Condition…………………………………………………………. 78
How Changes in the Current Exchange Rate Affect Expected Returns…………………………….. 79
The Equilibrium Exchange Rate………………………………………………………………………………… 81
Interest Rates, Expectations, and Equilibrium………………………………………………………………. 83
The Effect of Changing Interest Rates on the Current Exchange Rate……………………………… 83
The Effect of Changing Expectations on the Current Exchange Rate………………………………. 85
case study: What Explains the Carry Trade?………………………………………………………………. 85
Summary……………………………………………………………………………………………………………… 88
4
Money, Interest Rates, and Exchange Rates
96
Money Defined: A Brief Review……………………………………………………………………………….. 97
Money as a Medium of Exchange………………………………………………………………………………. 97
Money as a Unit of Account……………………………………………………………………………………… 97
Money as a Store of Value………………………………………………………………………………………… 98
What Is Money?………………………………………………………………………………………………………. 98
How the Money Supply Is Determined……………………………………………………………………….. 98
The Demand for Money by Individuals………………………………………………………………………. 99
Expected Return………………………………………………………………………………………………………. 99
Risk……………………………………………………………………………………………………………………… 100
Liquidity………………………………………………………………………………………………………………. 100
Aggregate Money Demand…………………………………………………………………………………….. 100
The Equilibrium Interest Rate: The Interaction of Money Supply and Demand……………….. 102
Equilibrium in the Money Market……………………………………………………………………………. 103
Interest Rates and the Money Supply………………………………………………………………………… 104
Output and the Interest Rate……………………………………………………………………………………. 105
The Money Supply and the Exchange Rate in the Short Run……………………………………….. 106
Linking Money, the Interest Rate, and the Exchange Rate…………………… …
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